##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




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FORM 10-Q

(Mark One)

þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 2004

o   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period
from                     to

Commission File Number: 001-16821

UNITED DEFENSE INDUSTRIES, INC.

(Exact Name of Registrant as Specified in its
charter)


|                                                          |  |                                  
|--------------------------------------------------------- |  | ---------------------------------
|Delaware                                                  |  | 52-2059782                       
|(State or other jurisdiction of
    incorporation)        |  | (IRS Employer Identification No.)
|                                                         
|1525 Wilson Boulevard, Suite 700
     Arlington, Virginia |  | 22209                            
|(Address of Principal Executive
    Offices)              |  | (Zip Code)                       



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(703) 312-6100

(Registrants telephone number, including
area code)


(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes þ          No o

At April 23, 2004 there were 52,557,889
shares outstanding of the Registrants common stock, par
value $.01 per share.



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##### 



UNITED DEFENSE INDUSTRIES, INC.

INDEX

|                                   |  |                                                                                                                        |    |      |    | 
|---------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                        |    | Page
|                                   |  |                                                                                                                        |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Consolidated Financial Statements 
    United Defense Industries, Inc.                                                |    |      |    | 
|                                   |  | Consolidated Balance Sheets as of December 31,
    2003 and March 31, 2004 (unaudited)                                 |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months ended March 31, 2003 and 2004                 |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statements of Changes in
    Stockholders Equity for the three months ended March 31,
    2004 |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the three months ended March 31, 2003 and 2004                 |    |      | 5  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements                                                               |    |      | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis of the
    Results of Operations and Financial Condition                          |    |      | 13 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                         |    |      | 17 | 
|Item 4.                            |  | Controls and Procedures                                                                                                |    |      | 17 | 
|PART II  OTHER
    INFORMATION   
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                       |    |      | 19 | 
|Signature                          |  |                                                                                                                        | 20 |     

1



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##### 



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |           |         | 
|-------------------------------------------------- | ------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -------------- | ------- | - | --------- | --------- | ------- | 
|                                                   |                                      | December 31, 2003                                                                                                                                                          |           | March 31, 2004
|                                                   |                                      |                                                                                                                                                                            |           |               
|                                                   |                                      |                                                                                                                                                                            |           | (Unaudited)   
|ASSETS                                            
|Current assets:                                    |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   |                                      | Cash and cash equivalents                                                                                                                                                  |           | $              | 286,730 |   |           | $         | 256,409 | 
|                                                   |                                      | Trade receivables, net                                                                                                                                                     |           |                | 168,625 |   |           |           | 227,794 | 
|                                                   |                                      | Long-term contract inventories                                                                                                                                             |           |                | 389,394 |   |           |           | 364,177 | 
|                                                   |                                      | Other current assets                                                                                                                                                       |           |                | 20,127  |   |           |           | 19,101  | 
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   | Total current assets                 |                                                                                                                                                                            |           | 864,876        |         |   |           | 867,481   |        
|Property, plant and equipment, net                 |                                      |                                                                                                                                                                            | 181,283   |                |         |   | 189,970   |          
|Goodwill                                           |                                      |                                                                                                                                                                            | 342,843   |                |         |   | 363,161   |          
|Intangible assets, net                             |                                      |                                                                                                                                                                            | 14,222    |                |         |   | 16,502    |          
|Prepaid pension and postretirement benefit cost    |                                      |                                                                                                                                                                            | 128,997   |                |         |   | 127,436   |          
|Restricted cash                                    |                                      |                                                                                                                                                                            | 12,244    |                |         |   | 11,631    |          
|Other assets                                       |                                      |                                                                                                                                                                            | 46,699    |                |         |   | 28,413    |          
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|Total assets                                       |                                      | $                                                                                                                                                                          | 1,591,164 |                |         | $ | 1,604,594 |          
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|Current liabilities:                               |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   |                                      | Current portion of long-term debt                                                                                                                                          |           | $              | 52,043  |   |           | $         | 52,043  | 
|                                                   |                                      | Accounts payable, trade and other                                                                                                                                          |           |                | 124,502 |   |           |           | 97,708  | 
|                                                   |                                      | Advanced payments                                                                                                                                                          |           |                | 462,304 |   |           |           | 463,513 | 
|                                                   |                                      | Deferred tax liability                                                                                                                                                     |           |                | 16,280  |   |           |           | 17,064  | 
|                                                   |                                      | Accrued and other liabilities                                                                                                                                              |           |                | 133,963 |   |           |           | 141,623 | 
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   | Total current liabilities            |                                                                                                                                                                            |           | 789,092        |         |   |           | 771,951   |        
|Long-term liabilities:                             |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   |                                      | Long-term debt, net of current portion                                                                                                                                     |           |                | 524,946 |   |           |           | 511,936 | 
|                                                   |                                      | Accrued pension and postretirement benefit cost                                                                                                                            |           |                | 51,538  |   |           |           | 47,117  | 
|                                                   |                                      | Deferred tax liability                                                                                                                                                     |           |                | 17,695  |   |           |           | 19,162  | 
|                                                   |                                      | Other liabilities                                                                                                                                                          |           |                | 80,812  |   |           |           | 80,440  | 
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   | Total liabilities                    |                                                                                                                                                                            |           | 1,464,083      |         |   |           | 1,430,606 |        
|Commitments and contingencies                      |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|Stockholders equity:                              |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   |                                      | Common stock $.01 par value, 150,000,000 shares
    authorized; 52,220,189 and 52,524,019 issued and outstanding at
    December 31, 2003 and March 31, 2004, respectively |           |                | 522     |   |           |           | 525     | 
|                                                   | Additional paid-in-capital           |                                                                                                                                                                            |           | 183,337        |         |   |           | 193,021   |        
|                                                   | Deferred compensation                |                                                                                                                                                                            |           | (197           | )       |   |           | (4,440    | )      
|                                                   | Retained deficit                     |                                                                                                                                                                            |           | (54,304        | )       |   |           | (12,421   | )      
|                                                   | Accumulated other comprehensive loss |                                                                                                                                                                            |           | (2,277         | )       |   |           | (2,697    | )      
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|                                                   | Total stockholders equity           |                                                                                                                                                                            |           | 127,081        |         |   |           | 173,988   |        
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          
|Total liabilities and stockholders equity         |                                      | $                                                                                                                                                                          | 1,591,164 |                |         | $ | 1,604,594 |          
|                                                   |                                      |                                                                                                                                                                            |           |                |         |   |           |          

See accompanying notes.

2



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except shares and per share
data)


|                                  |                                                           |                              |        |            |         |   |        |            |         | 
|--------------------------------- | --------------------------------------------------------- | ---------------------------- | ------ | ---------- | ------- | - | ------ | ---------- | ------- | 
|                                  |                                                           |                             
|                                  |                                                           | Three months ended March 31,
|                                  |                                                           |                             
|                                  |                                                           | 2003                         |        | 2004      
|                                  |                                                           |                              |        |           
|Revenue:                          |                                                           |                              |        |            |         |   |        |           
|                                  | Sales                                                     |                              | $      | 466,523    |         |   | $      | 547,077    |        
|Costs and expenses:               |                                                           |                              |        |            |         |   |        |           
|                                  | Cost of sales                                             |                              |        | 362,583    |         |   |        | 435,087    |        
|                                  | Selling, general and administrative expenses              |                              |        | 37,070     |         |   |        | 38,759     |        
|                                  | Research and development                                  |                              |        | 1,880      |         |   |        | 6,553      |        
|                                  |                                                           |                              |        |            |         |   |        |           
|                                  |                                                           | Total expenses               |        |            | 401,533 |   |        |            | 480,399 | 
|                                  |                                                           |                              |        |            |         |   |        |           
|Income from operations            |                                                           |                              | 64,990 |            |         |   | 66,678 |           
|                                  | Earnings related to investments in foreign
    affiliates |                              |        | 5,549      |         |   |        | 5,816      |        
|                                  | Interest income                                           |                              |        | 914        |         |   |        | 973        |        
|                                  | Interest expense                                          |                              |        | (7,488     | )       |   |        | (6,454     | )      
|                                  |                                                           |                              |        |            |         |   |        |           
|Total other (expense) income      |                                                           |                              | (1,025 | )          |         |   | 335    |           
|                                  |                                                           |                              |        |            |         |   |        |           
|Income before income taxes        |                                                           |                              | 63,965 |            |         |   | 67,013 |           
|Provision for income taxes        |                                                           |                              | 25,586 |            |         |   | 25,130 |           
|                                  |                                                           |                              |        |            |         |   |        |           
|Net income                        |                                                           | $                            | 38,379 |            |         | $ | 41,883 |           
|                                  |                                                           |                              |        |            |         |   |        |           
|Earnings per common share-basic   |                                                           | $                            | 0.74   |            |         | $ | 0.80   |           
|                                  |                                                           |                              |        |            |         |   |        |           
|                                  | Weighted average common shares outstanding                |                              |        | 51,730,313 |         |   |        | 52,399,717 |        
|Earnings per common share-diluted |                                                           | $                            | 0.73   |            |         | $ | 0.78   |           
|                                  |                                                           |                              |        |            |         |   |        |           
|                                  | Weighted average common shares outstanding                |                              |        | 52,652,524 |         |   |        | 53,367,770 |        

See accompanying notes.

3



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##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS


OF CHANGES IN STOCKHOLDERS
EQUITY


(In thousands)


|                                                                                  |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------ | --- | ---------- |  | ------------ | ------- | -------- |  | ------------- | ------ | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                  |  |        |     |            |  |              |         |          |  | Accumulated   |        |      
|                                                                                  |  |        |     | Additional |  |              |         |          |  | Other         |        |      
|                                                                                  |  | Common |     | Paid-In    |  | Deferred     |         | Retained |  | Comprehensive |        |      
|                                                                                  |  | Stock  |     | Capital    |  | Compensation |         | Deficit  |  | (Loss)/Gain   |        | Total
|                                                                                  |  |        |     |            |  |              |         |          |  |               |        |      
|Balance, December 31, 2003                                                        |  | $      | 522 |            |  | $            | 183,337 |          |  | $             | (197   | )     |  | $ | (54,304 | ) |  | $ | (2,277 | ) |  | $ | 127,081 |  
|Amortization of deferred stock compensation                                       |  |        |     |            |  |              |         |          |  |               | 271    |       |  |   |         |   |  |   |        |   |  |   | 271     |  
|Issuance of restricted stock awards                                               |  |        |     |            |  |              | 4,514   |          |  |               | (4,514 | )     |  |   |         |   |  |   |        |   |  |   |        |  
|Exercise of stock options                                                         |  |        | 3   |            |  |              | 3,287   |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 3,290   |  
|Tax benefit from stock options                                                    |  |        |     |            |  |              | 1,883   |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 1,883   |  
|Net foreign currency translation                                                  |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   | (1,474 | ) |  |   | (1,474  | )
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   | 1,054  |   |  |   | 1,054   |  
|Net income for quarter ended March 31, 2004                                       |  |        |     |            |  |              |         |          |  |               |        |       |  |   | 41,883  |   |  |   |        |   |  |   | 41,883  |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                        |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   | 41,463  |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2004                                                           |  | $      | 525 |            |  | $            | 193,021 |          |  | $             | (4,440 | )     |  | $ | (12,421 | ) |  | $ | (2,697 | ) |  | $ | 173,988 |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |        |       |  |   |         |   |  |   |        |   |  |   |         |  

See accompanying notes.

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                  |                                                                |                    |         |         |   |   |         |         |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------ | ------- | ------- | - | - | ------- | ------- | -
|                                                                                  |                                                                |                   
|                                                                                  |                                                                | Three months ended
|                                                                                  |                                                                | March 31,         
|                                                                                  |                                                                |                   
|                                                                                  |                                                                | 2003               |         | 2004   
|                                                                                  |                                                                |                    |         |        
|Operating activities                                                              |                                                                |                    |         |         |   |   |         |        
|Net income                                                                        |                                                                | $                  | 38,379  |         |   | $ | 41,883  |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                                |                    |         |         |   |   |         |        
|                                                                                  | Depreciation                                                   |                    |         | 6,472   |   |   |         | 6,754   |  
|                                                                                  | Amortization of software                                       |                    |         | 1,200   |   |   |         | 1,221   |  
|                                                                                  | Amortization of other intangible assets                        |                    |         | 3,295   |   |   |         | 1,720   |  
|                                                                                  | Amortization of financing costs                                |                    |         | 775     |   |   |         | 759     |  
|                                                                                  | Deferred tax provision                                         |                    |         | 23,710  |   |   |         | 2,336   |  
|Changes in assets and liabilities:                                                |                                                                |                    |         |         |   |   |         |        
|                                                                                  | Trade receivables, net                                         |                    |         | 25,316  |   |   |         | (54,399 | )
|                                                                                  | Inventories                                                    |                    |         | 673     |   |   |         | 30,288  |  
|                                                                                  | Other assets                                                   |                    |         | 13,038  |   |   |         | 19,940  |  
|                                                                                  | Prepaid pension and postretirement benefit cost                |                    |         | (857    | ) |   |         | 1,561   |  
|                                                                                  | Accounts payable, trade and other                              |                    |         | (17,255 | ) |   |         | (24,615 | )
|                                                                                  | Advanced payments                                              |                    |         | 870     |   |   |         | 1,861   |  
|                                                                                  | Accrued and other liabilities                                  |                    |         | (47,350 | ) |   |         | 7,286   |  
|                                                                                  | Accrued pension and postretirement benefit cost                |                    |         | 2,312   |   |   |         | (3,686  | )
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Cash provided by operating activities                                             |                                                                |                    | 50,578  |         |   |   | 32,909  |        
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Investing activities                                                              |                                                                |                    |         |         |   |   |         |        
|                                                                                  | Capital expenditures                                           |                    |         | (3,401  | ) |   |         | (5,056  | )
|                                                                                  | Purchase of Kaiser Compositek, Cercom and Hawaii
    Shipyards |                    |         |        |   |   |         | (45,766 | )
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Cash used in investing activities                                                 |                                                                |                    | (3,401  | )       |   |   | (50,822 | )      
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Financing activities                                                              |                                                                |                    |         |         |   |   |         |        
|                                                                                  | Payments on long-term debt                                     |                    |         |        |   |   |         | (13,010 | )
|                                                                                  | Proceeds from exercise of stock options                        |                    |         | 479     |   |   |         | 3,290   |  
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Cash provided by (used in) financing activities                                   |                                                                |                    | 479     |         |   |   | (9,720  | )      
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Effect of exchange rate changes on cash                                           |                                                                |                    | 1,302   |         |   |   | (2,688  | )      
|Increase (decrease) in cash and cash
    equivalents                              |                                                                |                    | 48,958  |         |   |   | (30,321 | )      
|Cash and cash equivalents, beginning of year                                      |                                                                |                    | 106,802 |         |   |   | 286,730 |        
|                                                                                  |                                                                |                    |         |         |   |   |         |        
|Cash and cash equivalents, end of period                                          |                                                                | $                  | 155,760 |         |   | $ | 256,409 |        
|                                                                                  |                                                                |                    |         |         |   |   |         |        

See accompanying notes.

5



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##### 



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

March 31, 2004


1.     Basis of
Presentation

The financial information presented as of any
date other than December 31 has been prepared from the
books and records without audit. Financial information as of
December 31, 2003 presented in this quarterly report has
been derived from the audited financial statements of United
Defense Industries, Inc., but does not include all the
associated disclosures required by generally accepted accounting
principles. In the opinion of management, the accompanying
unaudited interim financial statements contain all adjustments
(consisting of normal, recurring adjustments) necessary to
present fairly our financial position as of March 31, 2004
and the results of operations and cash flows for the three
months ended March 31, 2003 and 2004. The results of
operations are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004.
These unaudited consolidated financial statements should be read
in conjunction with the financial statements and the notes
thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2003.

2.     Summary of
Significant Accounting Principles



| |                                                             
| | ------------------------------------------------------------
| | Revenue and Profit Recognition for
    Contracts-in-Progress

We use different techniques for estimating and
recording revenues depending on the type and characteristics of
the contract. Sales are recognized on most fixed-price
production contracts when the risks and rewards of ownership
have been transferred to the customer. For our DoD production
contracts, those criteria are typically met when the manufacture
of the product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. Gross margin on each unit delivered or accepted is
recognized, based on an estimate of the margin that will be
realized over the life of the related contract. We evaluate
estimates of gross margin on production contracts and recognize
changes in estimates of gross margins during the period in which
those changes are determined. Sales under fixed-price ship
repair and maintenance contracts are recognized as work is
performed. Under this method, contract costs are expensed as
incurred and sales are recognized simultaneously based on the
ratio of direct labor inputs and other costs incurred to date
compared to estimated total direct labor inputs and total costs.
Sales under cost reimbursement contracts for research,
engineering, prototypes, ship repair and maintenance and certain
other contracts are recorded as costs are incurred and include
estimated fees in the proportion that costs incurred to date
bear to total estimated costs. Award fees are recorded as
revenue when the award is earned. We charge any anticipated
losses on a contract to operations as soon as those losses are
determined.



| |                         
| | ------------------------
| | Stock-Based Compensation

At March 31, 2004, we had a stock-based
employee compensation plan, which is described more fully in our
Form 10K for the year ended December 31, 2003. We
account for the plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. On
January 20, 2004, the Board of Directors authorized
issuance of 141,000 shares of restricted stock and new stock
options to purchase 500,000 common shares at an exercise price
of $31.80. Accordingly, we record compensation expense over the
vesting period in our consolidated statements of operations if
the option price is less than fair value of the common stock at
the date an option is granted. The compensation recorded in the
financial statements reflects the amortization based on vesting
of stock options. The following table illustrates the effect on
net income and earnings per share if we had elected to apply the

6



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                                                                                                    |                       |                       |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | --------------------- | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                       |                      
|                                                                                                                                                    |                       | Three months ended   
|                                                                                                                                                    |                       | March 31,            
|                                                                                                                                                    |                       |                      
|                                                                                                                                                    |                       | 2003                  |        | 2004
|                                                                                                                                                    |                       |                       |        |     
|                                                                                                                                                    |                       |                      
|                                                                                                                                                    |                       | (In thousands, except
|                                                                                                                                                    |                       | per share data)      
|Reported net income                                                                                                                                 |                       | $                     | 38,379 |      |  | $ | 41,883 |     
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |                       |                       | 12     |      |  |   | 163    |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                       | (1,049 | )    |  |   | (1,447 | )   
|                                                                                                                                                    |                       |                       |        |      |  |   |        |     
|Pro forma net income                                                                                                                                |                       | $                     | 37,342 |      |  | $ | 40,599 |     
|                                                                                                                                                    |                       |                       |        |      |  |   |        |     
|Earnings per share:                                                                                                                                 |                       |                       |        |      |  |   |        |     
|                                                                                                                                                    | Basic  as reported   |                       | $      | 0.74 |  |   | $      | 0.80 | 
|                                                                                                                                                    |                       |                       |        |      |  |   |        |     
|                                                                                                                                                    | Basic  pro forma     |                       | $      | 0.72 |  |   | $      | 0.77 | 
|                                                                                                                                                    |                       |                       |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  as reported |                       | $      | 0.73 |  |   | $      | 0.78 | 
|                                                                                                                                                    |                       |                       |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  pro forma   |                       | $      | 0.71 |  |   | $      | 0.76 | 
|                                                                                                                                                    |                       |                       |        |      |  |   |        |     



| |                              
| | -----------------------------
| | New Accounting Pronouncements

On January 17, 2003 the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46 becomes effective in
the first quarter of 2004 and requires a variable interest
entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. In
general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. The adoption of the
Interpretation had no significant impact on our financial
statements.

In December 2003, the FASB issued SFAS
No. 132R, Employers Disclosure about Pensions
and Other Postretirement Benefits. SFAS No. 132R
requires additional disclosures about defined benefit pension
plans and other post retirement benefit plans. The standard
requires, among other things, additional disclosures about the
assets held in employer sponsored pension plans, disclosures
relating to plan asset investment policy and practices,
disclosure of expected contributions to be made to the plans and
expected benefit payments to be made by the plans. Annual
disclosures applicable to our U.S. pension and post retirement
plans were required to be made in our financial statements for
the year ended December 31, 2003. Annual disclosures
relating to our non-U.S. plans will be required for the year
ending December 31, 2004. We have adopted this pronouncement as
of December 31, 2003 for all of our U.S. plans. Disclosure
of estimated future benefit payments is effective for fiscal
years ending after June 15, 2004.

3.     Investments in
Affiliated Companies

Our investment in our 51% owned foreign joint
venture in Turkey, FNSS Savunma Sistemleri A.S.
(FNSS), is accounted for using the equity method
because we do not control it due to our partners veto
rights over certain decisions, although we do have the ability
to exercise influence over its operating and financial policies.
Our share of the earnings from our investment in Turkey was
$5.5 million and $5.8 million for the three months
ended March 31, 2003 and 2004, respectively.

7



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reports financial results
from our joint venture in Turkey.

|              |  |                    |        |      |  |   |        | 
|------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|              |  |                   
|              |  | Three months ended
|              |  | March 31,         
|              |  |                   
|              |  | 2003               |        | 2004
|              |  |                    |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 41,853 |      |  | $ | 51,607 | 
|Cost of sales |  |                    | 20,380 |      |  |   | 24,235 | 
|Net income    |  |                    | 9,258  |      |  |   | 11,405 | 

4.     Comprehensive
Income

Comprehensive income was $40.5 million and
$41.5 million for the three-month periods ended
March 31, 2003 and 2004, respectively. Comprehensive income
consists primarily of net income, net foreign currency
translation adjustments and fair value adjustments of foreign
currency and interest rate hedges, net of taxes.

5.     Long-term
Debt

In August 2001, we entered into a credit facility
with various banks that included $600 million of term loan
facilities and a $200 million revolving credit facility. On
July 2, 2002 we amended the credit facility to borrow an
additional $300 million for the purchase of United States
Marine Repair, Inc. (USMR). We incurred
$5.5 million in additional financing fees that have been
deferred and amortized over the remaining term of the credit
facility using the effective interest method.

Outstanding borrowings on the term loan
facilities were $564 million at March 31, 2004. The
facilities bear interest at variable rates with a weighted
average rate of 3.05% at March 31, 2004. These loans are
due through 2009 and provide for quarterly principal and
interest payments. A principal payment for $13.0 million
was made in the first quarter of 2004.

6.     Pension and
Other Post Retirement Benefits

At December 31, 2003, we revised the
discount rate assumption used in the determination of net
pension and post retirement costs and benefit obligations from
6.5% to 6.0%. On January 1, 2004 the rate of return
assumption used for the actuarial estimates of these benefit
programs was unchanged at 8.5%.

Components of Net Periodic Benefit Cost for the
three months ended March 31:

|                                    |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|----------------------------------- |  | ---------------- | ------- | -------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                    |  |                  |         |               
|                                    |  | Pension Benefits |         | Other Benefits
|                                    |  |                  |         |               
|                                    |  | 2003             |         | 2004           |  | 2003 |         | 2004
|                                    |  |                  |         |                |  |      |         |     
|Service Cost                        |  | $                | 4,445   |                |  | $    | 4,775   |      |  | $ | 369    |   |  | $ | 386    |  
|Interest Cost                       |  |                  | 10,381  |                |  |      | 10,696  |      |  |   | 829    |   |  |   | 838    |  
|Expected return on plan assets      |  |                  | (13,559 | )              |  |      | (14,154 | )    |  |   | (1,300 | ) |  |   | (1,363 | )
|Amortization of prior service costs |  |                  | 448     |                |  |      | 458     |      |  |   | 34     |   |  |   | 34     |  
|Amortization of net (gain) loss     |  |                  | 556     |                |  |      | 1,390   |      |  |   | 1      |   |  |   | 5      |  
|                                    |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost           |  | $                | 2,271   |                |  | $    | 3,165   |      |  | $ | (67    | ) |  | $ | (100   | )
|                                    |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  

7.     Commitments
and Contingencies



| |                   
| | ------------------
| | Termination Claims

In 1994 the Crusader program was initiated to
develop for the U.S. Army an integrated and extensively
automated two-vehicle artillery system consisting of a 155mm,
self-propelled howitzer and a resupply vehicle. Since inception
of the program, we were the sole-source prime contractor for its
design and development. The

8



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Armys plan called for fielding of 480
Crusader systems, but in May 2002 the Secretary of Defense
announced the termination of the program. The Army gave us
formal notice of termination on August 7, 2002, and we have
since continued to receive Army funding to accomplish an orderly
closeout of Crusader activities and to transition key Crusader
technologies to the NLOS-C program. To date, the Crusader
termination has resulted in a reduction to our workforce of
approximately 180 employees. Through the period ended
March 31, 2004, we incurred and invoiced the U.S.
Government for $36.3 million of termination costs. In order
to complete the Crusader termination process, we are negotiating
a final termination settlement with the Army which we expect to
conclude in due course.



| |                  
| | -----------------
| | Legal Proceedings

As a government contractor, we are subject to the
audit, review, and investigative authority of various U.S.
Government agencies. Depending upon the particular
jurisdictional statute, violations of federal procurement rules
may result in contract price reductions or refunds, civil
penalties, and/or criminal penalties. Government contractors
that violate the False Claims Act and/or other applicable laws
may be suspended or debarred from receiving further government
contracts. Given our dependence on U.S. Government contracts,
suspension or debarment is an inherent risk that could readily
have a material adverse effect on us. Our policy is to cooperate
with governmental investigations and inquiries regarding
compliance matters, and we also make voluntary disclosures of
compliance issues to governmental agencies as appropriate. In
the ordinary course of business, we provide information on
compliance matters to various government agencies, and we expect
to continue to do so in the future. For example, as previously
disclosed, in 2002 we were served with a grand jury subpoena
issued by the United States District Court for the Eastern
District of Virginia, seeking information regarding a 2000
contract between us and the Italian government for the upgrading
of amphibious assault vehicles. We believe that the grand jury
investigation seeks to ascertain whether any violation of the
Foreign Corrupt Practices Act occurred in connection with the
Italian contract. While we are not aware of any such violation,
and we are cooperating with the investigation, it is too early
for us to determine whether the ultimate outcome of the
investigation would have a material adverse impact on our
results of operation or financial position.

From time to time we are involved in legal
proceedings arising in the ordinary course of our business. We
believe that we have adequately reserved for these liabilities
and that there is no litigation pending that we expect to have a
material adverse effect on our results of operations or
financial condition.



| |                      
| | ---------------------
| | Environmental Matters

We spend certain amounts annually to comply with
environmental laws. Operating and maintenance costs associated
with environmental compliance and prevention of pollution at our
facilities are a normal, recurring part of operations, are not
significant relative to total operating costs or cash flows, and
are generally allowable as contract costs under our contracts
with the U.S. Government (Allowable Costs).

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consist of Allowable Costs. As of March 31,
2004, we had accrued approximately $33 million to cover any
investigation and/or remediation costs that may not be Allowable
Costs. The amount accrued is based on reasonable estimates,
although there is a possibility that amounts in excess of costs
accrued may be incurred. The most significant of the estimated
liabilities are related to ongoing remediation efforts.

One of USMRs largest facilities is located
in San Diego, California. Pursuant to a demand from the
California Regional Water Quality Control Board, we completed a
study of sedimentary contamination in San Diego Bay. Once
definitive clean-up criteria are established, we expect that we
will be required to begin remediation procedures with respect to
the contamination. We anticipate that the total cost associated
with the remediation phase will range from $6 million to
$9 million, although it is conceivable that costs could be
as

9



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

high as $30 million if the most stringent
clean-up standard were to be adopted. Up to $9 million of such
remediation cost, to the extent the costs are not recovered on
USMRs government contracts or from other responsible
parties, may be recoverable from USMRs former
shareholders, under an escrow arrangement established in 1997
when the San Diego operation was acquired by USMR. Also, a
further $15 million escrow fund was established in our 2002
acquisition of USMR, which we believe is available in respect of
USMRs sediment exposure. We have asserted claims against
both escrow funds, primarily on account of the potential
remediation exposure at San Diego.

Since approximately 1941, we (and, prior to our
formation, Northern Ordnance, Inc. and then FMC) have operated a
manufacturing and engineering facility in Fridley, Minnesota.
The majority of the Fridley facility is owned by the U.S. Navy
(the Navy property), but has been operated by us
under contract with and on behalf of the Navy. We recently
agreed to purchase the Navy property and most of the equipment
for $6.5 million. Since 1991, the Navy has expended more
than $27 million in remediation costs, including site
investigation, on the Navy property, and the Navy has indicated
that it anticipates spending a further $8.9 million on such
matters at the site. The Navy has engaged us in discussions as
to whether we should pay a portion of its remediation expenses
at Fridley, and offered to resolve the matter if we would pay
25% of such costs (approximately $8.4 million). We dispute
any responsibility for such costs, and also believe that any
remediation costs that we may incur concerning the Navy property
would constitute Allowable Costs. However, there is substantial
uncertainty regarding the ultimate terms on which the matter
might be resolved.

8.     Acquisitions

On February 5, 2004, we completed the
acquisition of the assets of Kaiser Compositek, Inc.
(KCI) for an initial purchase price of
$8.3 million. KCI, located in Brea, California, is a
provider to government and industry sectors with particular
emphasis on primary structures fabricated with polymeric
composites. The acquisition will enhance and expand the
development of advanced weapon systems and combat vehicles for
the armed forces.

On March 1, 2004 we purchased certain assets
and liabilities of the Pearl Harbor, Hawaii Ship repair
operations of Pacific Shipyards International, LLC and Honolulu
Shipyards, Inc. for an initial purchase price of
$16.3 million. The Pearl Harbor ship repair business will
be operated by a newly formed subsidiary, Hawaii Shipyards,
Inc., which positions USMR as the largest private supplier of
ship repair and overhaul services for naval vessels stationed in
the Navys third largest homeport at Pearl Harbor, Hawaii.
The initial purchase price is subject to an adjustment for
closing date working capital which is expected to eventually
reduce the initial price by approximately $1 million. Principals
of the predecessor entity will serve as directors of Hawaii
Shipyards, Inc.

On March 1, 2004 we completed the
acquisition of Cercom, Inc. of Vista, California for an initial
purchase price of $21.2 million. Cercom is a producer of
advanced ceramic materials and supplier of light-weight ceramic
armor. The acquisition will boost our expertise in designing
survivability solutions that already include work in specialty
metals and composites.

9.     Earnings Per
Share

Basic and diluted earnings per share results for
all periods presented were computed based on the net income for
the respective periods. The weighted average number of common
shares outstanding during the period was used in the calculation
of basic earnings per share and this number of shares was
increased by the effects of dilutive stock options based on the
treasury stock method in the calculation of diluted earnings per
share. The dilutive effect of stock options based on the
treasury stock method were 968,000 in 2004 and 923,000 in 2003.

10



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Information
on Business Segments

We operate in two reportable business segments:
Defense Systems and Ship Repair and Maintenance. USMR is
categorized under the business segment Ship Repair and
Maintenance. All other business operations are categorized
as Defense Systems. We use earnings before interest
and taxes as the measure of financial performance for each
segment.

Summary unaudited financial data for each of our
business segments for the three months ended March 31, 2003
and 2004 follow:

Business
Segments

|                                                                |  |                    |         |      |  |   |         |  
|--------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                                                |  |                   
|                                                                |  | Three months ended
|                                                                |  | March 31,         
|                                                                |  |                   
|                                                                |  | 2003               |         | 2004
|                                                                |  |                    |         |     
|                                                                |  |                   
|                                                                |  | (in thousands)    
|Sales:                                                          |  |                    |         |      |  |   |         |  
|Defense Systems                                                 |  | $                  | 340,583 |      |  | $ | 409,888 |  
|Ship Repair and Maintenance                                     |  |                    | 125,940 |      |  |   | 137,189 |  
|                                                                |  |                    |         |      |  |   |         |  
|Total sales                                                     |  |                    | 466,523 |      |  |   | 547,077 |  
|Earnings related to investments in foreign
    affiliates:      |  |                    |         |      |  |   |         |  
|Defense Systems                                                 |  |                    | 5,549   |      |  |   | 5,816   |  
|Ship Repair and Maintenance                                     |  |                    |        |      |  |   |        |  
|                                                                |  |                    |         |      |  |   |         |  
|Total earnings related to investments in foreign
    affiliates |  |                    | 5,549   |      |  |   | 5,816   |  
|Depreciation and amortization:                                  |  |                    |         |      |  |   |         |  
|Defense Systems                                                 |  |                    | 5,626   |      |  |   | 5,641   |  
|Ship Repair and Maintenance                                     |  |                    | 4,169   |      |  |   | 4,031   |  
|Corporate                                                       |  |                    | 1,172   |      |  |   | 23      |  
|                                                                |  |                    |         |      |  |   |         |  
|Total depreciation and amortization                             |  |                    | 10,967  |      |  |   | 9,695   |  
|Capital spending:                                               |  |                    |         |      |  |   |         |  
|Defense Systems                                                 |  |                    | 2,155   |      |  |   | 3,353   |  
|Ship Repair and Maintenance                                     |  |                    | 1,246   |      |  |   | 1,485   |  
|Corporate                                                       |  |                    |        |      |  |   | 218     |  
|                                                                |  |                    |         |      |  |   |         |  
|Total capital spending                                          |  |                    | 3,401   |      |  |   | 5,056   |  
|Income before interest and taxes:                               |  |                    |         |      |  |   |         |  
|Defense Systems                                                 |  |                    | 66,966  |      |  |   | 70,139  |  
|Ship Repair and Maintenance                                     |  |                    | 7,370   |      |  |   | 6,727   |  
|Corporate                                                       |  |                    | (3,797  | )    |  |   | (4,372  | )
|                                                                |  |                    |         |      |  |   |         |  
|Total income before interest and taxes                          |  |                    | 70,539  |      |  |   | 72,494  |  
|Interest, net                                                   |  |                    | (6,574  | )    |  |   | (5,481  | )
|                                                                |  |                    |         |      |  |   |         |  
|Income before income taxes                                      |  | $                  | 63,965  |      |  | $ | 67,013  |  
|                                                                |  |                    |         |      |  |   |         |  

11



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                            |  |                |           |           |  |   |           | 
|--------------------------- |  | -------------- | --------- | --------- |  | - | --------- | 
|                            |  | December 31,   |           | March 31,
|                            |  | 2003           |           | 2004     
|                            |  |                |           |          
|                            |  |               
|                            |  | (In thousands)
|Total assets: (a)           |  |                |           |           |  |   |           | 
|Defense Systems             |  | $              | 852,863   |           |  | $ | 876,348   | 
|Ship Repair and Maintenance |  |                | 438,575   |           |  |   | 462,084   | 
|Corporate and eliminations  |  |                | 299,726   |           |  |   | 266,162   | 
|                            |  |                |           |           |  |   |           | 
|Total assets                |  | $              | 1,591,164 |           |  | $ | 1,604,594 | 
|                            |  |                |           |           |  |   |           | 



---



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Goodwill and other intangible assets and related
    amortization, and net pension and other post retirement benefits
    are included in the respective business segments. Corporate
    assets primarily include cash and cash equivalents and deferred
    financing costs.

11.     Income
Taxes

We account for income taxes under the liability
method. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws expected to be
effective when these differences reverse.

The provision for income taxes for the
three-month period ended March 31, 2004 and 2003 was
$25.1 million and $25.6 million, respectively. The
provision for taxes in 2004 reflects an effective tax rate of
37.5%.

12.     Related Party
Transactions

In October 1997, The Carlyle Group
(Carlyle) formed United Defense Industries, Inc. as
a wholly-owned entity in order to acquire our predecessor,
United Defense, L.P. Beginning with our initial public offering
in December 2001, Carlyle began to sell major portions of its
United Defense holdings. On April 26, 2004 Carlyle
announced the sale of its remaining 4.5 million United
Defense shares. In connection with our initial public offering,
we entered into agreements with Carlyle pursuant to which
Carlyle entities had the right to designate up to four nominees
for our Board of Directors, so long as Carlyle owned greater
than 20% of our voting stock. By virtue of Carlyles sales
of United Defense shares, such agreements have lapsed.
Nonetheless, three individuals affiliated with Carlyle
(Messrs. Carlucci, Conway, and Clare) have been re-elected
to our Board of Directors at our annual meeting on
April 13, 2004, and Carlyle may thereby continue to
influence our operations.

Commencing with Carlyles acquisition of
United Defense in October 1997, we agreed to pay Carlyle for
various management and consulting services under a management
agreement between Carlyle and United Defense. The management
agreement was terminated in March 2004, and in connection with
the termination, we made a final payment of $3.0 million to
Carlyle for services rendered from January 1, 2002 through
March 31, 2004. We had not previously provided payment to
Carlyle for services during this period.

During the first quarter of 2004, we paid $55,000
to compensate three non-management members of our Board of
Directors for service thereon.

In June 2002 we entered into an agreement with
CPU Technology, Inc. (CPU/ T) to purchase component
and design services regarding electronic subsystems for the
Bradley program. We currently have $1.4 million in purchase
orders with CPU/ T. Certain Carlyle affiliates are minority
stockholders of CPU/ T and collectively have the right to
appoint two of the six members of CPU/ Ts board.

We recognized $8.6 million and
$2.7 million of royalties, license fees and technical
service fees at March 31, 2003 and 2004, respectively, from
our Turkish joint venture. We have also entered into an
agreement with our Turkish joint venture to purchase
approximately $2.9 million in miscellaneous parts and kits
for our M113 vehicles and MK 25 canisters.

12



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##### 





|        |                                                                                                                   
|------- | ------------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of the Results of Operations and Financial Condition 
    March 31, 2004

Special Note Regarding Forward Looking
Statements

Our Form 10-Q disclosure and analysis
concerning our operations, cash flows and financial position,
including, in particular, the likelihood of our success in
developing and expanding our business and the realization of
sales from our backlog, include forward-looking statements
within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Statements that are
predictive in nature, that depend upon or refer to future events
or conditions, or that include words such as
expects, anticipates,
intends, plans, believes,
estimates and similar expressions are
forward-looking statements. Although these statements are based
upon assumptions we consider reasonable, they are subject to
risks and uncertainties that are described more fully below and
in our annual report on Form 10-K for the year ended
December 31, 2003. Accordingly, we can give no assurance
that we will achieve the results anticipated or implied by our
forward-looking statements.

Overview

United Defense is a leader in the design,
development and production of combat vehicles, artillery
systems, naval guns, missile launchers and precision munitions
used by the U.S. Department of Defense (DoD) and
more than 40 foreign militaries, and is the leading U.S.
provider of non-nuclear ship repair, modernization and
conversion services to the U.S. Navy and related government
agencies. For many of our key DoD programs, we are either the
sole-source prime contractor and systems integrator or have been
selected as the subcontractor to provide a major element or
system in the overall program. We conduct global operations
through our manufacturing facilities in the United States and
Sweden, our ship repair facilities in key homeport locations for
the U.S. Navy, a manufacturing joint venture in Turkey, and
co-production programs with various other governments and
foreign contractors.

The Carlyle Group (Carlyle) formed
United Defense Industries, Inc. in October 1997 to facilitate
the acquisition of United Defense, L.P., our predecessor entity.
In July 2002 we acquired USMR from Carlyle. On April 30,
2004, Carlyle completed the sale of the final portion of its
holdings of our common stock.

We had a firm funded backlog of approximately
$2.0 billion as of March 31, 2004, a substantial
majority of which was derived from sole-source, prime contracts.
Approximately 87% of our sales for the three months ended
March 31, 2004 were to the U.S. Government, primarily to
agencies of the DoD (excluding Foreign Military Sales), or
through subcontracts with other government contractors.

Our results of operations, particularly revenue,
gross profits and cash flows, vary significantly from period to
period, depending largely upon the timing of our delivery of
finished products, the terms of our contracts and our level of
export sales. As a result, period-to-period comparisons may show
substantial changes disproportionate to our underlying business
activity. Period to period comparisons are also affected by
acquisitions where the results of operations for the acquired
business are included in our results only for periods subsequent
to the date of acquisition.

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototypes, and some other matters are typically
cost-plus arrangements, under which we are reimbursed for
approved costs and also receive a fee. Our production contracts
are typically fixed-price arrangements under which we assume the
risk of cost overruns and receive the benefit of cost savings.
Our repair and maintenance contracts are a mix of fixed-price
and cost-plus arrangements with a recent trend toward cost-plus.
All of our DoD contracts, whether we are the prime contractor or
a subcontractor, are subject to audit and cost controls. As a
result, the DoD has the right to object to our costs as being
unallowable in kind or amount, which can preclude recovery of
these costs on both cost-plus and negotiated fixed-price
contracts.

There were no material changes to our major
programs from those described in our Form 10-K Report for
the year ended December 31, 2003, other than normal
additional funding as new contracts are negotiated and awarded.

13



---



##### 



Business Segments, Products and
Programs

We operate in two business segments: Defense
Systems and Ship Repair and Maintenance. Our Defense Systems
program portfolio consists of a mix of weapons systems
development, production, upgrade and life cycle support
programs. Our Ship Repair and Maintenance business segment
consists of ship repair, maintenance, and modernization service
programs. Revenue generated from each of our major programs is
summarized below.

|                            |                                         |                    |       |      |  |   |       |       | 
|--------------------------- | --------------------------------------- | ------------------ | ----- | ---- |  | - | ----- | ----- | 
|                            |                                         |                   
|                            |                                         | Three months ended
|                            |                                         | March 31,         
|                            |                                         |                   
|                            |                                         | 2003(a)            |       | 2004
|                            |                                         |                    |       |     
|                            |                                         |                   
|                            |                                         | (In millions)     
|Defense Systems:            |                                         |                    |       |      |  |   |       |      
|                            | Bradley Family of Vehicles              |                    | $     | 89.8 |  |   | $     | 112.4 | 
|                            | Naval Ordnance(b)                       |                    |       | 48.8 |  |   |       | 73.5  | 
|                            | Vertical Launch Systems                 |                    |       | 22.0 |  |   |       | 28.8  | 
|                            | Future Combat Systems(c)                |                    |       | 43.2 |  |   |       | 67.4  | 
|                            | Artillery Systems(d)                    |                    |       | 11.3 |  |   |       | 27.2  | 
|                            | Combat, Engineering & Recovery Vehicles |                    |       | 39.4 |  |   |       | 24.9  | 
|                            | Assault Amphibious Vehicles             |                    |       | 29.5 |  |   |       | 7.0   | 
|                            | Other                                   |                    |       | 56.6 |  |   |       | 68.7  | 
|                            |                                         |                    |       |      |  |   |       |      
|Total Defense Systems       |                                         |                    | 340.6 |      |  |   | 409.9 |      
|Ship Repair and Maintenance |                                         |                    | 125.9 |      |  |   | 137.2 |      
|                            |                                         |                    |       |      |  |   |       |      
|Total                       |                                         | $                  | 466.5 |      |  | $ | 547.1 |      
|                            |                                         |                    |       |      |  |   |       |      



---



|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 2003 revenue by program modified for changes in
    program categories. No changes to segment or total year revenue.                             
|   
|(b) | Modified to include Bofors naval ordnance program
    revenues previously included in Other.                                                   
|   
|(c) | Future Combat Systems including Non Line-of-Sight
    Cannon previously included in Artillery Systems.                                         
|   
|(d) | Modified to include Bofors artillery program
    revenues previously included in Other and move
    Future Combat Systems to separate category.

For a more detailed description of our business
and principal operating programs, see our Form 10-K for the
year ended December 31, 2003.

14



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##### 



Results of Operations

The following table summarizes key income
statement financial results:

|                                                          |                             |                |         |         |   |  |         |         |  
|--------------------------------------------------------- | --------------------------- | -------------- | ------- | ------- | - |  | ------- | ------- | -
|                                                          |                             |               
|                                                          |                             | March 31,     
|                                                          |                             |               
|                                                          |                             | 2003           |         | 2004   
|                                                          |                             |                |         |        
|                                                          |                             |               
|                                                          |                             | (in thousands)
|Revenue:                                                  |                             |                |         |         |   |  |         |        
|                                                          | Defense Systems             |                | $       | 340,583 |   |  | $       | 409,888 |  
|                                                          | Ship Repair and Maintenance |                |         | 125,940 |   |  |         | 137,189 |  
|                                                          |                             |                |         |         |   |  |         |        
|Total Revenue                                             |                             |                | 466,523 |         |   |  | 547,077 |        
|Cost of sales:                                            |                             |                |         |         |   |  |         |        
|                                                          | Defense Systems             |                |         | 251,876 |   |  |         | 312,422 |  
|                                                          | Ship Repair and Maintenance |                |         | 110,707 |   |  |         | 122,665 |  
|                                                          |                             |                |         |         |   |  |         |        
|Total cost of sales                                       |                             |                | 362,583 |         |   |  | 435,087 |        
|Gross Profit:                                             |                             |                |         |         |   |  |         |        
|                                                          | Defense Systems             |                |         | 88,707  |   |  |         | 97,466  |  
|                                                          | Ship Repair and Maintenance |                |         | 15,233  |   |  |         | 14,524  |  
|                                                          |                             |                |         |         |   |  |         |        
|Total gross profit                                        |                             |                | 103,940 |         |   |  | 111,990 |        
|Gross profit % of sales:                                  |                             |                |         |         |   |  |         |        
|                                                          | Defense Systems             |                |         | 26.0    | % |  |         | 23.8    | %
|                                                          | Ship Repair and Maintenance |                |         | 12.1    | % |  |         | 10.7    | %
|                                                          |                             |                |         |         |   |  |         |        
|Total gross profit % of sales                             |                             |                | 22.3    | %       |   |  | 20.5    | %      
|Selling, general and administrative expenses:             |                             |                |         |         |   |  |         |        
|                                                          | Defense Systems             |                | $       | 29,205  |   |  | $       | 30,962  |  
|                                                          | Ship Repair and Maintenance |                |         | 7,865   |   |  |         | 7,797   |  
|                                                          |                             |                |         |         |   |  |         |        
|Total selling, general and administrative expenses        |                             |                | 37,070  |         |   |  | 38,759  |        
|Research and development                                  |                             |                | 1,880   |         |   |  | 6,553   |        
|                                                          |                             |                |         |         |   |  |         |        
|Income from operations                                    |                             |                | 64,990  |         |   |  | 66,678  |        
|Earnings related to investments in foreign
    affiliates |                             |                | 5,549   |         |   |  | 5,816   |        
|                                                          | Interest income             |                |         | 914     |   |  |         | 973     |  
|                                                          | Interest expense            |                |         | (7,488  | ) |  |         | (6,454  | )
|                                                          |                             |                |         |         |   |  |         |        
|Net interest expense                                      |                             |                | (6,574  | )       |   |  | (5,481  | )      
|                                                          |                             |                |         |         |   |  |         |        
|                                                          | Income before income taxes  |                |         | 63,965  |   |  |         | 67,013  |  
|                                                          |                             |                |         |         |   |  |         |        
|Provision for income taxes                                |                             |                | 25,586  |         |   |  | 25,130  |        
|                                                          |                             |                |         |         |   |  |         |        
|                                                          | Net income                  |                | $       | 38,379  |   |  | $       | 41,883  |  
|                                                          |                             |                |         |         |   |  |         |        



| |        
| | -------
| | Revenue

Revenue of $547.1 million for the three
months ended March 31, 2004 was $80.6 million, or 17%
higher than the $466.5 million for the comparable period in
2003. Defense Systems segment revenue of $409.9 million was
$69.3 million, or 20% higher than the $340.6 million
in the first quarter of 2003 driven by higher Bradley upgrade
fieldings, continued ramp-up in development programs including
the Armys Future Combat Systems (FCS) and the
Navys new destroyer program, DD(X), and a surge in combat
vehicle track shipments. Ship Repair and Maintenance segment
revenue of $137.2 million was 9%, or $11.3 million
higher than the same period in 2003.

15



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##### 





| |             
| | ------------
| | Gross profit

Gross profit of $112.0 million for the
three-month period ended March 31, 2004 was
$8.1 million, higher than the $103.9 million for the
corresponding period in 2003. This increase was principally
attributable to higher sales. Gross profit as a percentage of
sales for the three months ended March 31, 2004 was 20.5%
compared with 22.3% for the same period in 2003. The Defense
Systems segments gross profit rate for the three months
ended March 31, 2004 and 2003 was 23.8% and 26.0%,
respectively. The lower gross profit rate in 2004 was due to a
decline in royalties and technology fees from our Turkish joint
venture and a shift in mix as lower margin development programs
such as for FCS and DD(X) account for a higher percentage of
total sales. The Ship Repair and Maintenance segments
gross profit rate was 10.7% for the three months ended
March 31, 2004 compared with 12.1% in the prior year period
due primarily to timing of award fees on cost plus contracts and
a sizeable decline in volume at one of the smaller sites
resulting in a loss at that location through March.



| |                                                 
| | ------------------------------------------------
| | Selling, general and administrative
    expenses

Selling, general and administrative expenses for
the three months ended March 31, 2004 were
$38.8 million, or $1.7 million higher than the $37.1
million for the same period in 2003. Higher retiree benefit
costs, commissions, and the addition of expenses from
acquisitions were the major contributors to the increase, but
were partially offset by reduced amortization of intangible
expense.



| |                         
| | ------------------------
| | Research and development

Research and development costs were
$6.6 million for the three months ended March 31, 2004
compared with $1.9 million for the corresponding prior
period. The increase was primarily associated with higher
spending on several projects related to new market opportunities
and a risk mitigation project.



| |                                 
| | --------------------------------
| | Earnings from foreign affiliates

Earnings from foreign affiliates of
$5.8 million for the three months ended March 31, 2004
compares with $5.5 million for the same period last year.



| |                 
| | ----------------
| | Interest expense

Net interest expense was $5.5 million in the
three months ended March 31, 2004 compared with
$6.6 million in the same period in 2003. The lower interest
expense in 2004 was due to a lower debt level in 2004 and a
lower interest rate on our variable rate debt.



| |                           
| | --------------------------
| | Provision for Income Taxes

The provision for income taxes for the three
month period ended March 31, 2004 was $25.1 million
compared with $25.6 million for the same prior period. The
provision for income taxes is based on an estimated annual
effective income tax rate of 37.5% and 40% for 2004 and 2003,
respectively.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$32.9 million for the three-month period ended
March 31, 2004 compared with $50.6 million in the same
prior period, a $17.7 million decrease. The primary reason
for the decrease was a higher accounts receivable balance at
March 31, 2004 due to timing of billings and collections.

Cash used in investing activities was
$50.8 million for the three-month period ended
March 31, 2004 compared with $3.4 million in the prior
year period. The increase is primarily attributable to three
acquisitions we made during the three-month period: Kaiser
Compositek for $8.3 million, Cercom for $21.2 million,
and Hawaii Shipyards for $16.3 million. We recently agreed
to pay $6.5 million to purchase from the U.S. Navy its
portion of the land and facility we currently operate in
Fridley, Minnesota. This capital expenditure is expected to
occur in the second quarter of 2004.

16



---



##### 



Cash used in financing activities was
$9.7 million for the three-month period ended
March 31, 2004, compared with $0.5 million of cash
provided in the same period in 2003. Debt repaid in the first
quarter of 2004 was $13.0 million versus none in the same period
in 2003. Proceeds from the exercise of stock options increased
to $3.3 million in 2004.

Based on current levels of operations and
anticipated growth, we believe that our cash from operations,
together with other available sources of liquidity, including
borrowings available under the revolving credit facility, will
be sufficient to fund anticipated capital expenditures and make
required payments of principal and interest on debt, including
payments due under our senior credit facility, for the
foreseeable future. Additionally, the cash on hand is sufficient
to permit the company to execute a recently authorized share
repurchase of up to $100 million.



|        |                                                                                
|------- | -------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk  March 31, 2004

All of our financial instruments that are
sensitive to market risk are entered into for purposes other
than trading.

Forward Currency Exchange Risk

We conduct some of our operations outside the
U.S. in functional currencies other than the U.S. dollar. To
mitigate the risk associated with fluctuating currencies on
short-term and long-term foreign currency-denominated
transactions, we enter into foreign currency forward exchange
contracts. We do not enter into foreign currency forward
exchange contracts for trading purposes.

Interest Rate Risk

Borrowings under our senior secured credit
facility are sensitive to changes in interest rates. As of
March 31, 2004 the weighted average interest rate on the
$82.4 million Term A borrowings and on the
$481.5 million Term B borrowings was 3.05%. Loans made
pursuant to the Term A loan facility require equal quarterly
amortization payments of $6.3 million, with a final payment
due on August 13, 2007. On April 29, 2004, we made a
mandatory $9.9 million debt repayment to the Term A lenders
pursuant to the excess cash flow provisions in the current
credit facility. This payment eliminates the amortization
payment due to the Term A lenders on June 30, 2004 and
reduces the Term A amortization due on September 30, 2004
by $3.6 million. Loans made pursuant to the Term B facility
require quarterly amortization payments of $6.7 million
beginning on March 31, 2004 until June 30, 2007, and
$49.4 million each quarter thereafter, with the final
payment being due on August 13, 2009.

In January 2002, we entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings under our senior secured credit
facility. The specified contract amount of this interest rate
swap agreement is $173 million. The agreement entitles us
to pay a base interest rate of 3.45%, in return for the right to
receive a floating interest rate which is based on three-month
LIBOR as of each quarterly measurement date. In the event the
three-month LIBOR at the measurement date exceeds 6%, the base
interest rate is adjusted to the then effective LIBOR up to a
maximum of 8%. USMR had also entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings. The specified amount of the agreement
was $20 million which matured on January 29, 2004. The
net cash amounts paid or received on these agreements are
accrued and recognized as an adjustment to interest expense.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

We maintain disclosure controls and procedures
designed to ensure that information required to be disclosed in
our Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and
procedures, no matter how well

17



---



##### 



designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Also, from time to time we make
investments in unconsolidated entities, the largest of which has
been the 51% ownership position we have held in our Turkish
affiliate since 1989. As we do not control or manage such
entities, the disclosure controls and procedures with respect
thereto may be substantially more limited than those we maintain
with respect to our consolidated subsidiaries.


As of December 31, 2003, we carried out an
evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and
operation of the our disclosure controls and procedures. Based
on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective.

There have been no significant changes in our
internal controls or in other factors that could significantly
affect the internal controls subsequent to the date we completed
the evaluation.

18



---



##### 



PART II

OTHER INFORMATION

March 31, 2004



|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits



| |                                               
| | ----------------------------------------------
| | 31.1 Certification of Chief Executive Officer.
|
| | 31.2 Certification of Chief Financial Officer.
|
| | 32.1 Certification of Chief Executive Officer.
|
| | 32.2 Certification of Chief Financial Officer.

(b) Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 27, 2004, we filed a report on
    Form 8-K to include our fourth quarter earnings press
    release.                                                                                                                                                                                
|
| | On February 24, 2004, we filed a report on
    Form 8-K indicating that we had entered into an
    underwriting agreement with J. P. Morgan Securities, Inc. in
    connection with the public offering of up to 7,000,000 shares of
    our common stock by certain named selling shareholders.

19



---



##### 



SIGNATURE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                                
| | -------------------------------
| | UNITED DEFENSE INDUSTRIES, INC.
| | (registrant)                   



| |     |                   
| | --- | ------------------
| | By: | /s/ FRANCIS RABORN

| |                                               
| | ----------------------------------------------
| |                                               
| | Francis Raborn                                
| | Principal Financial and Accounting
    Officer
| | and Authorized Signatory                      

Dated: May 3, 2004

20