**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterly period endedJune 30, 2006**

 

**or**

 

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

**For the transition period from                       to                      **

**Commission File Number: 1-4252**

 

**UNITED INDUSTRIAL CORPORATION**

(Exact name of registrant asspecified in its charter)

| **Delaware**                                                    | ** ** | **95-2081809**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **124  Industry Lane, Hunt Valley, Maryland**                   | ** ** | **21030**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

**(410) 628-3500**

(Registrant’s telephonenumber, including area code)

 

**Not Applicable**

(Former name, former address and former fiscalyear, if changed since last report)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x   Noo

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 11,420,539 shares of common stock asof July 24, 2006.

 

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**UNITED INDUSTRIALCORPORATION**

**INDEX**
| PART  I - FINANCIAL INFORMATION |                                                                                                |
|---------------------------------|-----------------------------------------------------------------------------------------------------|
|                            |                                                                                                |
|                            | Item 1.  Financial Statements                                                                       |   |
|                            |                                                                                                |   |
|                            |                                                                                                | Consolidated  Condensed Balance Sheets - |   |
|                            |                                                                                                | June 30, 2006 and December  31, 2005 |   |
|                            |                                                                                                |   |
|                            |                                                                                                | Consolidated  Condensed Statements of Operations - |   |
|                            |                                                                                                | Three Months and Six Months  Ended June 30, 2006 and 2005 |   |
|                            |                                                                                                |   |   |
|                            |                                                                                                | Consolidated  Condensed Statements of Cash Flows - |   |
|                            |                                                                                                | Six Months Ended June 30,  2006 and 2005 |   |
|                            |                                                                                                |   |   |
|                            |                                                                                                | Notes to Consolidated Condensed Financial Statements |   |
|                            |                                                                                                |   |
|                            | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                            |                                                                                                |   |
|                            | Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |   |
|                            |                                                                                                |   |
|                            | Item 4. Controls and Procedures                                                                     |   |
|                            |                                                                                                |   |
| PART  II - OTHER INFORMATION    |                                                                                                |
|                            |                                                                                                |
|                            | Item  1. Legal Proceedings                                                                          |   |
|                            |                                                                                                |   |
|                            | Item 4. Submission of Matters to a Vote of Security  Holders                                        |   |
|                            |                                                                                                |   |
|                            | Item 6. Exhibits                                                                                    |   |
|                            |                                                                                                |   |
| SIGNATURES                      |                                                                                                |

1

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**PART I - FINANCIAL INFORMATION**

**Item 1. - Financial Statements**

UNITED INDUSTRIALCORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

*(Dollars in thousands)*
| ** **                                                                                                                                                                                              | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                                                                  |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                         |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                              |       | $                       | 91,101     |                        | $          | 77,496 |   |
| Marketable  equity securities                                                                                                                                                                           |       | —                  |       | 11,617                      |       |
| Deposits and  restricted cash                                                                                                                                                                           |       | —                  |       | 4,810                       |       |
| Trade  receivables, net                                                                                                                                                                                 |       | 97,416                  |       | 69,284                      |       |
| Inventories                                                                                                                                                                                             |       | 33,331                  |       | 23,603                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                              |       | 9,813                   |       | 9,244                       |       |
| Assets of  discontinued operations                                                                                                                                                                      |       | 12,532                  |       | 12,428                      |       |
| Total current  assets                                                                                                                                                                                   |       | 244,193                 |       | 208,482                     |       |
| Marketable equity securities                                                                                                                                                                            |       | 7,888                   |       | —                      |       |
| Deferred income taxes                                                                                                                                                                                   |       | 13,526                  |       | 12,835                      |       |
| Intangible assets, net                                                                                                                                                                                  |       | 10,285                  |       | 7,946                       |       |
| Goodwill                                                                                                                                                                                                |       | 7,365                   |       | 3,607                       |       |
| Other assets                                                                                                                                                                                            |       | 6,336                   |       | 6,602                       |       |
| Insurance receivable -  asbestos litigation                                                                                                                                                             |       | 20,186                  |       | 20,186                      |       |
| Property and equipment –  net                                                                                                                                                                      |       | 42,925                  |       | 44,743                      |       |
| Total assets                                                                                                                                                                                            |       | $                       | 352,704    |                        | $          | 304,401 |   |
|                                                                                                                                                                                                    |       |                    |       |                        |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                                                              |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                    |       |                    |       |                        |       |
| Current portion  of long-term debt                                                                                                                                                                      |       | $                       | 995        |                        | $          | 964 |   |
| Accounts payable                                                                                                                                                                                        |       | 37,994                  |       | 25,787                      |       |
| Accrued employee  compensation and taxes                                                                                                                                                                |       | 14,615                  |       | 17,290                      |       |
| Other current  liabilities                                                                                                                                                                              |       | 38,816                  |       | 20,147                      |       |
| Liabilities of  discontinued operations                                                                                                                                                                 |       | 12,583                  |       | 13,287                      |       |
| Total current  liabilities                                                                                                                                                                              |       | 105,003                 |       | 77,475                      |       |
| Long-term debt                                                                                                                                                                                          |       | 120,050                 |       | 120,723                     |       |
| Post-retirement benefit  obligation other than pension                                                                                                                                                  |       | 18,918                  |       | 19,409                      |       |
| Minimum pension  liability                                                                                                                                                                              |       | 32,329                  |       | 28,448                      |       |
| Accrual for asbestos  obligations                                                                                                                                                                       |       | 31,450                  |       | 31,450                      |       |
| Other liabilities                                                                                                                                                                                       |       | 1,844                   |       | 1,374                       |       |
| Total  liabilities                                                                                                                                                                                      |       | 309,594                 |       | 278,879                     |       |
| Shareholders’ equity:                                                                                                                                                                              |       |                    |       |                        |       |
| Preferred stock,  par value $1.00 per share; 1,000,000 shares authorized; none issued and  outstanding                                                                                                  |       | —                  |       | —                      |       |
| Common stock,  par value $1.00 per share; 30,000,000 shares authorized; 11,420,539 and  11,279,379 shares outstanding at June 30, 2006 And December 31, 2005,  respectively (net of shares in treasury) |       | 14,374                  |       | 14,374                      |       |
| Additional  capital                                                                                                                                                                                     |       | 84,910                  |       | 83,799                      |       |
| Retained  earnings                                                                                                                                                                                      |       | 56,276                  |       | 39,724                      |       |
| Treasury stock,  at cost; 2,953,609 and 3,094,769 shares at June 30, 2006 and December 31,  2005, respectively                                                                                          |       | (73,362                 | )          | (76,868                     | )          |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                       |       | (39,088                 | )          | (35,507                     | )          |
| Total  shareholders’ equity                                                                                                                                                                        |       | 43,110                  |       | 25,522                      |       |
| Total liabilities and shareholders’ equity                                                                                                                                                         |       | $                       | 352,704    |                        | $          | 304,401 |   |

 

See accompanyingnotes to the consolidated condensed financial statements.

2

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UNITED INDUSTRIALCORPORATION AND SUBSIDIARIES

CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS

*(Dollarsin thousands, except per share amounts)*

(Unaudited)
| ** **                                                                                                                                                                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                                                                                                                                                                                                   |       | $                                               | 149,215    |                                          | $          | 119,928 |   | $ | 286,834 |   | $ | 227,476 |   |
| Operating costs and  expenses                                                                                                                                                                                               |       | 132,890                                         |       | 107,312                                       |       | 255,397 |   | 202,622 |   |
| Operating income                                                                                                                                                                                                            |       | 16,325                                          |       | 12,616                                        |       | 31,437 |   | 24,854 |   |
| Non-operating income  and (expense):                                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Gain on sale of  property                                                                                                                                                                                                   |       | —                                          |       | —                                        |       | — |   | 7,152 |   |
| Interest income                                                                                                                                                                                                             |       | 1,092                                           |       | 698                                           |       | 2,181 |   | 1,749 |   |
| Interest expense                                                                                                                                                                                                            |       | (1,442                                          | )          | (1,390                                        | )          | (2,825 | ) | (3,218 | ) |
| Other income  (expense), net                                                                                                                                                                                                |       | 773                                             |       | 253                                           |       | 198 |   | 889 |   |
|                                                                                                                                                                                                                        |       | 423                                             |       | (439                                          | )          | (446 | ) | 6,572 |   |
| Income from continuing  operations before income taxes                                                                                                                                                                      |       | 16,748                                          |       | 12,177                                        |       | 30,991 |   | 31,426 |   |
| Provision for income  taxes                                                                                                                                                                                                 |       | 6,175                                           |       | 3,876                                         |       | 11,563 |   | 10,501 |   |
| Income from continuing  operations                                                                                                                                                                                          |       | 10,573                                          |       | 8,301                                         |       | 19,428 |   | 20,925 |   |
| (Loss) income from  discontinued operations, net of income tax benefit (provision) of $168 and  $123 for the three months ended June 30, 2006 and 2005 and $323 and ($406)  for the six months ended June 30, 2006 and 2005 |       | (314                                            | )          | 145                                           |       | (601 | ) | 193 |   |
| Net income                                                                                                                                                                                                                  |       | $                                               | 10,259     |                                          | $          | 8,446 |   | $ | 18,827 |   | $ | 21,118 |   |
|                                                                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Basic earnings per  share:                                                                                                                                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                                                                          |       | $                                               | 0.93       |                                          | $          | 0.69 |   | $ | 1.71 |   | $ | 1.72 |   |
| (Loss) income  from discontinued operations                                                                                                                                                                                 |       | (0.03                                           | )          | 0.01                                          |       | (0.05 | ) | 0.01 |   |
| Net income                                                                                                                                                                                                                  |       | $                                               | 0.90       |                                          | $          | 0.70 |   | $ | 1.66 |   | $ | 1.73 |   |
| Diluted earnings per  share:                                                                                                                                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                                                                          |       | $                                               | 0.74       |                                          | $          | 0.60 |   | $ | 1.43 |   | $ | 1.44 |   |
| (Loss) income  from discontinued operations                                                                                                                                                                                 |       | (0.02                                           | )          | 0.01                                          |       | (0.04 | ) | 0.01 |   |
| Net income                                                                                                                                                                                                                  |       | $                                               | 0.72       |                                          | $          | 0.61 |   | $ | 1.39 |   | $ | 1.45 |   |

 

Seeaccompanying notes to the consolidated condensed financial statements.

3

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UNITED INDUSTRIALCORPORATION AND SUBSIDIARIES

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS

*(Dollarsin thousands)*

(Unaudited)
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 18,827     |   | $ | 21,118 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                          |       |   |   |
| Loss (income) from  discontinued operations, net of taxes                          |       | 601                                           |       | (193 | ) |
| Amortization of  debt issuance costs and deferred financing costs                  |       | 644                                           |       | 491 |   |
| Depreciation and  amortization                                                     |       | 5,448                                         |       | 4,010 |   |
| Stock based  compensation                                                          |       | 1,144                                         |       | — |   |
| Gain on sale of  property                                                          |       | —                                        |       | (7,152 | ) |
| Deferred income  taxes                                                             |       | (636                                          | )          | 2,816 |   |
| Income from  equity investment in joint venture                                    |       | (213                                          | )          | (52 | ) |
| Excess tax  benefit from stock based compensation                                  |       | (1,059                                        | )          | — |   |
| Other – net                                                                   |       | 346                                           |       | (1,309 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                          |       |   |   |
| Increase in trade  receivables                                                     |       | (28,132                                       | )          | (12,670 | ) |
| (Increase)  decrease in inventories                                                |       | (9,478                                        | )          | 12,362 |   |
| Decrease in  prepaid expenses and other current assets                             |       | 238                                           |       | 3,030 |   |
| Increase  (decrease) in accounts payable, accruals and other current liabilities   |       | 28,136                                        |       | (2,390 | ) |
| Increase in  long-term liabilities                                                 |       | 3,859                                         |       | 1,191 |   |
| Net cash provided by  operating activities from continuing operations              |       | 19,725                                        |       | 21,252 |   |
| Net cash used in  operating activities by discontinued operations                  |       | (1,409                                        | )          | (2,596 | ) |
| Net cash provided by  operating activities                                         |       | 18,316                                        |       | 18,656 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         |       |                                          |       |   |   |
| Purchases of property  and equipment                                               |       | (3,526                                        | )          | (12,591 | ) |
| Proceeds from sale of  available-for-sale securities                               |       | —                                        |       | 124,626 |   |
| Purchase of marketable  equity securities                                          |       | —                                        |       | (12,684 | ) |
| Business acquisition,  net of cash acquired                                        |       | (6,556                                        | )          | (9,883 | ) |
| Proceeds from sale of  property                                                    |       | —                                        |       | 7,555 |   |
| Net cash (used in)  provided by investing activities                               |       | (10,082                                       | )          | 97,023 |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         |       |                                          |       |   |   |
| Repayment of long-term  debt                                                       |       | (642                                          | )          | (638 | ) |
| Repayment of collateral  received from securities lending transaction              |       | —                                        |       | (124,619 | ) |
| Decrease in deposits  and restricted cash                                          |       | 4,810                                         |       | 29,046 |   |
| Proceeds from exercise  of stock options                                           |       | 2,414                                         |       | 1,208 |   |
| Excess tax benefit from  stock based compensation                                  |       | 1,059                                         |       | — |   |
| Dividends paid                                                                     |       | (2,270                                        | )          | (2,465 | ) |
| Purchase of treasury  shares                                                       |       | —                                        |       | (24,978 | ) |
| Net cash provided by  (used in) financing activities                               |       | 5,371                                         |       | (122,446 | ) |
| Increase (decrease) in  cash and cash equivalents                                  |       | 13,605                                        |       | (6,767 | ) |
| Cash and cash  equivalents at beginning of year                                    |       | 77,496                                        |       | 80,679 |   |
| Cash and cash equivalents at end of period                                         |       | $                                             | 91,101     |   | $ | 73,912 |   |

 

See accompanyingnotes to the consolidated condensed financial statements.

4

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UNITED INDUSTRIALCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Dollars in thousands, except share and per share amounts, or unless otherwisenoted)

**Note A -Basis of Presentation and Nature of Operations**

Theaccompanying Consolidated Condensed Financial Statements of United IndustrialCorporation (“United Industrial”) and its subsidiaries (collectively, the “Company”)have been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America (GAAP) for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring items) considered necessary for a fairpresentation have been included. Operating results for the three month and six month periods ended June30, 2006 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2006.  Theseunaudited Consolidated Condensed Financial Statements should be read inconjunction with the Consolidated Financial Statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

OnApril 4, 2005, the Company acquired ESL Defence Limited (“ESL”), an electronicwarfare systems company based in the United Kingdom. The operating results ofESL have been included in the consolidated financial statements of the Companysince April 4, 2005.  On June 19, 2006,the Company acquired Aerosonde Pty  Ltd,a Victoria, Australia-based manufacturer of Unmanned Aircraft Vehicles (“UAV”)and Aerosonde North America, Inc., which operates the Aerosonde UAV in supportof customer research and development and weather forecasting requirements ofU.S. based customers (collectively “Aerosonde”).  The operating results of Aerosonde have beenincluded in the consolidated financial statements of the Company since June 19,2006.

The Company conducts asignificant amount of business with the U.S. Government.  No single customer other than the U.S.Government accounted for ten percent or more of consolidated net sales in anyyear.

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements as well as reported amounts of revenues andexpenses during the reporting period. Actual results could differ from these estimates and those differencescould be material.  Certain prior yearamounts have been reclassified to conform to current year presentation.  Specifically, general and administrativeexpenses have been included in operating costs and expenses.

**Note B -****New Accounting Prouncement**

OnJuly 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty inIncome Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”) wasissued.  The provisions of FIN 48 areeffective for fiscal years beginning after December 15, 2006.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, Accounting for Income Taxes.  It also prescribes a recognition thresholdand measurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  The Company is currently evaluating theimpact of FIN 48 on its results of operations, financial condition or cashflows.

**Note C -Segment Information - Continuing Operations**

The Company consists of two reportable segments:Defense and Energy.  The operations ofthe Defense and Energy segments are conducted principally through two whollyowned subsidiaries, AAI Corporation and its subsidiaries (“AAI”) and DetroitStoker Company (“Detroit Stoker”), respectively.  The Company measures its segment performancebased on income (loss) before income taxes. Costs related to the continuing operations that are not identified withthe two business segments primarily relate to financing costs and are groupedunder the heading Other.  The Company hasa transportation operation that is accounted for as discontinued operations inthe accompanying Consolidated Condensed Financial Statements.

5

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| ** **                                                    | ** ** | **Defense** | ** ** | **Energy** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|------------|------------|
| Three Months  Ended June 30, 2006                             |       |        |       |       |       |      |       |       |       |
| Net sales                                                     |       | $           | 137,400    |       | $          | 11,815    |       | $          | —     |   | $ | 149,215 |   |
| Operating costs  and expenses                                 |       | 123,913     |       | 8,530      |       | 447       |       | 132,890    |       |
| Operating income                                              |       | 13,487      |       | 3,285      |       | (447      | )          | 16,325     |       |
| Income from  equity investment in joint venture               |       | 168         |       | —     |       | —    |       | 168        |       |
| Interest income  (expense), net                               |       | 192         |       | 184        |       | (726      | )          | (350       | )          |
| Depreciation and  amortization expense                        |       | 2,587       |       | 47         |       | —    |       | 2,634      |       |
| Income (loss) from  continuing operations before income taxes |       | 13,817      |       | 3,479      |       | (548      | )          | 16,748     |       |
|                                                               |            |             |            |            |            |           |            |            |            |  |  |  |  |

 
| ** **                                                    | ** ** | **Defense** | ** ** | **Energy** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|------------|------------|
| Three Months  Ended June 30, 2005                             |       |        |       |       |       |      |       |       |       |
| Net sales                                                     |       | $           | 111,614    |       | $          | 8,314     |       | $          | —     |   | $ | 119,928 |   |
| Operating costs  and expenses                                 |       | 99,913      |       | 7,415      |       | (16       | )          | 107,312    |       |
| Operating income                                              |       | 11,701      |       | 899        |       | 16        |       | 12,616     |       |
| Income from  equity investment in joint venture               |       | 38          |       | —     |       | —    |       | 38         |       |
| Interest income  (expense), net                               |       | 109         |       | 48         |       | (849      | )          | (692       | )          |
| Depreciation and  amortization expense                        |       | 1,991       |       | 75         |       | —    |       | 2,066      |       |
| Income (loss) from  continuing operations before income taxes |       | 12,212      |       | 915        |       | (950      | )          | 12,177     |       |
|                                                               |            |             |            |            |            |           |            |            |            |  |  |  |  |

 
| ** **                                                    | ** ** | **Defense** | ** ** | **Energy** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|------------|------------|
| Six Months Ended  June 30, 2006                               |       |        |       |       |       |      |       |       |       |
| Net sales                                                     |       | $           | 266,101    |       | $          | 20,733    |       | $          | —     |   | $ | 286,834 |   |
| Operating costs  and expenses                                 |       | 238,959     |       | 15,741     |       | 697       |       | 255,397    |       |
| Operating income  (loss)                                      |       | 27,142      |       | 4,992      |       | (697      | )          | 31,437     |       |
| Income from  equity investment in joint venture               |       | 213         |       | —     |       | —    |       | 213        |       |
| Interest income  (expense), net                               |       | 492         |       | 348        |       | (1,484    | )          | (644       | )          |
| Depreciation and  amortization expense                        |       | 5,354       |       | 94         |       | —    |       | 5,448      |       |
| Income (loss) from  continuing operations before income taxes |       | 27,832      |       | 5,345      |       | (2,186    | )          | 30,991     |       |
|                                                               |            |             |            |            |            |           |            |            |            |  |  |  |  |

 
| ** **                                                    | ** ** | **Defense** | ** ** | **Energy** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|------------|------------|
| Six Months Ended  June 30, 2005                               |       |        |       |       |       |      |       |       |       |
| Net sales                                                     |       | $           | 211,771    |       | $          | 15,705    |       | $          | —     |   | $ | 227,476 |   |
| Operating costs  and expenses                                 |       | 187,952     |       | 14,702     |       | (32       | )          | 202,622    |       |
| Operating income                                              |       | 23,819      |       | 1,003      |       | 32        |       | 24,854     |       |
| Income from  equity investment in joint venture               |       | 52          |       | —     |       | —    |       | 52         |       |
| Interest income  (expense), net                               |       | 116         |       | 87         |       | (1,672    | )          | (1,469     | )          |
| Depreciation and  amortization expense                        |       | 3,860       |       | 150        |       | —    |       | 4,010      |       |
| Income (loss) from  continuing operations before income taxes |       | 31,659      |       | 1,090      |       | (1,323    | )          | 31,426     |       |
|                                                               |            |             |            |            |            |           |            |            |            |  |  |  |  |

 

6

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##### **Note D - Earnings Per Share**

Basic earnings per sharefor all periods presented was computed by dividing net earnings for therespective period by the weighted average number of shares of the Company’scommon stock outstanding during the period. Diluted earnings per share was computed by dividing (i) net earningsduring the period, adjusted to add back the after-tax interest and other  charges incurred on the Company’s $120,000aggregate principal amount of 3.75% Convertible Senior Notes due September 15,2024, by (ii) the weighted average number of shares of Common Stock outstandingduring the period, adjusted to add the weighted average number of potentialdilutive common shares that would have been outstanding upon the assumedexercise of stock options using the treasury stock method and conversion of the3.75% Convertible Senior Notes for Common Stock.

Options to purchase37,500 shares and 128,500 shares of the Company’s Common Stock for the threeand six months ended June 30, 2006, respectively, and options to purchase189,000 shares of the Company’s Common Stock for the three and six months endedJune 30, 2005 were not included in the computation of diluted earnings pershare because their impact would be anti-dilutive.

Basic and dilutedearnings per share amounts were computed as follows:
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Earnings**                                        | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
|                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations  |       | $                                                   | 10,573     |   | 11,400,448 |   | $ | 0.93 |   | $ | 8,301 |   | 12,077,612 |   | $ | 0.69 |   |
|                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of Dilutive  Securities     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Stock Options                      |       | —                                              |       | 399,259 |   |   |   | — |   | 410,267 |   |   |   |
| 3.75% Convertible Senior Notes     |       | 492                                                 |       | 3,058,356 |   |   |   | 989 |   | 3,058,356 |   |   |   |
| Diluted Earnings  Per Share        |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Income from  continuing operations |       | $                                                   | 11,065     |   | 14,858,063 |   | $ | 0.74 |   | $ | 9,290 |   | 15,546,235 |   | $ | 0.60 |   |

 
| ** **                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Earnings**                                      | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
|                               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations  |       | $                                                 | 19,428     |   | 11,345,420 |   | $ | 1.71 |   | $ | 20,925 |   | 12,196,224 |   | $ | 1.72 |   |
|                               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  Dilutive Securities     |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Stock Options                      |       | —                                            |       | 416,578 |   |   |   | — |   | 426,328 |   |   |   |
| 3.75% Convertible Senior Notes     |       | 1,802                                             |       | 3,058,356 |   |   |   | 1,596 |   | 3,058,356 |   |   |   |
| Diluted Earnings  Per Share        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing  operations |       | $                                                 | 21,230     |   | 14,820,354 |   | $ | 1. 43 |   | $ | 22,521 |   | 15,680,908 |   | $ | 1.44 |   |

 

7

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**Note E - StockBased Compensation**

TheCompany adopted the provisions of Statement of Financial Accounting StandardNo. 123 Revised, Accounting for Stock Based Compensation (“SFAS 123R”) onJanuary 1, 2006, using the modified prospective method.  Under that transition method, compensationcost is recognized for all awards granted after the effective date, and to allawards modified, repurchased, or cancelled after that date.  In addition, compensation cost is recognizedon or after the effective date for the portion of outstanding awards for whichthe requisite service has not yet been rendered, based on the grant date fairvalue of those awards previously calculated and reported in the pro formadisclosures under Statement of Financial Accounting Standards No. 123,Accounting for Stock Based Compensation, (“SFAS No. 123”).  Net income for the three and six months endedJune 30, 2006 includes $508 net of tax, or $0.03 per diluted share and $743 netof tax or $0.05 per diluted share, respectively, of stock based compensationexpense.  Stock based compensationexpense was recorded in selling and administrative expenses included in operatingincome.  In accordance with the modifiedprospective adoption method of SFAS 123R, financial results for the priorperiods have not been restated.  Based onthe number of unvested outstanding awards at June 30, 2006, the effect ofadopting SFAS No. 123R is expected to increase compensation cost for the yearended December 31, 2006, by approximately $2,432 before tax.  Additional compensation cost will berecognized as new options are awarded. The Company has not made any material modifications to its stock-basedcompensation plans as the result of the issuance of SFAS No. 123R.

Prior to January 1, 2006, the Companyaccounted for its stock-based compensation plans in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APBNo. 25”), and its related implementation guidance, whereby compensation costfor stock options was recognized in earnings based on the excess, if any, ofthe quoted market price of the stock at the grant date of the award or othermeasurement date over the amount an employee must pay to acquire thestock.  Had compensation cost beendetermined consistent with the fair value method set forth under SFAS No. 123,for all awards under the plans, income and earnings per share from continuing operationswould have decreased to the pro forma amount indicated below for the three andsix months ended June 30, 2005:
|                                                                                                                        | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                                                                   |       |                                                  |       |                                                |       |
| Income from  continuing operations:                                                                                    |       |                                                  |       |                                                |       |
| As reported                                                                                                            |       | $                                                     | 8,301      |                                                | $          | 20,925 |   |
| Deduct: Total employee stock-based compensation  expense determined under fair value method for all awards, net of tax |       | (259                                                  | )          | (467                                                | )          |
|                                                                                                                   |       |                                                  |       |                                                |       |
| Pro forma income from continuing operations  determined under the fair value based method, net of tax                  |       | $                                                     | 8,042      |                                                | $          | 20,458 |   |
|                                                                                                                   |       |                                                  |       |                                                |       |
| Earnings per  share from continuing operations:                                                                        |       |                                                  |       |                                                |       |
|                                                                                                                   |       |                                                  |       |                                                |       |
| As reported:                                                                                                           |       |                                                  |       |                                                |       |
| Basic                                                                                                                  |       | $                                                     | 0.69       |                                                | $          | 1.72 |   |
| Diluted                                                                                                                |       | 0.60                                                  |       | 1.44                                                |       |
| Pro forma:                                                                                                             |       |                                                  |       |                                                |       |
| Basic                                                                                                                  |       | $                                                     | 0.67       |                                                | $          | 1.68 |   |
| Diluted                                                                                                                |       | 0.58                                                  |       | 1.41                                                |       |

 

On May 18, 2006, the Company’s shareholdersapproved the 2006 Long Term Incentive Plan (the “2006 Plan”) at the AnnualMeeting of Shareholders.  The 2006 Planwas approved by the Company’s Board of Directors (the “Board”) onMarch 30, 2006, subject to shareholder approval. The 2006 Plan providesfor the granting of cash and equity-based incentives in the form ofnon-qualified stock options, stock appreciation rights, performance shares,restricted stock, other stock-based awards and performance-based cash awards toall of the Company’s employees, consultants and non-employee directors. Inaddition, employees of the Company’s affiliates that qualify as subsidiaries(as defined under Section 424 of

8

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the Internal Revenue Code) are eligible to begranted incentive stock options under the 2006 Plan. The 2006 Plan isadministered by the Compensation and Stock Option Committee of the Board ofDirectors (the “Compensation Committee”).

Awards that were granted on or prior to May 18,2006 (collectively, the “Prior Awards”), under the United IndustrialCorporation 1994 Stock Option Plan, as amended, United Industrial Corporation1996 Stock Option Plan for Non-employee Directors, as amended, and UnitedIndustrial Corporation 2004 Stock Option Plan (collectively the “Prior Plans”),were transferred to and assumed by the 2006 Plan as of May 18, 2006, and aresubject to the 2006 Plan’s share reserves and provisions in respect ofadjustments; provided that the Prior Awards otherwise continue to be governedby the terms of the applicable agreement in effect prior to such assumption andtransfer.  Upon approval of the 2006Plan, no further awards may be made under the Prior Plans.

Theaggregate number of shares of common stock which may be issued or used forreference purposes under the 2006 Plan is 1,787,204 shares, of which 1,034,704shares are in respect of the Prior Awards. Shares issued under the 2006 Plan may be authorized and unissued sharesor previously issued shares acquired or to be acquired by the Company and heldin its treasury.   As of June 30, 2006,the Company had not awarded any equity-based compensation under the 2006 Planother than stock options.  Under the 2006Plan, the exercise price for each share subject to a stock option granted maynot be less than 100% of the market value of the Common Stock on the date thestock option is granted.

Underthe terms of the 2006 Plan, the term of each stock option granted to anemployee or consultant is fixed by the Compensation Committee, provided that nostock option may be exercisable more than 10 years after the date the stockoption is granted; and provided further that the term of an Incentive StockOption granted to a ten percent shareholder may not exceed five years.

Unlessotherwise determined by the Compensation Committee at the time of grant or in awritten employment agreement, employee and consultant awards subject to vestingand/or restrictions will accelerate and vest, or restrictions will lapse, upona change in control (as defined in the 2006 Plan) of the Company.  In addition, at the discretion of the CompensationCommittee, such awards will be (i) assumed and continued or substituted inaccordance with applicable law, (ii) purchased by the Company for an amountequal to the excess of the price of the Company’s common stock paid in a changein control over the exercise price of the award, or (iii) cancelled if theprice of the Company’s common stock paid in a change in control is less thanthe exercise price of the award.  TheCompensation Committee may also, in its sole discretion, provide foraccelerated vesting or lapse of restrictions of an award at any time.  All awards under the 2006 Plan must begranted subject to a minimum one-year vesting condition, other than in the caseof the participant’s death or change in control.

Underthe 2006 Plan, the Compensation Committee may grant nonqualified stock optionsto non-employee directors to purchase up to 5,000 shares of common stock as ofthe date of the annual meeting of the shareholders of the Company at which thedirector is elected or re-elected to service. Stock options granted tonon-employee directors are exercisable at the next annual meeting ofshareholders of the Company that occurs after the date of grant subject to thedirector’s continuous service through that date.  All non-employee director stock optionsbecome fully vested and exercisable in the event of a change in control of theCompany during the director’s period of service, and are exercisable for aperiod of one year following termination of service as a director unless forcause (as defined in the Plan), in which case the stock option will beimmediately cancelled.

Underthe 2004 Plan and the 1994 Plan (collectively, the “Prior Employee Option Plans”),the exercise price for each share subject to a stock option may not be lessthan 100% of the market value of the Common Stock on the date the stock optionwas granted.  Stock options granted underthe Prior Employee Option Plans are exercisable over a period determined by theBoard of Directors, but no longer than ten years after the date they aregranted under the 1994 Plan and five years for the 2004 Plan.  Stock options granted under the PriorEmployee Option Plans generally vest in three equal installments on the first,second and third anniversaries of the date of grant. Under the Prior EmployeePlans, upon as change in control (as defined in the plan) all outstanding stockoptions become immediately exercisable. In addition, at the discretion of the Compensation Committee, such stockoption may terminated for an amount equal to the excess of the price of theCompany’s common stock paid in a change in control over the exercise price ofthe stock option.

9

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Underthe 1996 Stock Option Plan for Non-Employee Directors, as amended (the “1996Plan”), the exercise price for each share subject to a stock option granted maynot be less than 100% of the market value of the Common Stock on the date thestock option was granted.  With theexception of two grants on May 18, 2006, stock options granted under the 1996Plan are exercisable up to one-third as of the grant date of the stock option,and up to an additional one-third as of the date of each subsequent annualmeeting of shareholders.  Stock optionsgranted pursuant to the 1996 Plan prior to April 8, 2004 expire and are nolonger exercisable after ten years from the date of grant, and, as the resultof an amendment to the 1996 Plan during 2004, stock options granted after April8, 2004 expire after five years from the date of grant. Pursuant to the 1996Plan, Eligible Directors (as defined in the 1996 Plan) were granted a stockoption to purchase 15,000 shares of common stock upon initial appointment tothe Board of Directors.  Thereafter, eachEligible Director received further automatic grants of a stock option topurchase 15,000 shares of common stock on the date of the third annualshareholders’ meeting following the date of the last grant under the 1996 Planprovided the director continued in office following the annual meeting.   Upon a change in control (as defined in the1996 Plan), all outstanding stock options become immediately exercisable, andupon the occurrence of certain change in control events, immediately terminateand entitle the holder to an amount equal to the excess of the price of theCompany’s common stock paid in a change in control over the exercise price ofthe stock option.

Inconnection with the adoption of the 2006 Plan by the Board of Directors inMarch 2006, the Board of Directors amended the 1996 Plan to provide for a finalaward under the 1996 Plan of a fully exercisable stock option to purchase 5,000shares to two directors (if re-elected to office) who otherwise would havereceived automatic grants for 15,000 shares exercisable under the old formuladescribed above.

Asummary of stock option activity under all plans is as follows:
|                                 | ** ** | **Number of  Shares  (in thousands)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Remaining  Contractual  Term (Yrs)** | ** ** | **Weighted -  Average  Exercise Price** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|
| Balance at  December 31, 2005   |       | 945                                             |       | —                          |       | —                                      |       | $                                                 | 20.73      |   |
| Granted                         |       | 173                                             |       | —                          |       | —                                      |       | $                                                 | 52.86      |   |
| Exercised                       |       | (141                                            | )          | —                          |       | —                                      |       | $                                                 | 17.10      |   |
| Cancelled                       |       | (2                                              | )          | —                          |       | —                                      |       | $                                                 | 24.29      |   |
| Balance at June  30, 2006       |       | 975                                             |       | $                               | 19,160     |                                        | 5.22       |                                              | $          | 26.96 |   |
|                            |       |                                            |       |                            |       |                                        |       |                                              |       |
| Exercisable at  June 30, 2006   |       | 581                                             |       | $                               | 15,570     |                                        | 5.39       |                                              | $          | 18.50 |   |
| Unexercisable at  June 30, 2006 |       | 394                                             |       | $                               | 3,590      |                                        | 4.98       |                                              | $          | 39.41 |   |
| Available for future  grants    |       | 812                                             |       |                            |       |                                        |       |                                              |       |

 

Asummary of nonvested stock option activity under all plans is as follows:
|                               | ** ** | **Number of  Shares  (in thousands)** | ** ** | **Weighted -  Average Grant  Date  Fair Value** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Nonvested at  January 1, 2006 |       | 366                                             |       | $                                                              | 9.29       |   |
| Granted                       |       | 173                                             |       | $                                                              | 18.43      |   |
| Vested                        |       | (143                                            | )          | $                                                              | 8.96       |   |
| Cancelled                     |       | (2                                              | )          | $                                                              | 7.68       |   |
| Nonvested at June 30,  2006   |       | 394                                             |       | $                                                              | 13.43      |   |

 

Asof June 30, 2006, there was $4,403 of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under theplans.  That cost is expected to berecognized over a three year period.

10

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The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option pricing model to estimate the fair value ofemployee stock options based on the exercise price of the option, the expectedterm of the option, the current price of the underlying share, the expectedvolatility of the price of the underlying share over the expected life of theoption, the expected dividends on the underlying share and the risk-freeinterest rate for the expected term of the option as of the date of grant usingthe following assumptions:
|                          | ** ** | 2006 Grants | ** ** | **2005 Grants** | ** ** |
|--------------------------|------------|------------------|------------|----------------------|------------|
| Risk-free  interest rate |       | 4.46% - 4.95%    |       | 3.73% - 4.36%        |       |
| Expected  dividend yield |       | 0.68% - 0.90%    |       | 1.00% - 1.30%        |       |
| Expected  volatility     |       | 38.42% - 40.61%  |       | 35.79% - 40.31%      |       |
| Expected  life           |       | 4.0 years        |       | 5.0 years            |       |

 

##### **NoteF – Marketable Equity Securities**

##### TheCompany’s investment in marketable equity securities consist of an investmentin common stock of one company in the Aerospace and Defense industry.  Unrealized holding gains and losses deemedtemporary on available-for-sale securities are excluded from earnings and arereported as a separate component of other comprehensive income until realized. If an unrealized holding loss is deemed tobe other-than-temporary, such unrealized loss is charged to earnings whenidentified.  An unrealized loss of $6,074in the second quarter was recorded in other comprehensive income at June 30,2006.  Management believes that themagnitude of the unrealized loss is attributable to the June 2006 disclosuresof an indictment of the issuer and its chairman and suspension of certain of its plants from receiving U.S. governmentcontracts, and possible delisting of its common stock.  Management evaluated the near-term prospectsof the issuer in relation to the severity (at June 30, 2006 the market valuewas 37% less than the Company’s cost) and duration of the unrealized loss (lessthan one month).  Based on thatevaluation and the Company’s ability and intent to hold the investment for areasonable period of time sufficient for a forecasted recovery of fair value,the Company does not consider this investment to be other-than-temporarilyimpaired at June 30, 2006.

##### **NoteG - Supplemental Balance Sheet and Cash Flow Information**

Inventoriesconsisted of the following components:
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Finished goods and  work-in-process |       | $                 | 27,106     |                  | $          | 21,601 |   |
| Materials and supplies              |       | 6,225             |       | 2,002                 |       |
| Total inventories                   |       | $                 | 33,331     |                  | $          | 23,603 |   |

 

Cashpaid for Federal income taxes during the six months ended June 30, 2006 and2005 was $8,010 and $6,500, respectively. Cash paid for interest during the sixmonths ended June 30, 2006 and 2005 was $2,332 and $2,286, respectively.

11

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**Note H - Pension and Other Post-retirementBenefits**

The following table provides thecomponents of net periodic pension benefit cost for the three and six monthsended June 30, 2006 and 2005:
|                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                       |       | $                                               | 1,189      |                                          | $          | 809 |   | $ | 2,384 |   | $ | 1,618 |   |
| Interest cost                      |       | 2,621                                           |       | 2,579                                         |       | 5,231 |   | 5,158 |   |
| Expected return  on plan assets    |       | (3,207                                          | )          | (3,209                                        | )          | (6,415 | ) | (6,419 | ) |
| Net amortization  and deferral:    |       |                                            |       |                                          |       |   |   |   |   |
| Amortization of prior service cost |       | 182                                             |       | 69                                            |       | 365 |   | 138 |   |
| Amortization of actuarial loss     |       | 1,264                                           |       | 1,054                                         |       | 2,524 |   | 2,108 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Net periodic  pension benefit cost |       | $                                               | 2,049      |                                          | $          | 1,302 |   | $ | 4,089 |   | $ | 2,603 |   |

 

The following table provides thecomponents of post-retirement benefit obligation cost other than pension forthe three and six months ended June 30, 2006 and 2005:
|                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                        |       | $                                               | 39         |                                          | $          | 48 |   | $ | 87 |   | $ | 95 |   |
| Interest cost                       |       | 301                                             |       | 297                                           |       | 615 |   | 593 |   |
| Net amortization  and deferral:     |       |                                            |       |                                          |       |   |   |   |   |
| Amortization of prior service cost  |       | (3                                              | )          | (5                                            | )          | (6 | ) | (9 | ) |
| Amortization of actuarial loss      |       | 29                                              |       | 3                                             |       | 75 |   | 6 |   |
|                                |       |                                            |       |                                          |       |   |   |   |   |
| Other  post-retirement benefit cost |       | $                                               | 366        |                                          | $          | 343 |   | $ | 771 |   | $ | 685 |   |

 

The followingtable provides the Company’s contributions to and benefits paid under pensionand post-retirement benefit plans:
|                                                                            | ** ** | **Pension Benefits  Six Months Ended  June 30,** | ** ** | **Post-retirement Benefit  Obligation Other Than  Pension  Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                         | ** ** | **2005**                                                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected fiscal year  contributions reported at the end of the prior year: |       |                                             |       |                                                                                                                  |       |   |   |   |   |
| Employer                                                                   |       | $                                                | 935        |                                                                                                                  | $          | 244 |   | $ | 2,689 |   | $ | 3,007 |   |
| Employee                                                                   |       | —                                           |       | —                                                                                                                |       | — |   | — |   |
|                                                                       |       | 935                                              |       | 244                                                                                                                   |       | 2,689 |   | 3,007 |   |
|                                                                       |       |                                             |       |                                                                                                                  |       |   |   |   |   |
| Actual contributions  made in the current year                             |       | 208                                              |       | 88                                                                                                                    |       | 1,262 |   | 1,844 |   |
| Remaining contributions  expected to be made in the current year           |       | 727                                              |       | 156                                                                                                                   |       | 1,189 |   | 1,504 |   |
| Total expected current  year contributions                                 |       | 935                                              |       | 244                                                                                                                   |       | 2,451 |   | 3,348 |   |
| Difference from  expectations at end of the prior year                     |       | $                                                | —     |                                                                                                                  | $          | — |   | $ | (238 | ) | $ | (341 | ) |

#####  

12

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##### **Note I - Comprehensive Income**

The following table sets forth the components of othercomprehensive income and total comprehensive income:
|                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                   |       | $                                               | 10,259     |                                          | $          | 8,446 |   | $ | 18,827 |   | $ | 21,118 |   |
|                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Other comprehensive  income:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Unrealized  (loss) gain on marketable securities, net of tax |       | (6,074                                          | )          | 151                                           |       | (4,075 | ) | 155 |   |
| Gain (loss) on  foreign currency translation                 |       | 388                                             |       | (242                                          | )          | 494 |   | (242 | ) |
| Total comprehensive  income                                  |       | $                                               | 4,573      |                                          | $          | 8,355 |   | $ | 15,246 |   | $ | 21,031 |   |

 

##### **Note J – Acquisitions**

On June 19, 2006, theCompany acquired Aerosonde Pty Ltd. and Aerosonde North America, Inc. in stockpurchase transactions for an aggregate purchase price of $6,556 net of cashacquired, with additional consideration payable upon the achievement of certainmilestones.  The operating results ofAerosonde have been included in the consolidated financial statements of theCompany since June 19, 2006.  The purchaseprice for the stock of Aerosonde has been allocated to the estimated fair valueof net tangible and intangible assets acquired, with any excess recorded asGoodwill.  The estimates related to theacquisition are still preliminary at June 30, 2006.  The Company is awaiting the completion of thefinal identification and valuation of intangible assets acquired.  On June 19, 2006, the Goodwill and intangibleassets were estimated to be $3,595 and $2,532, respectively of the purchaseprice.

|                           | ** ** | **At June 19, 2006** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
|                      |       |                                |       |
| Cash and equivalents      |       | 80                                  |       |
| Current assets            |       | 828                                 |       |
| Property and equipment    |       | 179                                 |       |
| Intangible assets         |       | 2,532                               |       |
| Goodwill                  |       | 3,595                               |       |
| Total assets acquired     |       | 7,214                               |       |
|                      |       |                                |       |
| Current liabilities       |       | 768                                 |       |
| Total liabilities assumed |       | 768                                 |       |
| Net assets acquired       |       | 6,446                               |       |

 

##### **Note K - Discontinued TransportationOperations**

In December 2001, a decisionwas made to discontinue the transportation business. Further, the Companyceased to accept new transportation business at that time.  It was decided that AAI would sell all orpart of the transportation business and “runoff” the operations for anyremaining contractual obligations.  As ofJune 30, 2006, the Company’s transportation operations consist primarily of oneremaining production contract between Electric Transit, Inc. (“ETI”) and SanFrancisco Municipal Railway (“MUNI”). AAI owns a 35% interest in the shares of ETI, with the remaining 65%owned by a Czech company, Skoda a.s. (“Skoda”). As of April 22, 2006, AAI’s guarantee of certain of ETI’s obligationsregarding the MUNI contract expired, thereby concluding AAI’s commitment toETI.

13

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Following Skoda’s bankruptcy declaration in 2001 in theCzech Republic, effective as of 2002, AAI began recording 100%, instead of 35%,of ETI’s losses and income in accordance with the equity method of accountingapplicable to minority shareholders.  TheCompany has determined that ETI is a variable interest entity, for which theCompany is the primary beneficiary, in accordance with the FASB issuedInterpretation No. 46 (revised December 2003), Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin No. 51** (“FIN 46R”), whichbecame effective for years beginning after December 31, 2002.  The financial statements for ETI have beenconsolidated for all years presented . Prior to the filing of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2005, the Company accounted for its investment in ETI under the equity method.  The Company accounts forits remaining transportation operation as discontinued operations, includingthe consolidation of ETI as a variable interest entity.

Summary results of thediscontinued transportation operation, which have been reported separately as(loss) income from discontinued operations in the accompanying ConsolidatedStatements of Operations, were as follows:
|                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                                                            |       | $                                               | 446        |                                          | $          | 20 |   | $ | 839 |   | $ | 1,032 |   |
| Cost of sales                                                    |       | 109                                             |       | 730                                           |       | (146 | ) | 1,218 |   |
| General and  administrative expenses                             |       | (1,023                                          | )          | (735                                          | )          | (1,584 | ) | (1,624 | ) |
| Other expense                                                    |       | (14                                             | )          | 7                                             |       | (33 | ) | (27 | ) |
| (Loss) income before  income taxes                               |       | (482                                            | )          | 22                                            |       | (924 | ) | 599 |   |
| Benefit from (provision  for) income taxes                       |       | 168                                             |       | 123                                           |       | 323 |   | (406 | ) |
| (Loss) income from  discontinued operations, net of income taxes |       | $                                               | (314       | )                                             | $          | 145 |   | $ | (601 | ) | $ | 193 |   |

 

During2005, ETI was able to favorably resolve certain operational risks associatedwith the execution of its last remaining program.  ETI reported net income for the three and sixmonths ended June 30, 2006 of approximately $340 and $342, respectively, offsetby $822 and $1,266 of general and administrative expenses incurred by theCompany’s discontinued transportation operation attributable to ongoinglitigation involving AAI’s claims under a labor and materials bond.  ETI reported net income for the three and sixmonths ended June 30, 2005 of approximately $642 and $1,965, respectivelyoffset by $620 and $1,366 of general and administrative expenses, consistingprimarily of professional fees related to a certain litigation matter involvinga recovery claim initiated by the Company.

The following table provides the sources and uses of net cash flows forthe discontinued transportation operation, which are aggregated and reportedseparately as Net cash used in operating activities by discontinued operationsin the accompanying Consolidated Statements of Cash Flows:
|                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                                                              |       |                                          |       |   |   |
| Net (loss)  income                                                |       | $                                             | (601       | ) | $ | 193 |   |
| Changes in  operating assets and liabilities                      |       | (906                                          | )          | (4,073 | ) |
| Deferred income  taxes                                            |       | 98                                            |       | 1,284 |   |
| Net cash used in  operating activities by discontinued operations |       | $                                             | (1,409     | ) | $ | (2,596 | ) |

 

Therewere no financing or investing activities in the six months ended June 30, 2006and 2005.

14

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Assets and liabilities of thediscontinued transportation operation, which have been reported and summarizedin the accompanying Consolidated Balance Sheets as Assets and Liabilities ofdiscontinued operations, respectively, were as follows:
|                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Current Assets:                           |       |              |       |                  |       |
| Cash                                      |       | $                 | 853        |                  | $          | 606 |   |
| Trade receivables                         |       | 140               |       | 103                   |       |
| Prepaid expenses and other current assets |       | 68                |       | 150                   |       |
| Deferred income taxes                     |       | 11,471            |       | 11,569                |       |
|                                      |       | $                 | 12,532     |                  | $          | 12,428 |   |
|                                      |       |              |       |                  |       |
| Current  Liabilities:                     |       |              |       |                  |       |
| Accounts payable                          |       | 251               |       | 256                   |       |
| Accrued employee compensation and taxes   |       | 106               |       | 159                   |       |
| Other current liabilities                 |       | 11,785            |       | 11,270                |       |
| Accrual for contract losses               |       | 441               |       | 1,602                 |       |
|                                      |       | $                 | 12,583     |                  | $          | 13,287 |   |

 

**Note L - Commitments and Contingencies**

In the normal course of its continuing anddiscontinued business, various lawsuits, claims and legal proceedings have beenor may be instituted or asserted against or by the Company.  Based on currently available facts, theCompany believes, except as otherwise set forth below, that the disposition ofmatters pending or asserted against the Company will not have a materialadverse effect on the Company’s financial position, results of operations orliquidity.

ASBESTOS

History

United Industrial and Detroit Stoker have been named asdefendants in asbestos-related personal injury litigation. Neither UnitedIndustrial nor Detroit Stoker fabricated, milled, mined, manufactured ormarketed asbestos, and neither United Industrial nor Detroit Stoker made orsold insulation products or other construction materials that have beenidentified as the primary cause of asbestos-related disease in the vastmajority of claimants. Rather, United Industrial and Detroit Stoker madeseveral products, some of the parts and components of which usedasbestos-containing material fabricated and provided by third parties. The useof asbestos-containing materials ceased in approximately 1981.

Cases involving UnitedIndustrial and Detroit Stoker typically name 80 to 100 defendants. As of thisdate, United Industrial and Detroit Stoker have not gone to trial with respectto any asbestos-related personal injury claims, although there is no assurancethat trials may not occur in the future. Accordingly, as of June 30, 2006,neither United Industrial nor Detroit Stoker have been required to pay anypunitive damage awards, although there can be no assurance this might not occurin the future. In addition, as of June 30, 2006, some previously pending claimshave been settled or dismissed (with or without prejudice).  There is no assurance, however, thatdismissals and settlements will occur at the same rate, if at all, or thatclaims that have been dismissed without prejudice will not be re-filed.

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Defenses

Management continues to believe that a majority of theclaimants in pending cases will not be able to demonstrate that they have beenexposed to United Industrial’s or Detroit Stoker’s asbestos-containing productsor suffered any compensable loss as a result of any such exposure. This beliefis based in large part on two factors: the limited number ofasbestos-containing products and betterments sold by United Industrial andDetroit Stoker and United Industrial’s and Detroit Stoker’s access to sales,service, and other historical business records going back over 100 years, whichallow United Industrial and Detroit Stoker to determine to whom products weresold, the date of sale, the installation site and, in some instances, the dateproducts were removed from service. In addition, because of the limited andrestricted placement of the asbestos-containing products, even at sites where aclaimant can verify his or her presence during the same period those productswere installed, liability cannot be presumed because, even if an individualcontracted an asbestos-related disease, not everyone who was employed at a sitewas exposed to United Industrial’s or Detroit Stoker’s asbestos-containingproducts.

These factors have allowed United Industrial and DetroitStoker to effectively manage their asbestos-related claims.

Settlements

To date, settlements of claims against UnitedIndustrial and/or Detroit Stoker have been made without any admission ofliability by United Industrial and/or Detroit Stoker. Settlement amounts mayvary depending upon a number of factors, including the jurisdiction where theaction was brought, the nature and extent of the disease alleged and theassociated medical evidence, the age and occupation of the claimant, theexistence or absence of other possible causes of the claimant’s allegedillness, and the availability of legal defenses, as well as whether the actionis brought alone or as part of a group of claimants. Before paying anysettlement amount, United Industrial and/or Detroit Stoker require proof ofexposure to their asbestos-containing products and proof of injury to theplaintiff. In addition, the claimant is required to execute a release of UnitedIndustrial, Detroit Stoker and associated parties, from any liability forasbestos-related injuries or claims.

Insurance Coverage

The insurance coverage potentially available to UnitedIndustrial and Detroit Stoker is substantial. Following the institution ofasbestos litigation, an effort was made to identify all of United Industrial’sand Detroit Stoker’s primary and excess insurance carriers from 1940 through1990. There were approximately 40 such carriers, all of which were put onnotice of the litigation. In November of 1999, a Participation Agreement wasentered into among United Industrial, Detroit Stoker and three of their primaryinsurance carriers. The Participation Agreement is an advance understandingthat supplements all of the contracts of insurance, without altering thecoverage of those contracts, which creates an administrative framework withinwhich the insurers and United Industrial and Detroit Stoker can moreefficiently and effectively manage the large quantity of on-going litigation.

Any party may terminate the Participation Agreement, withoutcause, by giving the other parties 60 days prior written notice. Termination ofthe Participation Agreement does not affect any rights or obligations of theparties that have accrued under the Participation Agreement on or before theeffective date of the termination, nor does it affect any rights outside of theParticipation Agreement.

Although the carriers canopt out of the Participation Agreement on 60 days notice, management does notbelieve that this will occur in the immediate or near term. For example, unlessa carrier professes to have met the limits of its liability, it would have toconsider the potentially greater costs of permitting United Industrial andDetroit Stoker to handle their own cases. Further, opting out of theParticipation Agreement does not exculpate liability on the part of thecarrier.

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United Industrial’s counsel retained a consulting firm withexpertise in the field of evaluating insurance coverage and the likelihood ofrecovery for claims, such as costs incurred in connection with asbestos-relatedinjury claims. In 2002 and 2003, that firm worked with United Industrial toproject the insurance coverage of United Industrial and Detroit Stoker forasbestos-related claims.  In 2005, UnitedIndustrial engaged the same firm to update its insurance analysis and projection.  In each case, the insurance consultant’sconclusions were based primarily on a review of United Industrial’s and DetroitStoker’s coverage history, application of reasonable assumptions to theallocation of coverage consistent with industry standards, an assessment of thecreditworthiness of the insurance carriers, and the knowledge and experience ofthe consulting firm in the field of insurance coverage analysis. The insuranceconsultant also considered the Participation Agreement.

Based on the assumptions employed by and the report preparedby the insurance consultant, other variables, and the report prepared by theasbestos liability consultant, which is discussed below, the Company recordedan estimated insurance recovery as of December 31, 2005, of $20,186 reflectingthe estimate determined to be probable of being available to mitigate UnitedIndustrial’s and Detroit Stoker’s potential asbestos liability through 2015,and as of December 31, 2002, of $20,343, reflecting the estimate determined tobe probable of being available to mitigate United Industrial’s and DetroitStoker’s potential asbestos liability through 2012.  The Company continuously evaluates thisinsurance receivable and believes it is appropriately valued at June 30, 2006.

Quantitative Claims Information

As of June 30, 2006, United Industrial and/or Detroit Stokerwere named in asbestos litigation pending in Arkansas, California, Louisiana,Michigan, Minnesota, Mississippi, New Jersey, New York, North Dakota and RhodeIsland. As of June 30, 2006, there were approximately 9,496 total pendingclaims asserted in law suits, compared to approximately 11,059 pending claimsasserted in lawsuits as of December 31, 2005 and approximately 13,750 pendingclaims as of June 30, 2005.  The decreasein claims was primarily attributable to dismissal of cases initially brought inMississippi in 2002-2003.  In 2004,Detroit Stoker was named as a defendant in two cases in Arkansas allegingpersonal injuries to one and approximately 199 plaintiffs (subsequently reducedto 37), respectively, as a result of silica and/or refractory ceramic fiberexposure, in addition to asbestos exposure. The pleadings in these two cases name approximately 32 and 68defendants, respectively.  Because claimsare often filed and disposed of by dismissal or settlement in large numbers,the amount and timing of settlements and the number of open claims during aparticular period can fluctuate from period to period and may not be indicativeof the trend in future claims, settlements or dismissals. In addition, most ofthese lawsuits do not include specific dollar claims for damages, and manyinclude a number of plaintiffs and multiple defendants. Therefore, the Companycannot provide any meaningful disclosure about the total amount of the damagessought. In addition, the direct asbestos-related expenses of United Industrialand Detroit Stoker for defense and indemnity for the past five years were notmaterial.

A significant increase in the volume of asbestos-relatedbodily injury cases arose in Mississippi beginning in 2002 and extended throughmid-year 2003. Management believes this peak in the volume of claims inMississippi was due to the passage of tort reform legislation (applicable toasbestos-related injuries), which became effective at the end of 2002 and whichresulted in a large number of claims being filed in Mississippi by plaintiffsseeking to ensure their claims would be governed by the law in effect prior tothe passage of tort reform.

In 2002, United Industrial’scounsel engaged a consulting firm with expertise in the field of evaluatingasbestos bodily-injury claims to assist United Industrial in projecting thefuture asbestos-related liabilities and defense costs of United Industrial andDetroit Stoker. In 2005, United Industrial’s counsel engaged the sameconsulting firm to update the report it issued in 2003.  In each case, the methodology used by theasbestos liability consultant to project future asbestos-related costs is basedprimarily on estimates of the labor force exposed to asbestos in UnitedIndustrial’s and Detroit Stoker’s products, epidemiological modeling ofasbestos-related disease manifestation, and estimates of claim filings andsettlement and defense costs that may occur in the future. Using this information,in each case the asbestos liability consultant estimated the number of futureclaims that would be filed, as well as the related costs that would be incurredin resolving those claims. United Industrial’s and Detroit Stoker’s claimshistory prior to 2002 was not a significant variable in developing theestimates because such history was determined by the consulting firm not to besignificant as compared to the number of claims filed in 2002.

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Projecting future asbestos costs is subject to numerousvariables that are extremely difficult to predict. In addition to thesignificant uncertainties surrounding the number of claims that might bereceived, other variables include the type and severity of the disease allegedby each claimant, the long latency period associated with asbestos exposure,dismissal rates, costs of medical treatment, the impact of bankruptcies ofother companies that are co-defendants in claims, uncertainties surrounding thelitigation process from jurisdiction to jurisdiction and from case to case, andthe impact of potential changes in legislative or judicial standards.Furthermore, any predictions with respect to these variables are subject toeven greater uncertainty as the projection period lengthens. In light of theseinherent uncertainties, United Industrial’s and Detroit Stoker’s limited claimshistory and consultation with the asbestos and insurance consultants, theCompany believes that ten years is the most reasonable period for recognizing areserve for future costs, and that costs that might be incurred after thatperiod were not reasonably estimable.  Asa result, the Company also believes that its ultimate net asbestos-relatedcontingent liability (i.e. its indemnity or other claim disposition costs plusrelated legal fees less insurance recoveries) cannot be estimated withcertainty.

Based on the assumptions and results reflected in the 2005and 2003 reports, prepared by the asbestos liability consultant and othervariables, the Company recorded an undiscounted liability for its best estimateof liabilities for asbestos-related matters in the amount of $31,450 as of June30, 2006 and $ 31,852as of June 30, 2005, respectively, including damages anddefense costs, and its insurance receivables for asbestos-related liabilitieswere $20,186 and $20,343 at June 30, 2006 and 2005, respectively.  These figures reflect the Company’s policy ofmaintaining a ten-year estimate of future liability, the period in which suchcosts are deemed to be reasonably estimable.

Given the inherent uncertainty in making futureprojections, and the fact that United Industrial and Detroit Stokerperiodically receive potentially material new information from claimants andtheir counsel that relates to the factual basis of their asserted and unassertedclaims, United Industrial and Detroit Stoker will periodically, either (1)validate the key assumptions used in projecting the future asbestos-relatedliabilities and defense costs of United Industrial and Detroit Stoker or; (2)re-examine and if necessary update the projections of current and futureasbestos claims, based on experience and other relevant factors, such aschanges in the tort system and the resolution of bankruptcies of variousasbestos defendants.

No assurances can be given as to the actual amount of UnitedIndustrial’s and Detroit Stoker’s liability for such present and future claimsor the amount of insurance recoveries (including any recoveries fromliquidating excess insurance carriers), and the differences from estimatedamounts could be material.

FederalAsbestos Legislation

The outlook for federal legislation to provide a nationalasbestos litigation trust fund continues to be uncertain. Also uncertain iswhether, and to what extent, United Industrial and Detroit Stoker would be requiredto make contributions to any prospective national asbestos trust. No assurancescan be given that a proposed trust or any other asbestos legislation willultimately become law, or when such action might occur.

STATEOF ARIZONA DEPARTMENT OF ENVIRONMENTAL QUALITY V. UIC, ET AL.

On May 19, 1993, United Industrial was named as one of threedefendants in a civil action brought pursuant to the ComprehensiveEnvironmental Response Compensation and Liability Act (“CERCLA”) by the ArizonaDepartment of Environmental Quality (“ADEQ”) in the United States DistrictCourt for the District of Arizona. ADEQ sought remediation of a manufacturingsite in the State of Arizona operated by U.S. Semiconductor Products, Inc. (“U.S.Semiconductor”), a manufacturer of semiconductors formerly owned by UnitedIndustrial. ADEQ alleged that from 1959 until United Industrial sold U.S.Semiconductor in 1961, U.S. Semiconductor disposed of tricholoroethylene, a “hazardoussubstance,” and other hazardous substances under CERCLA, onto the ground andinto various pits and drains located on the site.

In 1996,United Industrial entered into a consent decree with ADEQ. Pursuant to theconsent decree, United Industrial is required to complete a RemedialInvestigation/Feasibility Study (“RI/FS”), pay $125 for past response costs,pay quarterly Arizona oversight costs (averaging less than $13 annually) andpay $125 for future response costs plus a graduated percentage of the cleanupcosts for the site if those costs are in excess of $10,000 but less than$40,000.  United Industrial’s liabilityfor future response costs under the consent decree is capped at $1,780 inaddition to the $125 that United Industrial has already paid. In connectionwith the RI/FS, United Industrial has retained and is paying for anenvironmental

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consultant.  TheRemedial Investigation was submitted to ADEQ for approval on March 31, 2004 andwas approved by ADEQ on August 9, 2004. In March 2005, ADEQ issued its Proposed Remedial Objectives Report forpublic comment.  ADEQ received nosubstantive comments regarding the report, and in May 2005, ADEQ issued itsfinal Remedial Objectives Report.  UnitedIndustrial is required to submit to ADEQ a Feasibility Study and ProposedRemedies to meet ADEQ’s May 2005 Remedial Objectives.  Management believes it will likely reachclosure with ADEQ on all RI/FS issues on an acceptable basis to UnitedIndustrial following approval of the Feasibility Study.  No assurances can be given, however, as tothe actual extent to which United Industrial may be determined to have furtherliability, if at all.  Managementbelieves it is appropriately accrued for this matter.

MICHIGANDEPARTMENT OF NATURAL RESOURCES

Detroit Stoker was notified in March 1992 by theMichigan Department of Natural Resources (“MDNR”) that it is a potentiallyresponsible party in connection with the cleanup of a former industriallandfill located in Port of Monroe, Michigan. MDNR is treating the Port ofMonroe landfill site as a contaminated facility within the meaning of theMichigan Environmental Response Act (“MERA”). Under MERA, if a release orpotential release of a discarded hazardous substance is or may be injurious tothe environment or to the public health, safety or welfare, MDNR is empoweredto undertake or compel investigation and response activities in order toalleviate any contamination threat. Management believes Detroit Stoker would be considered a de minimuspotentially responsible party and does not believe that the resolution of thismatter will have a materially adverse effect on United Industrial’s or DetroitStoker’s financial condition or results of operations. No assurances can begiven, however, as to the actual extent to which Detroit Stoker may bedetermined to be liable, if at all.

OTHER LEGAL MATTERS

Departments and agencies of the U.S. Government have theauthority at many levels to investigate transactions and operations of theCompany, and the results of such investigations may lead to administrative,civil, or criminal proceedings, the ultimate outcome of which could be fines,penalties, repayments or compensatory or treble damages. Agencies that overseecontract performance include: the Defense Contract Audit Agency, the Departmentof Defense Inspector General, the General Accounting Office, the Department ofJustice, the Department of State, and Congressional Committees.  U.S. Government regulations provide thatcertain findings against a contractor may lead to suspension or debarment fromfuture U.S. Government contracts or the loss of export privileges for a companyor an operating division or subdivision.

The Company has in placeinternational and domestic compliance policies and procedures, includingtraining of employees. From time to time, the Company receives allegations ofimproper conduct relating to its operations, including operations subject tothe U.S. Foreign Corrupt Practices Act, export control and licensingregulations and other U.S. domestic and international laws. When the Companyreceives any such allegations, it conducts internal (and if necessary,external) investigations to determine whether there is support for any suchallegations, and takes corrective action when warranted.  An investigation is ongoing in response toallegations provided to Company management of improper payments to foreigngovernment officials and improper invoicing. External counsel has been retainedby the Audit Committee of the Company’s Board of Directors to determine ifthere is support for any such allegations, and to review the Company’s compliancepolicies and procedures, and the Company is cooperating fully withcounsel.  In addition, appropriategovernment agencies have been advised of this investigation.  The Company is cooperating with theirrequests for information. The investigation by external counsel, which iscontinuing, has thus far not revealed any prior involvement or knowledgeregarding the allegations by any officer or director of United Industrial. Atthe current stage of this investigation, any ultimate liability is not presentlydeterminable.

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PERFORMANCE GUARANTIES

In connection with certain contracts, United Industrial’soperating subsidiaries have committed to certain performance guarantiesexisting at June 30, 2006. The ability to perform under these guaranties may,in part, be dependent on the performance of other parties, including partnersand subcontractors. If United Industrial’s operating subsidiaries are unable tomeet these performance obligations, the performance guaranties could have amaterial adverse effect on profit margins and the Company’s results ofoperations, liquidity or financial position. United Industrial’s operatingsubsidiaries monitor the progress of their partners and subcontractors, andUnited Industrial and its operating subsidiaries do not believe that theperformance of these partners and subcontractors will adversely affect thesecontracts.  No assurances can be given,however, as to the liability of United Industrial’s operating subsidiaries ifpartners or subcontractors are unable to perform their obligations.

DISCONTINUED TRANSPORTATION OPERATION

## MUNI Contract

In connection with the discontinued Transportationoperations, AAI owns 35% of ETI.  Skoda,a Czech company, owns the remaining 65% of ETI. ETI’s one remaining production contract with MUNI involves the designand manufacture of 273 electric trolley buses (“ETBs”). In executing itscontract with MUNI, ETI entered into subcontracts with AAI, certain Skodaoperating affiliates and others. AAI and the Skoda operating affiliates havecompleted performance of their respective scopes of work to support thedelivery of the ETBs to MUNI and the Skoda operating affiliates are now subjectto warranty requirements. Skoda’s operating affiliates have continued todeliver products and services under their subcontracts with ETI through March2006.

As of April 22, 2004, ETI and MUNI finalized an agreement tomodify the original MUNI contract (“Modification No. 6”) under which ETIassigned its remaining subcontractor obligations to MUNI and MUNI relieved ETIof its warranty, performance and certain related bonding obligations, as wellas other obligations under its ETB contract with MUNI, except for theperformance of a defined scope of work related to modifications of ETBhardware, which have been completed.

In conjunction with Modification No. 6, AAI executed aguaranty agreement with MUNI as of April 22, 2004 (the “Guaranty Agreement”)that assures performance of certain of ETI’s obligations under Modification No.6. In conjunction with the Guaranty Agreement, AAI obtained a release from allfurther obligations under its subcontract with ETI, including its subcontractorwarranty obligations, in exchange for a cash payment to MUNI of $500 and otherconsideration.  AAI’s sole remainingobligation under the Guaranty Agreement, which has been satisfied, was toprovide the services of three engineers and one purchasing expediter throughApril 2006.

As required by MUNI, ETIobtained a surety bond to guaranty payment to all those providing labor andmaterials to ETI in furtherance of its performance under the MUNIcontract.  AAI agreed to indemnify thesurety, if necessary, for up to $14,800 on this labor and materials bond,representing 35% of the original face value of the bond (in proportion to AAI’sequity interest in ETI). On November 18, 2003, AAI made a claim against thelabor and materials bond for unpaid receivables in connection with AAI’s MUNIsubcontract from ETI, totaling in excess of $47,000, the maximum penal sum ofthe labor and materials bond. AAI’s payment rights under the labor andmaterials bond (among other claims) are currently at issue in a case before theUnited States District Court for the Northern District of California.  Prior to final adjudication of this case,there can be no assurances as to the amount or timing of a recovery by AAI, ifany, on its claim on the labor and materials bond.  To date no amount of recovery has beenrecorded.

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##### **Note M – Dividends**

The Company’s Board of Directors declared a dividend of $0.10 per shareon its common stock during each quarter of the six months ended June 30, 2006and 2005.

| For the quarter ended | ** ** | **Total amount dividends paid** | ** ** | **Date dividends were paid** | ** **      |
|--------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------|-----------------|
| March 31, 2006                       |       | $1,127                                         |       |                                        | March  27, 2006 |   |
| June 30, 2006                        |       | $1,139                                         |       |                                        | May  25, 2006   |   |
| March 31, 2005                       |       | $1,230                                         |       |                                        | March  31, 2005 |   |
| June 30, 2005                        |       | $1,234                                         |       |                                        | May 30, 2005    |   |

 

**Note N – Treasury Stock**

OnMarch 10, 2005, the Company’s Board of Directors authorized a stock purchaseplan for up to $25,000. During the first six months of 2005, a total of 735,345shares were repurchased under the plan, at an average price of $33.97 pershare, utilizing all funds available under the March 10, 2005 stock purchaseplan.

OnSeptember 7, 2005, the Company’s Board of Directors authorized a stock purchaseplan for up to $15,000.  The Companyrepurchased a total of 425,627 shares at an average price of $35.20 during theremainder of 2005 utilizing all funds available under the plan.

** Note O - Supplemental Guarantor Information**

In September 2004, United Industrial issued and sold $120,000 aggregateprincipal amount of 3.75% Convertible Senior Notes, which are fully andunconditionally guarantied by AAI.  The3.75% Convertible Senior Notes are not guarantied by Detroit Stoker.  The following condensed consolidatingfinancial information sets forth supplemental information for UnitedIndustrial, the parent company, AAI, the guarantor subsidiary, and DetroitStoker, the non-guarantor subsidiary, as of June 30, 2006 and December 31,2005, and for the three month and six month periods ended June 30, 2006 and2005.

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CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING BALANCE SHEETS

As of June 30, 2006

(Unaudited)
|                                                  | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                             |       |                                          |       |                                                 |       |                                                |       |             |       |                                                   |       |
| ASSETS                                           |       |                                          |       |                                                 |       |                                                |       |             |       |                                                   |       |
| Current Assets                                   |       |                                          |       |                                                 |       |                                                |       |             |       |                                                   |       |
| Cash and cash  equivalents                       |       | $                                             | 58,937     |                                                 | $          | 14,704                                              |       | $                | 17,460     |                                                   | $          | — |   | $ | 91,101 |   |
| Trade  receivables, net                          |       | 311                                           |       | 93,702                                               |       | 3,513                                               |       | (110             | )          | 97,416                                                 |       |
| Inventories                                      |       | —                                        |       | 30,344                                               |       | 2,987                                               |       | —           |       | 33,331                                                 |       |
| Other current  assets                            |       | 1,221                                         |       | 7,813                                                |       | 845                                                 |       | (66              | )          | 9,813                                                  |       |
| Assets of  discontinued operations               |       | —                                        |       | 12,532                                               |       | —                                              |       | —           |       | 12,532                                                 |       |
| Total current  assets                            |       | 60,469                                        |       | 159,095                                              |       | 24,805                                              |       | (176             | )          | 244,193                                                |       |
| Insurance receivable –  asbestos litigation |       | —                                        |       | —                                               |       | 20,186                                              |       | —           |       | 20,186                                                 |       |
| Property and equipment,  net                     |       | —                                        |       | 41,383                                               |       | 1,542                                               |       | —           |       | 42,925                                                 |       |
| Other assets                                     |       | 11,070                                        |       | 41,689                                               |       | 10,775                                              |       | (18,134          | )          | 45,400                                                 |       |
| Intercompany  receivables                        |       | —                                        |       | 110                                                  |       | —                                              |       | (110             | )          | —                                                 |       |
| Investment in  consolidated subsidiaries         |       | 118,968                                       |       | —                                               |       | —                                              |       | (118,968         | )          | —                                                 |       |
|                                             |       | $                                             | 190,507    |                                                 | $          | 242,277                                             |       | $                | 57,308     |                                                   | $          | (137,388 | ) | $ | 352,704 |   |
|                                             |       |                                          |       |                                                 |       |                                                |       |             |       |                                                   |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY       |       |                                          |       |                                                 |       |                                                |       |             |       |                                                   |       |
| Current portion of  long-term debt               |       | $                                             | —     |                                                 | $          | 995                                                 |       | $                | —     |                                                   | $          | — |   | $ | 995 |   |
| Other current  liabilities                       |       | 7,510                                         |       | 109,370                                              |       | 6,259                                               |       | (31,714          | )          | 91,425                                                 |       |
| Liabilities of  discontinued operations          |       | —                                        |       | 12,583                                               |       | —                                              |       | —           |       | 12,583                                                 |       |
| Total current  liabilities                       |       | 7,510                                         |       | 122,948                                              |       | 6,259                                               |       | (31,714          | )          | 105,003                                                |       |
| Long-term debt                                   |       | 120,000                                       |       | 50                                                   |       | —                                              |       | —           |       | 120,050                                                |       |
| Accrual for asbestos  obligation                 |       | —                                        |       | —                                               |       | 31,450                                              |       | —           |       | 31,450                                                 |       |
| Other long-term  liabilities                     |       | 4,040                                         |       | 55,300                                               |       | 12,105                                              |       | (18,354          | )          | 53,091                                                 |       |
| Intercompany  (receivables) payables             |       | 42,347                                        |       | (74,147                                              | )          | 127                                                 |       | 31,673           |       | —                                                 |       |
| Shareholders’ equity  (deficit)             |       | 16,610                                        |       | 138,126                                              |       | 7,367                                               |       | (118,993         | )          | 43,110                                                 |       |
|                                             |       | $                                             | 190,507    |                                                 | $          | 242,277                                             |       | $                | 57,308     |                                                   | $          | (137,388 | ) | $ | 352,704 |   |

 

22

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING BALANCE SHEETS

Asof December 31, 2005
| (Dollars in thousands)           | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                       |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| ASSETS                                     |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Current assets:                            |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Cash and cash equivalents                  |       | $                                             | 54,365     |                                                 | $          | 8,768                                           |       | $                | 14,363     |                                                   | $          | — |   | $ | 77,496 |   |
| Marketable equity  securities              |       | 11,617                                        |       | —                                               |       | —                                          |       | —           |       | 11,617                                                 |       |
| Deposits and restricted  cash              |       | —                                        |       | 4,810                                                |       | —                                          |       | —           |       | 4,810                                                  |       |
| Trade receivables, net                     |       | 311                                           |       | 64,487                                               |       | 4,486                                           |       | —           |       | 69,284                                                 |       |
| Inventories                                |       | —                                        |       | 21,186                                               |       | 2,417                                           |       | —           |       | 23,603                                                 |       |
| Other current assets                       |       | 1,151                                         |       | 7,330                                                |       | 828                                             |       | (65              | )          | 9,244                                                  |       |
| Assets of discontinued  operations         |       | —                                        |       | 12,428                                               |       | —                                          |       | —           |       | 12,428                                                 |       |
| Total current assets                       |       | 67,444                                        |       | 119,009                                              |       | 22,094                                          |       | (65              | )          | 208,482                                                |       |
| Insurance receivable - asbestos litigation |       | —                                        |       | —                                               |       | 20,186                                          |       | —           |       | 20,186                                                 |       |
| Property and equipment, net                |       | —                                        |       | 43,128                                               |       | 1,615                                           |       | —           |       | 44,743                                                 |       |
| Other assets                               |       | 9,309                                         |       | 34,952                                               |       | 4,852                                           |       | (18,123          | )          | 30,990                                                 |       |
| Intercompany receivables                   |       | —                                        |       | 508                                                  |       | —                                          |       | (508             | )          | —                                                 |       |
| Investment in consolidated subsidiaries    |       | 118,968                                       |       | —                                               |       | —                                          |       | (118,968         | )          | —                                                 |       |
|                                       |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
|                                       |       | $                                             | 195,721    |                                                 | $          | 197,597                                         |       | $                | 48,747     |                                                   | $          | (137,664 | ) | $ | 304,401 |   |
|                                       |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Current liabilities:                       |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Current portion of  long-term debt         |       | $                                             | —     |                                                 | $          | 964                                             |       | $                | —     |                                                   | $          | — |   | $ | 964 |   |
| Other current liabilities                  |       | 5,020                                         |       | 72,582                                               |       | 6,564                                           |       | (20,942          | )          | 63,224                                                 |       |
| Liabilities of  discontinued operations    |       | —                                        |       | 13,287                                               |       | —                                          |       | —           |       | 13,287                                                 |       |
| Total current liabilities                  |       | 5,020                                         |       | 86,833                                               |       | 6,564                                           |       | (20,942          | )          | 77,475                                                 |       |
| Long-term debt                             |       | 120,000                                       |       | 723                                                  |       |                                            |       |             |       | 120,723                                                |       |
| Accrual for asbestos obligation            |       | —                                        |       | —                                               |       | 31,450                                          |       | —           |       | 31,450                                                 |       |
| Other long-term liabilities                |       | 3,260                                         |       | 52,305                                               |       | 11,789                                          |       | (18,123          | )          | 49,231                                                 |       |
| Intercompany (receivables) payables        |       | 41,617                                        |       | (62,622                                              | )          | 612                                             |       | 20,393           |       | —                                                 |       |
| Shareholders’ equity (deficit)        |       | 25,824                                        |       | 120,358                                              |       | (1,668                                          | )          | (118,992         | )          | 25,522                                                 |       |
|                                       |       | $                                             | 195,721    |                                                 | $          | 197,597                                         |       | $                | 48,747     |                                                   | $          | (137,664 | ) | $ | 304,401 |   |

 

23

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2006

(Unaudited)
|                                                                       | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit Stoker  Company  (Non-Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                  |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| Net sales                                                             |       | $                                             | —     |                                                 | $          | 137,400                                           |       | $                | 11,815     |                                                   | $          | — |   | $ | 149,215 |   |
| Operating costs  and expenses                                         |       | 447                                           |       | 123,913                                              |       | 8,530                                             |       | —           |       | 132,890                                                |       |
| Total operating income                                                |       | (447                                          | )          | 13,487                                               |       | 3,285                                             |       | —           |       | 16,325                                                 |       |
| Non-operating income and (expense):                                   |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
| Interest income                                                       |       | 644                                           |       | 264                                                  |       | 184                                               |       | —           |       | 1,092                                                  |       |
| Interest expense                                                      |       | (1,370                                        | )          | (72                                                  | )          | —                                            |       | —           |       | (1,442                                                 | )          |
| Intercompany interest income (expense)                                |       | 10                                            |       | —                                               |       | (10                                               | )          | —           |       | —                                                 |       |
| Other income (expense) - net                                          |       | 615                                           |       | 138                                                  |       | 20                                                |       | —           |       | 773                                                    |       |
|                                                                  |       |                                          |       |                                                 |       |                                              |       |             |       |                                                   |       |
|                                                                  |       | (101                                          | )          | 330                                                  |       | 194                                               |       | —           |       | 423                                                    |       |
| (Loss) income  from continuing operations before income taxes         |       | (548                                          | )          | 13,817                                               |       | 3,479                                             |       | —           |       | 16,748                                                 |       |
| Benefit from  (provision for) income taxes                            |       | 27                                            |       | (4,934                                               | )          | (1,268                                            | )          | —           |       | (6,175                                                 | )          |
| (Loss) income  from continuing operations                             |       | (521                                          | )          | 8,883                                                |       | 2,211                                             |       | —           |       | 10,573                                                 |       |
| Income from  discontinued operations – net of income tax benefit |       | —                                        |       | (314                                                 | )          | —                                            |       | —           |       | (314                                                   | )          |
| Income from  investment in subsidiaries                               |       | 10,780                                        |       | —                                               |       | —                                            |       | (10,780          | )          | —                                                 |       |
| Net income  (loss)                                                    |       | $                                             | 10,259     |                                                 | $          | 8,569                                             |       | $                | 2,211      |                                                   | $          | (10,780 | ) | $ | 10,259 |   |

 

24

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2005

(Unaudited)
|                                                                       | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net sales                                                             |       | $                                             | —     |                                                 | $          | 111,614                                         |       | $                | 8,314      |                                                   | $          | — |   | $ | 119,928 |   |
| Operating costs  and expenses                                         |       | (16                                           | )          | 99,913                                               |       | 7,415                                           |       | —           |       | 107,312                                                |       |
| Total operating  income                                               |       | 16                                            |       | 11,701                                               |       | 899                                             |       | —           |       | 12,616                                                 |       |
| Non-operating income and (expense):                                   |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Interest income                                                       |       | 521                                           |       | 128                                                  |       | 49                                              |       | —           |       | 698                                                    |       |
| Interest expense                                                      |       | (1,372                                        | )          | (18                                                  | )          | —                                          |       | —           |       | (1,390                                                 | )          |
| Intercompany interest income (expense)                                |       | 2                                             |       | —                                               |       | (2                                              | )          | —           |       | —                                                 |       |
| Other income - net                                                    |       | (117                                          | )          | 401                                                  |       | (31                                             | )          | —           |       | 253                                                    |       |
|                                                                  |       | (966                                          | )          | 511                                                  |       | 16                                              |       | —           |       | (439                                                   | )          |
| (Loss) income  from continuing operations before income taxes         |       | (950                                          | )          | 12,212                                               |       | 915                                             |       | —           |       | 12,177                                                 |       |
| Benefit from  (provision for) income taxes                            |       | 311                                           |       | (3,886                                               | )          | (301                                            | )          | —           |       | (3,876                                                 | )          |
| (Loss) income  from continuing operations                             |       | (639                                          | )          | 8,326                                                |       | 614                                             |       | —           |       | 8,301                                                  |       |
| Income from  discontinued operations – net of income tax benefit |       | —                                        |       | 145                                                  |       | —                                          |       | —           |       | 145                                                    |       |
| Income from  investment in subsidiaries                               |       | 9,085                                         |       | —                                               |       | —                                          |       | (9,085           | )          | —                                                 |       |
| Net income  (loss)                                                    |       | $                                             | 8,446      |                                                 | $          | 8,471                                           |       | $                | 614        |                                                   | $          | (9,085 | ) | $ | 8,446 |   |

 

25

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2006

(Unaudited)
|                                                                     | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net sales                                                           |       | $                                             | —     |                                                 | $          | 266,101                                         |       | $                | 20,733     |                                                   | $          | — |   | $ | 286,834 |   |
| Operating costs  and expenses                                       |       | 697                                           |       | 238,959                                              |       | 15,741                                          |       |             |       | 255,397                                                |       |
| Total operating  income                                             |       | (697                                          | )          | 27,142                                               |       | 4,992                                           |       |             |       | 31,437                                                 |       |
| Non-operating income and (expense):                                 |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Interest income                                                     |       | 1,256                                         |       | 577                                                  |       | 348                                             |       |             |       | 2,181                                                  |       |
| Interest expense                                                    |       | (2,740                                        | )          | (85                                                  | )          | —                                          |       |             |       | (2,825                                                 | )          |
| Intercompany interest income (expense)                              |       | 25                                            |       | —                                               |       | (25                                             | )          |             |       | —                                                 |       |
| Other income (expense) - net                                        |       | (30                                           | )          | 198                                                  |       | 30                                              |       |             |       | 198                                                    |       |
|                                                                |       | (1,489                                        | )          | 690                                                  |       | 353                                             |       |             |       | (446                                                   | )          |
| (Loss) income  from continuing operations before income taxes       |       | (2,186                                        | )          | 27,832                                               |       | 5,345                                           |       |             |       | 30,991                                                 |       |
| Benefit from  (provision for) income taxes                          |       | 340                                           |       | (9,957                                               | )          | (1,946                                          | )          |             |       | (11,563                                                | )          |
| (Loss) income  from continuing operations                           |       | (1,846                                        | )          | 17,875                                               |       | 3,399                                           |       |             |       | 19,428                                                 |       |
| Loss from  discontinued operations – net of income tax benefit |       | —                                        |       | (601                                                 | )          | —                                          |       |             |       | (601                                                   | )          |
| Income from  investment in subsidiaries                             |       | 20,673                                        |       | —                                               |       | —                                          |       | (20,673          | )          |                                                   |       |
| Net income (loss)                                                   |       | $                                             | 18,827     |                                                 | $          | 17,274                                          |       | $                | 3,399      |                                                   | $          | (20,673 | ) | $ | 18,827 |   |

 

26

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2005

(Unaudited)
|                                                                         | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                    |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net sales                                                               |       | $                                             | —     |                                                 | $          | 211,771                                         |       | $                | 15,705     |                                                   | $          | — |   | $ | 227,476 |   |
| Operating costs  and expenses                                           |       | (32                                           | )          | 187,952                                              |       | 14,702                                          |       | —           |       | 202,622                                                |       |
| Total operating  income                                                 |       | 32                                            |       | 23,819                                               |       | 1,003                                           |       | —           |       | 24,854                                                 |       |
| Non-operating income and (expense):                                     |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Interest income                                                         |       | 1,436                                         |       | 226                                                  |       | 87                                              |       | —           |       | 1,749                                                  |       |
| Interest expense                                                        |       | (3,108                                        | )          | (110                                                 | )          | —                                          |       | —           |       | (3,218                                                 | )          |
| Intercompany interest income (expense)                                  |       | 1                                             |       | —                                               |       | (1                                              | )          | —           |       | —                                                 |       |
| Other income (expense) - net                                            |       | 316                                           |       | 7,724                                                |       | 1                                               |       | —           |       | 8,041                                                  |       |
|                                                                    |       | (1,355                                        | )          | 7,840                                                |       | 87                                              |       | —           |       | 6,572                                                  |       |
| (Loss) income  from continuing operations before income taxes           |       | (1,323                                        | )          | 31,659                                               |       | 1,090                                           |       | —           |       | 31,426                                                 |       |
| Benefit from  (provision for) income taxes                              |       | 442                                           |       | (10,575                                              | )          | (368                                            | )          | —           |       | (10,501                                                | )          |
| (Loss) income  from continuing operations                               |       | (881                                          | )          | 21,084                                               |       | 722                                             |       | —           |       | 20,925                                                 |       |
| Income from  discontinued operations – net of income tax provision |       | —                                        |       | 193                                                  |       | —                                          |       | —           |       | 193                                                    |       |
| Income from  investment in subsidiaries                                 |       | 21,999                                        |       | —                                               |       | —                                          |       | (21,999          | )          | —                                                 |       |
| Net income  (loss)                                                      |       | $                                             | 21,118     |                                                 | $          | 21,277                                          |       | $                | 722        |                                                   | $          | (21,999 | ) | $ | 21,118 |   |

 

27

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2006

(Unaudited)
|                                                                     | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| OPERATING  ACTIVITIES:                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Cash flows provided  by continuing operations                       |       | $                                             | 3,369      |                                                 | $          | 13,217                                          |       | $                | 3,139      |                                                   | $          | — |   | $ | 19,725 |   |
| Cash flows used  in operating activities by discontinued operations |       | —                                        |       | (1,409                                               | )          | —                                          |       | —           |       | (1,409                                                 | )          |
| Net cash provided by operating activities                           |       | 3,369                                         |       | 11,808                                               |       | 3,139                                           |       | —           |       | 18,316                                                 |       |
|                                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| INVESTING  ACTIVITIES:                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Purchase of  property and equipment                                 |       | —                                        |       | (3,484                                               | )          | (42                                             | )          | —           |       | (3,526                                                 | )          |
| Business  acquisition, net of cash acquired                         |       | —                                        |       | (6,556                                               | )          | —                                          |       | —           |       | (6,556                                                 | )          |
| Net cash used in investing activities                               |       | —                                        |       | (10,040                                              | )          | (42                                             | )          | —           |       | (10,082                                                | )          |
|                                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| FINANCING  ACTIVITIES:                                              |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Repayment of  long-term debt                                        |       | —                                        |       | (642                                                 | )          | —                                          |       | —           |       | (642                                                   | )          |
| Proceeds from  exercise of stock options                            |       | 2,414                                         |       | —                                               |       | —                                          |       | —           |       | 2,414                                                  |       |
| Excess benefit  from stock based compensation                       |       | 1,059                                         |       | —                                               |       | —                                          |       | —           |       | 1,059                                                  |       |
| Dividends paid                                                      |       | (2,270                                        | )          | —                                               |       | —                                          |       | —           |       | (2,270                                                 | )          |
| Decrease in  deposits and restricted cash                           |       | —                                        |       | 4,810                                                |       | —                                          |       | —           |       | 4,810                                                  |       |
| Intercompany  activities                                            |       | —                                        |       | —                                               |       | —                                          |       | —           |       | —                                                 |       |
| Net cash provided by financing activities                           |       | 1,203                                         |       | 4,168                                                |       | —                                          |       | —           |       | 5,371                                                  |       |
| Increase in cash  and cash equivalents                              |       | 4,572                                         |       | 5,936                                                |       | 3,097                                           |       | —           |       | 13,605                                                 |       |
| Cash and cash  equivalents at beginning of year                     |       | 54,365                                        |       | 8,768                                                |       | 14,363                                          |       | —           |       | 77,496                                                 |       |
| Cash and cash  equivalents at end of period                         |       | $                                             | 58,937     |                                                 | $          | 14,704                                          |       | $                | 17,460     |                                                   | $          | — |   | $ | 91,101 |   |

 

28

----

 

CONDENSEDCONSOLIDATING FINANCIAL INFORMATION

CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2005

(Unaudited)
|                                                                       | ** ** | **United  Industrial  Corporation  (Parent)** | ** ** | **AAI  Corporation  and  Subsidiaries  (Guarantor)** | ** ** | **Detroit  Stoker  Company  (Non-  Guarantor)** | ** ** | **Eliminations** | ** ** | **United  Industrial  Corporation  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| OPERATING  ACTIVITIES:                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Cash flows  provided by (used in) continuing operations               |       | $                                             | (6,056     | )                                                    | $          | 26,943                                          |       | $                | 365        |                                                   | $          | — |   | $ | 21,252 |   |
| Cash flows used  in operating activities by discontinued operations   |       | —                                        |       | (2,596                                               | )          | —                                          |       | —           |       | (2,596                                                 | )          |
| Net cash provided by (used in) operating activities                   |       | (6,056                                        | )          | 24,347                                               |       | 365                                             |       | —           |       | 18,656                                                 |       |
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| INVESTING  ACTIVITIES:                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Purchase of  property and equipment                                   |       | —                                        |       | (12,542                                              | )          | (49                                             | )          | —           |       | (12,591                                                | )          |
| Proceeds from  sale of available for sale securities                  |       | 124,626                                       |       | —                                               |       | —                                          |       | —           |       | 124,626                                                |       |
| Investment in  marketable equity securities                           |       | (12,684                                       | )          | —                                               |       | —                                          |       | —           |       | (12,684                                                | )          |
| Business  acquisition net of cash acquired                            |       | —                                        |       | (9,883                                               | )          | —                                          |       | —           |       | (9,883                                                 | )          |
| Proceeds from  sale of property                                       |       | —                                        |       | 7,555                                                |       | —                                          |       | —           |       | 7,555                                                  |       |
| Net cash provided by (used in) investing activities                   |       | 111,942                                       |       | (14,870                                              | )          | (49                                             | )          | —           |       | 97,023                                                 |       |
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| FINANCING  ACTIVITIES:                                                |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Repayment of  collateral received from securities lending transaction |       | (124,619                                      | )          | —                                               |       | —                                          |       | —           |       | (124,619                                               | )          |
| Repayment of long-term  debt                                          |       | —                                        |       | (638                                                 | )          | —                                          |       | —           |       | (638                                                   | )          |
| Proceeds from  exercise of stock options                              |       | 1,208                                         |       | —                                               |       | —                                          |       | —           |       | 1,208                                                  |       |
| Dividends paid                                                        |       | (2,465                                        | )          | —                                               |       | —                                          |       | —           |       | (2,465                                                 | )          |
| Decrease in  deposits and restricted cash                             |       | 25,000                                        |       | 4,046                                                |       | —                                          |       | —           |       | 29,046                                                 |       |
| Purchase of  treasury shares                                          |       | (24,978                                       | )          |                                                 |       |                                            |       |             |       | (24,978                                                | )          |
| Intercompany  activities                                              |       | 20,000                                        |       | (20,000                                              | )          | —                                          |       | —           |       | —                                                 |       |
|                                                                  |       |                                          |       |                                                 |       |                                            |       |             |       |                                                   |       |
| Net cash used in  financing activities                                |       | (105,854                                      | )          | (16,592                                              | )          | —                                          |       | —           |       | (122,446                                               | )          |
| Increase  (decrease) in cash and cash equivalents                     |       | 32                                            |       | (7,115                                               | )          | 316                                             |       | —           |       | (6,767                                                 | )          |
| Cash and cash  equivalents at beginning of year                       |       | 129                                           |       | 72,269                                               |       | 8,281                                           |       | —           |       | 80,679                                                 |       |
| Cash and cash  equivalents at end of period                           |       | $                                             | 161        |                                                 | $          | 65,154                                          |       | $                | 8,597      |                                                   | $          | — |   | $ | 73,912 |   |

 

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** **

**Item 2. - Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**    (Dollars in thousands, except per shareamounts, or unless otherwise noted)**

**Forward-Looking Information**

This Quarterly Report onForm 10-Q contains “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995.  Such forward-looking statements are based onmanagement’s expectations, estimates, projections and assumptions.  Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “estimates,” and variations of such words and similarexpressions are intended to identify such forward-looking statements whichinclude, but are not limited to, projections of revenues, earnings, segmentperformance, cash flows and contract awards. These forward-looking statements are subject to risks and uncertainties,which could cause the actual results or performance of United IndustrialCorporation and its subsidiaries (collectively, the “Company”) to differmaterially from those expressed or implied in such statements.  These risks and uncertainties include, butare not limited to, the following:

·                  the Company’s successful execution ofinternal performance plans;

·                  performance issues with keysuppliers, subcontractors and business partners;

·                  the ability to negotiate financingarrangements with lenders;

·                  the outcome of current and futurelitigation, proceedings and investigations;

·                  the accuracy of the Company’sanalysis of its potential asbestos-related exposure and insurance coverage;

·                  product demand and market acceptancerisks;

·                  the effect of economic conditions;

·                  the impact of competitive productsand pricing;

·                  product development,commercialization and technological difficulties;

·                  capacity and supply constraints ordifficulties;

·                  the integration of acquisitions;

·                  legislative or regulatory actionsimpacting the Company’s Defense segment, Energy segment and discontinuedtransportation operation;

·                  changing priorities or reductions inthe U.S. Government’s defense budget;

·                  contract continuation and futurecontract awards; and

·                  U.S.and foreign military budget constraints and determinations.

The Company intends thatall forward-looking statements it makes will be subject to the safe harborprotection of the Federal securities laws found in Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.

These statements speakonly as to the date when they are made. The Company makes no commitment to update any forward-looking statementor to disclose any facts, events, or circumstances after the date hereof thatmay affect the accuracy of any forward-looking statements.  See “Risk Factors” under Item 1A of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005, forimportant factors that could cause the Company’s actual results to differmaterially from those suggested by the Company’s forward-looking statementscontained in this Quarterly Report on Form 10-Q.

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###### ** **

**Business Overview**

The continuing operations of the Company consist oftwo business segments: Defense and Energy. The Company designs, produces and supports defense systems.  Its products and services include unmannedaircraft systems, training and simulation systems, automated aircraft test andmaintenance equipment, armament systems, logistical and engineering services,and other leading-edge technology solutions for defense needs.  The primary customers for the Company’sdefense products are the U.S. military and the armed forces of alliednations.  The Company also manufacturescombustion equipment for biomass and refuse fuels.  It markets and sells these products andservices in North America, Europe, Asia, South America and New Zealand.

Costs related tothe continuing operations that are not identified with the two businesssegments primarily relate to financing costs and are grouped under the headingOther.  The operations of the Company’sDefense and Energy segments are conducted principally through its two whollyowned subsidiaries, AAI and Detroit Stoker, respectively.  The following information primarily relatesto the continuing operations of the Company and its consolidatedsubsidiaries.  The Company has atransportation operation that is accounted for as a discontinued operation, andis discussed separately in the information that follows.

The following discussionshould be read in conjunction with the Company’s Consolidated FinancialStatements and related notes thereto contained in this Quarterly Report on Form10-Q for the quarterly period ended June 30, 2006, and the discussion includedin its Annual Report on Form 10-K for the year ended December 31, 2005.

**Acquisition of Aerosonde**

On June 19, 2006, the Companyacquired Aerosonde Pty Ltd. and Aerosonde North America, Inc. in stock purchasetransactions for an aggregate purchase price of $6,556, with additionalconsideration payable upon the achievement of certain milestones.  Aerosonde Pty Ltd. is a Victoria,Australia-based manufacturer and developer of Unmanned Aircraft Vehicles (“UAV”).  Aerosonde North America operates theAerosonde UAV in support of research and development and weather forecastingrequirements of U.S. based customers including the U.S. Air Force, the NationalOceanic and Atmospheric Administration and NASA.  The operating results of Aerosonde have beenincluded in the consolidated financial statements of the Company since June 19,2006.

**Resultsof Operations**

**ConsolidatedOverview**

Net sales for thesecond quarter of 2006 were $149,215, an increase of 24.4% over the secondquarter of 2005.  The increase resultedprimarily from support for a growing number of fielded Shadow 200 TacticalUnmanned Aircraft Systems (“TUAS”) as well as higher production volume of thesesystems.

Net sales for thesix months ended June 30, 2006 were $286,834, an increase of 26.1% over the sixmonths ended June 30, 2005.  The increaseresulted primarily from support for a growing number of fielded Shadow 200 TUASas well as higher production volume of these systems.

Operating margin for thesecond quarter of 2006 increased to 10.9% from 10.5% for the second quarter of2005.  Operating margins for the sixmonths ended June 30, 2006 increased to 11.0% from 10.9% for the six monthsended June 30, 2005.  An increase inoperating margins in the Energy segment was partially offset by a decrease inoperating margins in the Defense segment in the second quarter of 2006 and thesix months ended June 30, 2006.  Thesecond quarter of 2006 and the six months ended June 30, 2006 include stockbased compensation expense of $782 and $1,144 respectively, not included in2005. The decrease in the operating margins of the Defense segment is theresult of higher pension expense of $745 and $1,485 in the second quarter of2006 and the six months ended June 30, 2006, respectively, and productmix.  Greater sales growth from contractsthat generate earnings from cost plus fee contracts than from contracts thatgenerate earnings from fixed price contracts contributed to lower operatingmargins.  The U.S. government recognizes that certaincontracts expose a contractor to significant cost uncertainty and consequentlythese contractors are often times compensated

31

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ona cost plus fee arrangement.  Becausethis arrangement greatly reduces the risk to the contractor, cost plus feecontracts generally generate lower earnings compared to fixed price contracts.  Also, in the second quarter of 2005 and thesix months ended June 30, 2005, the Company experienced higher margins due tofavorable production efficiencies realized on the initial full rate productioncontracts for the TUAS and the Joint Service Electronic Combat Systems Tester(“JSECST”) production programs.  Thesecontracts were completed in 2005.

Netincome from continuing operations includes the effect of expensing stock optioncompensation of $508 net of tax, or $0.03 per diluted share, in the secondquarter of 2006 and $743 net of tax, or $0.05 per diluted share, for the sixmonths ended June 30, 2006.  The sixmonths ended June 30, 2005 included a gain on sale of undeveloped property of$4,649, net of tax, or 0.30 per diluted share.

The Company’seffective tax rate for the six-month period ended June 30, 2006, was 37.3%compared with 33.4% for the same period in 2005.  This was primarily the result of permanentdifferences fluctuations, including those related to the stock basecompensation expense taken in 2006, and domestic production activitydeductions.

The Company’s total backlog increased to $653,044 atJune 30, 2006 compared with $495,865 at December 31, 2005.  New orders received in the second quarterwere $259,885, including $252,191 in the Defense Segment and $7,694 in theEnergy segment.

***Three and Six Months Ended June 30, 2006 Compared tothe Three and Six Months Ended June 30, 2005***
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                                    | ** ** | **2006**                                        | ** ** | **2005**                 | ** ** | **$**                                         | ** ** | **%**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                          |       |                                            |       |                     |       |                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Net sales                                                     |       | $                                               | 149,215    |                     | $          | 119,928                                       |       | $                        | 29,287     |   | 24.4 |   | $ | 286,834 |   | $ | 227,476 |   | $ | 59,358 |   | 26.1 |   |
| Operating costs and  expenses                                 |       | 132,890                                         |       | 107,312                  |       | 25,578                                        |       | 23.8                     |       | 255,397 |   | 202,622 |   | 52,775 |   | 26.0 |   |
| Operating income                                              |       | 16,325                                          |       | 12,616                   |       | 3,709                                         |       | 29.4                     |       | 31,437 |   | 24,854 |   | 6,583 |   | 26.5 |   |
| Operating margin                                              |       | 10.9                                            | %          | 10.5                     | %          | —                                        |       | —                   |       | 11.0 | % | 10.9 | % | — |   | — |   |
| Non-operating  income (expense)                               |       | 423                                             |       | (439                     | )          | 862                                           |       | 196.4                    |       | (446 | ) | 6,572 |   | (7,018 | ) | (106.8 | ) |
| Income from  continuing operations, net of income taxes       |       | 10,573                                          |       | 8,301                    |       | 2,272                                         |       | 27.4                     |       | 19,428 |   | 20,925 |   | (1,497 | ) | (7.2 | ) |
| (Loss) income  from discontinued operations net of income tax |       | (314                                            | )          | 145                      |       | (459                                          | )          | (316.6                   | )          | (601 | ) | 193 |   | (794 | ) | (411.4 | ) |
| Net income                                                    |       | 10,259                                          |       | 8,446                    |       | 1,813                                         |       | 21.5                     |       | 18,827 |   | 21,118 |   | (2,291 | ) | (10.9 | ) |
| Diluted earnings  per share                                   |       |                                            |       |                     |       |                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                             |       | 0.74                                            |       | 0.60                     |       | —                                        |       | —                   |       | 1.43 |   | 1.44 |   | — |   | — |   |
| Loss from discontinued operations                             |       | (0.02                                           | )          | 0.01                     |       | —                                        |       | —                   |       | (0.04 | ) | 0.01 |   | — |   | — |   |
| Net income                                                    |       | 0.72                                            |       | 0.61                     |       | —                                        |       | —                   |       | 1.39 |   | 1.45 |   | — |   | — |   |
|                                                               |            |                                                 |            |                          |            |                                               |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*** ***

***Defense Segment***
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **2006**                                        | ** ** | **2005**                 | ** ** | **$**                                         | ** ** | **%**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
|                          |       |                                            |       |                     |       |                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Net sales                     |       | $                                               | 137,400    |                     | $          | 111,614                                       |       | $                        | 25,786     |   | 23.1 |   | $ | 266,101 |   | $ | 211,771 |   | $ | 54,330 |   | 25.7 |   |
| Operating costs  and expenses |       | 123,913                                         |       | 99,913                   |       | 24,000                                        |       | 24.0                     |       | 238,959 |   | 187,952 |   | 51,007 |   | 27.1 |   |
| Operating income              |       | 13,487                                          |       | 11,701                   |       | 1,786                                         |       | 15.3                     |       | 27,142 |   | 23,819 |   | 3,323 |   | 14.0 |   |
| Operating margin              |       | 9.8                                             | %          | 10.5                     | %          | —                                        |       | —                   |       | 10.2 | % | 11.2 | % | — |   | — |   |
| Income before income  taxes   |       | 13,817                                          |       | 12,212                   |       | 1,605                                         |       | 13.1                     |       | 27,832 |   | 31,659 |   | (3,827 | ) | (12.1 | ) |
|                               |            |                                                 |            |                          |            |                                               |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Energy Segment***
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **2006**                                        | ** ** | **2005**                 | ** ** | **$**                                         | ** ** | **%**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
|                          |       |                                            |       |                     |       |                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Net sales                     |       | $                                               | 11,815     |                     | $          | 8,314                                         |       | $                        | 3,501      |   | 42.1 |   | $ | 20,733 |   | $ | 15,705 |   | $ | 5,028 |   | 32.0 |   |
| Operating costs  and expenses |       | 8,530                                           |       | 7,415                    |       | 1,115                                         |       | 15.0                     |       | 15,741 |   | 14,702 |   | 1,039 |   | 7.1 |   |
| Operating income              |       | 3,285                                           |       | 899                      |       | 2,386                                         |       | 265.4                    |       | 4,992 |   | 1,003 |   | 3,989 |   | 397.7 |   |
| Operating margin              |       | 27.8                                            | %          | 10.8                     | %          | —                                        |       | —                   |       | 24.1 | % | 6.4 | % | — |   | — |   |
| Income before  income taxes   |       | 3,479                                           |       | 915                      |       | 2,564                                         |       | 280.2                    |       | 5,345 |   | 1,090 |   | 4,255 |   | 390.4 |   |
|                               |            |                                                 |            |                          |            |                                               |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Three Months Ended June 30, 2006 compared to the ThreeMonths Ended June 30, 2005***

DefenseSegment

Thegrowth in net sales in the Defense segment was primarily due to an $10,012increase in Shadow 200 TUAS production volume, a $9,301 increase in logisticalsupport for an increasing number of fielded Shadow 200 TUAS, a $6,494 increasein UAS engineering activities, and $2,821 of other various increases, partiallyoffset by a $2,842 decrease in Test and Training.

The increased Shadow 200TUAS production activity in 2006 was related to management’s decision toincrease production capacity to address higher order volumes.  The increased Shadow 200 TUAS logisticalsupport activity was due to the growing number of flight hours that resultedfrom an increasing number of fielded systems and utility, especially by thosefielded by the U.S. Army in Operation Iraqi Freedom.

The decrease in theoperating margin was largely due to higher pension expense of $732, resultingfrom greater employment and a lower discount rate used to calculate the presentvalue of the pension obligation, and an increase in cost plus contracts, whichgenerally result in lower operating margins than fixed price contracts, for thelogistical support of a growing number of fielded TUAS.  Further, the second quarter of 2005experienced higher operating margins due to production efficiencies realized onthe initial full rate production contract for the TUAS and the favorable JSECSTproduction program.  These contracts werecompleted in 2005.

EnergySegment

The net sales increase inthe Energy segment was primarily driven by higher demand for its alternativefuel products, such as coal and wood burning stokers, in response to recenthigh and volatile prices for oil and natural gas.  The Energy segment’s operating margins increasedas a result of the restructuring activities completed in 2005. The fullbenefits of the Energy segment’s restructuring plan including its outsourcingstrategy for manufacturing activities were not fully realized until the fourthquarter of 

33

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2005.  Additionally, the economies of scale relatedto the higher sales volume levels in 2006, contributed to the increase inoperating margin.

***Six Months Ended June 30, 2006 compared to the Six MonthsEnded June 30, 2005***

DefenseSegment

Thegrowth in net sales in the Defense segment was primarily due to a $23,801increase in logistical support for an increasing number of fielded Shadow 200TUAS, a $19,568 increase in Shadow 200 TUAS production volume, a $11,276increase in UAS engineering activities, a $3,136 increase generated by ESL and$3,686 of other various increases, partially offset by a $7,137 decrease inTest and Training.

Theincreased Shadow 200 TUAS production activity in 2006 was related to management’sdecision to increase production capacity to address higher order volumes.  The increased Shadow 200 TUAS logisticalsupport activity was due to the growing number of flight hours that resultedfrom an increasing number of fielded systems and utility, especially by thosefielded by the U.S. Army in Operation Iraqi Freedom.

The decrease in operatingmargins of the Defense segment was the result of higher pension expense of$1,467 and product mix in the six months ended June 30, 2006, compared to thesix months ended June 30, 2005.  In thesix months ended June 30, 2005, the Defense segment experienced higheroperating margins on the initial full rate production contracts for the Shadow200 TUAS due to production efficiencies realized and the favorable JSECSTproduction programs.  These contractswere completed in 2005.

EnergySegment

Thenet sales increase in the Energy segment was primarily driven by higher demandfor its alternative fuel products, such as coal and wood burning stokers, inresponse to recent high and volatile prices for oil and natural gas.  The improved margins were a result of therestructuring activities completed in 2005. The full benefits of the Energysegment’s restructuring plan including its outsourcing strategy for manufacturingactivities were not fully realized until the fourth quarter of 2005.  Additionally, the economies of scale relatedto the higher sales volume levels in 2006, contributed to the increase inoperating margin.

**Discontinued Transportation Operations**

For additionalinformation regarding the discontinued transportation operations, see Note K tothe Consolidated Condensed Financial Statements included in this QuarterlyReport on Form 10-Q.

**Funded Backlog**
|                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Defense segment |       | $                       | 641,584    |                        | $          | 487,366 |   |
| Energy segment  |       | 11,460                  |       | 8,499                       |       |
| Total           |       | $                       | 653,044    |                        | $          | 495,865 |   |

 

The Company’s fundedbacklog for continuing operations, defined as orders placed for which fundshave been appropriated or purchase orders received, was $653,044 at June 30,2006, an increase of $157,179 or 31.7%, from December 31, 2005.

The Company received$259,885 of funded new orders for products and services during the secondquarter of 2006, an increase of $35,326 or 15.7%, compared to $224,559 for thesame period in 2005. Included in the second quarter 2006 were funded new ordersof $252,191 in the Defense segment and $7,694 in the Energy segment.

The Company received$443,107 of funded new orders for products and services during the six monthsended June 30, 2006, an increase of $122,714 or 38.3%, compared to $320,393 forthe same period in 2005. Included in the six months ended June 30, 2006 werefunded new orders of $419,269 in the Defense segment and $23,838 in the Energysegment.

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** **

**Liquidity and Capital Resources**

**Overview**

TheCompany’s principal source of liquidity is cash on hand, cash generated fromoperations and availability under the Company’s four-year $100 millionrevolving credit facility entered into by the Company and AAI on July 18, 2005with a syndicate of six banks (“Credit Facility”).  On June 30, 2006, the Company had cash andcash equivalents of $91,101 and availability under its Credit Facility of$97,500.  Based upon cash on hand, cashexpected to be generated from operations and availability under the CreditFacility, the Company expects to have sufficient cash to meet its requirementsfor at least the next twelve months.

Inaccordance with its strategic initiatives to enhance shareholder value, theCompany is continuing to focus its efforts on the profitability and growth ofits core Defense product areas, seeking to maximize operating efficiencies, andexploring the sale of non-core assets.  

TheCompany intends to complement its organic growth strategy for its Defensesegment through select acquisitions that broaden its product and serviceofferings, deepen its capabilities, and allow entry into new markets.  Acquisition candidates may include public andprivate companies and divisions, subsidiaries and product lines of suchcompanies.  As part of this initiative,the Company acquired ESL in April 2005 and Aerosonde in June 2006.

 As a part of the Company’s strategy to explorethe sale of non-core assets, the Company continues its engagement with ImperialCapital, LLC, an investment-banking firm, to act as exclusive financial advisorto assist in exploring strategic alternatives for Detroit Stoker, including apossible sale (the “Transaction”).  TheCompany continues to explore potential Transactions involving DetroitStoker.  From time to time, the Companyand potential buyers may (i) have discussions regarding a potentialTransaction, (ii) negotiate the preliminary terms of a potentialTransaction, and (iii) enter into customary non-binding agreements in order tofacilitate any such discussions and negotiations.  No assurances can be given regarding whethera Transaction involving Detroit Stoker will occur or the timing or proceedsfrom any such Transaction.

**Sources and Uses of Cash**

The following is a discussion of theCompany’s major operating, investing, and financing activities for the sixmonth periods ended June 30, 2006 and 2005. The financial information presented in the table below is summarizedfrom the Company’s Consolidated Condensed Statements of Cash Flows.

|                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Operating  activities:                                            |       |                                          |       |   |   |
|                                                              |       |                                          |       |   |   |
| Net cash provided by continuing operations                        |       | $                                             | 19,725     |   | $ | 21,252 |   |
|                                                              |       |                                          |       |   |   |
| Net cash used in operating activities by  discontinued operations |       | (1,409                                        | )          | (2,596 | ) |
|                                                              |       |                                          |       |   |   |
| Net cash  provided by operating activities                        |       | 18,316                                        |       | 18,656 |   |
|                                                              |       |                                          |       |   |   |
| Net cash (used  in) provided by investing activities              |       | (10,082                                       | )          | 97,023 |   |
|                                                              |       |                                          |       |   |   |
| Net cash  provided by (used in) financing activities              |       | 5,371                                         |       | (122,446 | ) |
|                                                              |       |                                          |       |   |   |
| Increase (decrease) in  cash and cash equivalents                 |       | $                                             | 13,605     |   | $ | (6,767 | ) |

 

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## *** ***

## ***Operating Activities***

Net cash provided by continuing operations in the sixmonths ended June 30, 2006 decreased $1,527 compared to the six months endedJune 30, 2005.  This decrease wasgenerally due to a decrease of $5,377 in operating assets and liabilitiesmainly due to the timing of milestone billings and payments related to ourShadow 200 TUAS program, partially offset by higher income from continuingoperations.

The Company’s cash flows fromoperations are dependent on the timing of receipts from various U.S. governmentpayment offices and, as a result, may differ from period to period and suchdifferences could be significant.

Netcash used by the discontinued transportation operations in the six months endedJune 30, 2006 primarily related to expenses attributable to ongoing litigationinvolving AAI’s claims under a labor and materials bond, as discussed in Note17 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005 and Note L tothe Consolidated Condensed Financial Statements included in part I, Item 1 ofthis Quarterly Report on Form 10-Q.

## ***Investing Activities***

Cash used for thepurchase of property and equipment declined by $9,065 in the six months endedJune 30, 2006 compared to the six months ended June 30, 2005.  The decrease primarily relates to activitiesin 2005 that included $6,707 for the purchase and improvement of a building inSouth Carolina, $2,097 for implementation of AAI’s new enterprise resourceplanning (“ERP”) system, and $2,747 for Defense facility improvements including$1,323 for enhancements to the UAS production facilities.  The Company anticipates that futurerequirements will include expenditures incurred during the ordinary course ofbusiness.  See “*Capital Expenditures*” below.

On December 29, 2004, theCompany invested $124,619 in U.S. treasury bills maturing February 24,2005.  On February 23, 2005, the Companyredeemed the U.S. treasury bills and received approximately $373 of short-termcapital gain thereon, repaid the cash collateral to its broker-dealer togetherwith $444 of related interest charges, and collected the $25,000 deposit plus$86 of accrued interest thereon.

During the six monthsended June 30, 2005, the Company invested $12,684 in marketable common stocksecurities of one entity that are available for sale.

On June 19, 2006, theCompany purchased Aerosonde Pty Ltd and Aerosonde North America for $6,556, netof cash acquired.  On April 4, 2005, theCompany purchased ESL Defence Limited, for $9,883, net of cash acquired.

Net cash provided byinvesting activities in the six months ended June 30, 2005 included proceeds of$7,555 from the sale of certain undeveloped property adjacent to the Company’sHunt Valley, MD corporate headquarters.

## ***Financing Activities***

The Company’s financingactivities in the six months ended June 30, 2006 provided $5,371 of cash,including a decrease in restricted cash of $4,810, proceeds from the exerciseof stock options of $2,414, excess tax benefits from stock-based paymentarrangements of $1,059, offset by dividends paid of $2,270 and repayment oflong-term debt of $642.

The Company’s financingactivities in the six months ended June 30, 2005 used $122,446 of cash,including approximately $124,619 for the repayment of collateral received froma securities lending transaction of U.S. treasury bills that were soldconcurrently.  In connection with thesecurities lending transaction, the Company also received the $25,000refundable deposit from its broker-dealer together with a decrease of $4,046 inrequired collateral.  Financingactivities in 2005 also included $24,978 for the purchase of the Company’scommon stock.

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** **

**Debt and Related Covenants**

The Credit Facility entered into on July 18, 2005 bythe Company and AAI contains affirmative, negative and financial covenantscustomary for facilities of this type, including, among other things,maintenance of certain leverage and fixed charge coverage ratios, as well asminimum consolidated tangible net worth ratios, limits on the incurrence ofdebt and preferred equity, limits on the incurrence of liens, a limit on themaking of dividends or distributions, limits on sales of assets and a limit oncapital expenditures.

For a completedescription of the Company’s long-term debt, including the terms and conditionsof each debt instrument, please see Note 7 to the Consolidated FinancialStatements included in Part II, Item 8 of the Company’s Annual Report on Form10-K for the year ended December 31, 2005. The Company was in compliance with all of its covenants under the CreditFacility as of June 30, 2006.

**Cash Requirements**

***Capital Expenditures***

TheCompany expects that capital expenditures in 2006 will be significantly lowerthan in 2005.

Capital expenditures duringthe six months ended June 30, 2005 were significantly higher than during the sixmonths ended June 30, 2006 primarily due to the purchase of a facility inCharleston, South Carolina for AAI Services Corporation to support the growthin its operations, enhancements to certain of the Company’s UAS productionfacilities, including the purchase of new manufacturing equipment to increaseproduction output and efficiency, and implementation of the Company’s ERPSystem.

Asof June 30, 2006, the Company had no significant commitments for capitalexpenditures.

***Other Cash Requirements***

During the six monthsended June 30, 2006, the Company paid two quarterly cash dividends of $0.10 pershare for an aggregate amount of $2,270. Thepayment of any future dividends will be at the discretion of the Board ofDirectors and will depend upon, among other things, the Company’s corporatestrategy, future earnings, operations, capital requirements, and the Company’sfinancial condition and general business conditions.  Should the Companydistribute a cash dividend in any quarterly period in excess of $0.10 pershare, the conversion rate provided for in the Indenture governing the 3.75%Convertible Senior Notes would be adjusted.  In addition, theCompany’s Credit Facility imposes certain restrictions on the payment ofdividends.

The cash required to completely exit the discontinuedtransportation operation subsequent to June 30, 2006 is expected to be approximately$390 through 2006.  These amounts excludelegal fees expected to be incurred related to claims made by AAI in pursuit ofpayment under a surety bond (see Note L to the Consolidated Condensed FinancialStatements included in this Quarterly Report on Form 10-Q for a discussion ofAAI’s claims).

For additional information regarding the Company’scontingencies, please see the discussion under the heading “*Contingent Matters*” below.

TheCompany is currently evaluating the need to contribute cash to the UICRetirement Pension Plan, and does expect to contribute $935 to the unionpension plan in the Energy segment during 2006, of which $208 was funded in thesix months ended June 30, 2006.  Further,the Company expects to pay other post-retirement benefits of approximately$2,451 in 2006, of which $1,262 was paid during the six months ended June 30,2006.

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** **

**ContingentMatters**

**Off-Balance Sheet Arrangements**

Inconnection with certain contracts, United Industrial’s operating subsidiarieshave committed to certain performance guaranties. The ability to perform underthese guaranties may, in part, be dependent on the performance of otherparties, including partners and subcontractors. If United Industrial’soperating subsidiaries are unable to meet these performance obligations, theperformance guaranties could have a material adverse effect on product marginsand the Company’s results of operations, liquidity or financial position.United Industrial’s operating subsidiaries monitor the progress of theirpartners and subcontractors, and as of June 30, 2006 United Industrial does notbelieve that the performance of these partners and subcontractors willadversely affect these contracts. No assurances can be given, however, as tothe liability of United Industrial’s operating subsidiaries if partners orsubcontractors are unable to perform their obligations.

**Other Contingent Matters**

TheCompany is involved in various lawsuits and claims, including asbestos-relatedlitigation and environmental matters. There have been no material changes in any legal proceedings since theCompany filed its Annual Report on Form 10-K for the year ended December 31,2005.  For further information, refer tothe Consolidated Financial Statements and Notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005 and Note L tothe Consolidation Condensed Financial Statements included in Part I, Item 1 ofthis Quarterly Report on Form 10-Q.

##### **MarketableEquity Securities**

TheCompany’s investment in marketable equity securities consist of an investmentin common stock of one company in the Aerospace and Defense industry.Unrealized holding gains and losses deemed temporary on available-for-salesecurities are excluded from earnings and are reported as a separate componentof other comprehensive income until realized.  If an unrealized holding loss is deemed to beother-than-temporary, such unrealized loss is charged to earnings whenidentified.  An unrealized loss of $6,074in the second quarter was recorded in other comprehensive income at June 30,2006.  Management believes that themagnitude of the unrealized loss is attributable to the June 2006 disclosuresof an indictment of the issuer and its chairman and suspension of certain ofits plants from receiving U.S. government contracts, and possible delisting ofits common stock.  Management evaluatedthe near-term prospects of the issuer in relation to the severity (at June 30,2006 the market value was 37% less than the Company’s cost) and duration of theunrealized loss (less than one month). Based on that evaluation and the Company’s ability and intent to holdthe investment for a reasonable period of time sufficient for a forecastedrecovery of fair value, the Company does not consider this investment to beother-than-temporarily impaired at June 30, 2006.

**Critical Accounting Policies**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements, as well as reported amounts of revenues andexpenses during the reporting period. Judgments and assessments of uncertainties are required in applying theCompany’s accounting policies in many areas. Actual results could differ from these estimates.

There have been no revisions to the CriticalAccounting Policies as disclosed in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

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**Item3. - Quantitative and Qualitative Disclosures about Market Risk**

**InterestRate**

On September 15, 2004,the Company issued and sold $120,000 of 3.75% Convertible Senior Notes.  Several features contained in the indenturegoverning the 3.75% Convertible Senior Notes are considered embedded derivativeinstruments and are being accounted for as derivative instruments separate fromthe host contract (the 3.75% Convertible Senior Notes). The Company will recordgains or losses in its Consolidated Condensed Statements of Operations forchanges in the fair value of these embedded derivatives.  The aggregate fair value assigned to theseembedded derivatives at June 30, 2006 was approximately $489 and $457 atDecember 31, 2005.  Accordingly, theCompany recognized a loss of $32 for the six months ended June 30, 2006 as theresult of the change in fair value of the embedded derivatives.

Each of the embeddedderivatives may result in certain payments to the holders of the 3.75%Convertible Senior Notes.

Therehas been no material change in the interest rate market risk or contingentpayment features from December 31, 2005 (see Item 7A in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005).

**Foreign Currency**

There has been nomaterial changes from December 31, 2005 (see Item 7A in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005).

**Marketable Equity Securities**

For a discussion of marketrisk related to an investment in a marketable equity security of one companysee Note F to the Consolidated Condensed Financial Statements included in PartI, Item 1 of this Quarterly Report on Form 10-Q.

**Item4. - Controls and Procedures**

(a)                The Company maintains disclosure controls andprocedures designed to ensure that it is able to collect the information it isrequired to disclose in the reports it files with the SEC, and to process,summarize and disclose this information within the time periods specified inthe rules of the SEC.  The Company’smanagement evaluated, with the participation of the Company’s principalexecutive and principal financial officers, the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), asof June 30, 2006.  Based on theirevaluation, the Company’s principal executive and principal financial officersconcluded that the Company’s disclosure controls and procedures were effectiveas of June 30, 2006 to ensure that the Company is able to collect, process, anddisclose the information it is required to disclose in the reports it fileswith the SEC within the required time periods.

(b)               Therehas been no change in the Company’s internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) thatoccurred during the Company’s fiscal quarter ended June 30, 2006, that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

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**PART II - OTHER INFORMATION**

##### **Item 1. - Legal Proceedings**

Referenceis made to the information contained in the section entitled “*Management’s Discussion and Analysis of FinancialCondition and Results of Operations*” set forth above in Item 2 ofPart I and to Note 17 to the Consolidated Condensed Financial Statementsincluded in Part II, Item 8 of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2005 and Note L to the Consolidated Condensed FinancialStatements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

**Item 4. - Submission of Matters to a Vote of Security Holders**

(a)  The Company held its 2006 Annual Meeting ofShareholders on May 18, 2006.

(b)  The following matters were voted upon at themeeting:

(i)   The first item considered was the electionof six directors of the Company to serve until the 2007 annual meeting ofshareholders, and the results of such voting were as follows:

| Nominees                     | ** ** | **Votes For** | ** ** | **Withheld** | ** ** |
|------------------------------|------------|--------------------|------------|--------------|------------|
|                         |       |               |       |         |       |
| Thomas A. Corcoran           |       | 10,461,887         |       | 145,671      |       |
|                         |       |               |       |         |       |
| Glen M. Kassan               |       | 10,458,869         |       | 148,689      |       |
|                         |       |               |       |         |       |
| Warren G. Lichtenstein       |       | 10,411,031         |       | 196,528      |       |
|                         |       |               |       |         |       |
| Robert F. Mehmel             |       | 10,488,581         |       | 118,977      |       |
|                         |       |               |       |         |       |
| Gen. Richard I. Neal  (Ret.) |       | 10,467,892         |       | 139,666      |       |
|                         |       |               |       |         |       |
| Frederick M. Strader         |       | 10,488,423         |       | 119,135      |       |

 

(ii)           The second itemconsidered was a proposal to approve the 2006 Long Term Incentive Plan, whichwas approved with 7,397,237 shares voted in favor of such proposal, 887,866shares voted against such proposal, and holders of 40,052 shares abstaining.

 (iii) The third item considered was a proposalto ratify KPMG LLP as the Company’s independent auditor for 2006, which wasapproved with 10,542,167 shares voted in favor of such proposal, 37,032 sharesvoted against such proposal, and holders of 28,358 shares abstaining.

**Item6. - Exhibits**

31.1                           Rule13a-14(a)/15d-14(a) Certification by the Chief Executive Officer of theCompany.

31.2                           Rule13a-14(a)/15d-14(a) Certification by the Chief Financial Officer of theCompany.

32.1                           Section1350 Certification by the Chief Executive Officer of the Company.

32.2                           Section1350 Certification by the Chief Financial Officer of the Company.

 

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SIGNATURE

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

 
|        |                     | UNITED INDUSTRIAL CORPORATION |
|--------|--------------------------|-------------------------------|
|   |                     |                          |
|   |                     |                          |
| Date:  | August 1, 2006 |                          |   | By: | /s/ James H.  Perry |   |
|   |                     |                          | James H. Perry |
|   |                     |                          | Vice President, |
|   |                     |                          | Chief Financial  Officer, and Controller |
|   |                     |                          | (as duly authorized  officer  and principal accounting  officer) |
|        |                          |                               |  |  |  |  |  |  |  |

 

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INDEX OF EXHIBITS FILEDHEREWITH

**Exhibit No.**

31.1                     Rule13a-14(a)/15d-14(a) Certification by the Chief Executive Officer of theCompany.

31.2                     Rule13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of theCompany.

32.1                     Section 1350Certification of the Chief Executive Officer of the Company.

32.2                     Section 1350Certification of the Chief Financial Officer of the Company.

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