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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934




|                                  |                              
|--------------------------------- | -----------------------------
|For Year Ended: December 31, 2003 | Commission File No. 001-16821



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UNITED DEFENSE INDUSTRIES, INC.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 52-2059782                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)



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1525 Wilson Boulevard,
Suite 700,

Arlington, Virginia, 22209-2411


(703) 312-6100


(Address and telephone number of principal
executive offices of


Registrant and each Co-Registrant)




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Securities registered pursuant to
Section 12(b) of the Act:

|                                       |  |                                     
|-------------------------------------- |  | ------------------------------------
|Title of each class                    |  | Name of exchange on which registered
|                                       |  |                                     
|Common Stock, par value $.01 per share |  | New York Stock Exchange             

Securities registered pursuant to
Section 12(g) of the Act:

None


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

Indicate by check mark if the disclosure of
delinquent filers pursuant to Item 405 or
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in part III of this Form 10-K or any amendment to
this
Form 10-K.     o

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

The aggregate market value of the common stock
held by non-affiliates of the registrant was $1,043,480,494
based on the closing price of $25.94 per share on the New York
Stock Exchange on June 30, 2003.

Common Stock, $.01 par value, 52,341,136 shares
outstanding as of January 30, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the registrants
definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A no later
than April 30, 2004 is incorporated by reference in Part
III of this Report.



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TABLE OF CONTENTS

|         |  |                                                                                                        |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|         |  |                                                                                                        |  | Page
|         |  |                                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                                               |  |      | 2  | 
|Item 2.  |  | Properties                                                                                             |  |      | 22 | 
|Item 3.  |  | Legal Proceedings                                                                                      |  |      | 23 | 
|Item 4.  |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 23 | 
|PART II 
|Item 5.  |  | Market for Registrants
    Common Equity and Related Shareholder Matters                              |  |      | 23 | 
|Item 6.  |  | Selected Consolidated
    Financial Data                                                               |  |      | 24 | 
|Item 7.  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 24 | 
|Item 7A. |  | Quantitative and Qualitative
    Disclosures about Market Risk                                         |  |      | 35 | 
|Item 8.  |  | Consolidated Financial
    Statements and Supplementary Data  Contents                                |  |      | 35 | 
|Item 9.  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 36 | 
|Item 9A. |  | Controls
    and Procedures                                                                            |  |      | 36 | 
|PART III
|Item 10. |  | Directors and
    Executive Officers                                                                   |  |      | 36 | 
|Item 11. |  | Executive Compensation                                                                                 |  |      | 36 | 
|Item 12. |  | Security Ownership of
    Certain Beneficial Owners and Management and Related
    Stockholder Matters |  |      | 36 | 
|Item 13. |  | Certain Relationships and
    Related Transactions                                                     |  |      | 36 | 
|Item 14. |  | Principal Accountant Fees
    and services                                                             |  |      | 37 | 
|PART IV 
|Item 15. |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  |      | 37 | 
|EX-10.2 
|EX-10.4 
|EX-10.6 
|EX-10.11
|EX-10.22
|EX-21.1 
|EX-23.1 
|EX-23.2 
|EX-23.3 
|EX-31.1 
|EX-31.2 
|EX-32.1 
|EX-32.2 





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Special Note Regarding Forward-Looking
Statements

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

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PART I






|        |                        
|------- | -----------------------
|ITEM 1. | Description of Business

Overview

United Defense Industries, Inc. was incorporated
in 1997 to acquire United Defense, L.P. (UDLP), a
global leader in the design, development, and production of
combat vehicles, artillery systems, naval guns, and missile
launchers used by the U.S. Department of Defense and allied
militaries throughout the world. In 2000, we acquired Bofors
Defence (Bofors), based in Sweden, a leading
producer of artillery systems, air defense and naval guns, and
precision munitions. In 2002, we acquired United States Marine
Repair, Inc. (USMR), the leading provider of ship
repair, maintenance and modernization services to the U.S. Navy,
other U.S. defense related agencies, and commercial customers.
With the acquisition of USMR, we are now organized into two
separate product and service lines which are each considered
separate reportable segments: Defense Systems and Ship Repair
and Maintenance. Our Defense Systems program portfolio consists
of a mix of weapons system development, production, upgrade, and
life cycle support programs. Our Ship Repair and Maintenance
business segment consists of ship repair, maintenance, and
modernization service programs.

Our Defense Systems segments primary
military programs include upgrades of the Bradley Fighting
Vehicle (BFV) and its derivatives, Naval Ordnance
production and development programs, and development of several
manned ground vehicle types within the Armys Future Combat
Systems (FCS) program, including the
Non-Line-of-Sight Cannon (NLOS-C). Since 1981, the
BFV has served as the leading domestically produced vehicle able
to fulfill the dual role of troop transport and armored fighting
vehicle. We have maintained our prime contractor position on the
BFV program since production began, and have added a number of
technology-based upgrades and derivative vehicles that continue
to extend the programs life cycle. In addition to managing
the BFV vehicle programs, we serve as the prime contractor for a
number of military programs, several of which have spanned
decades, including the M88 tank recovery vehicle since 1960, the
M113 armored personnel carrier since 1960, and the U.S.
Navys Mk45 naval gun system since 1968. However, many of
our traditional U.S. Army (the Army) programs are
expected to be supplanted by the Armys Stryker and/or FCS
programs (discussed below).

The Ship Repair and Maintenance segments
primary military contracts relate to long-term maintenance
programs on U.S. surface ships including, guided missile
destroyers, cruisers, mine countermeasures ships, cargo, and
amphibious ships.

Business Segments, Products and
Programs

Revenue generated from each of our segments and
major programs is summarized below.

|                                            |  |                         |         |      |  |      |         |  |  |   |         | 
|------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                            |  |                        
|                                            |  | Year Ended December 31,
|                                            |  |                        
|                                            |  | 2001                    |         | 2002 |  | 2003
|                                            |  |                         |         |      |  |     
|                                            |  |                        
|                                            |  | (in millions)          
|Defense Systems:                            |  |                         |         |      |  |      |         |  |  |   |         | 
|Bradley Family of Vehicles                  |  | $                       | 275.7   |      |  | $    | 335.9   |  |  | $ | 292.6   | 
|Naval Ordnance                              |  |                         | 230.7   |      |  |      | 219.0   |  |  |   | 239.9   | 
|Vertical Launch System                      |  |                         | 85.4    |      |  |      | 114.5   |  |  |   | 115.4   | 
|Combat, Engineering &
    Recovery Vehicles |  |                         | 102.0   |      |  |      | 147.8   |  |  |   | 99.6    | 
|Artillery Systems                           |  |                         | 292.1   |      |  |      | 309.7   |  |  |   | 310.8   | 
|Assault Amphibious Vehicles                 |  |                         | 55.3    |      |  |      | 65.3    |  |  |   | 132.0   | 
|Other                                       |  |                         | 277.3   |      |  |      | 277.7   |  |  |   | 317.0   | 
|                                            |  |                         |         |      |  |      |         |  |  |   |         | 
|Total Defense Systems                       |  | $                       | 1,318.5 |      |  | $    | 1,469.9 |  |  | $ | 1,507.3 | 
|Ship Repair and Maintenance                 |  |                         |        |      |  |      | 255.4   |  |  |   | 545.3   | 
|                                            |  |                         |         |      |  |      |         |  |  |   |         | 
|Total                                       |  | $                       | 1,318.5 |      |  | $    | 1,725.3 |  |  | $ | 2,052.6 | 
|                                            |  |                         |         |      |  |      |         |  |  |   |         | 

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| |                        
| | -----------------------
| | Defense Systems Segment

The Bradley Fighting
Vehicle.We have been the sole-source,
prime contractor of the BFV to the Army since its initial
production in 1981. The BFV is a tracked armored vehicle with a
25mm cannon, TOW missiles and a stabilized turret, and is the
leading domestically produced vehicle able to fulfill the dual
role of troop transport and armored fighting vehicle. The BFV is
outfitted with armor and day/night sights, and can transport up
to nine soldiers across rough terrain. The vehicles
combination of lethality, survivability, and mobility has
established it as a critical component of the U.S.
Governments full-spectrum warfare strategy. A total of
7,178 BFVs and derivatives have been built, of which 400 were
for the Saudi Arabian Army.

Although new BFVs are no longer being built, we
derive significant revenue from upgrading the Armys
existing fleet of BFVs. We initiated delivery of the latest
upgrade, the BFV A3 version, in October of 1998 as part of a low
rate initial production contract awarded in July of 1997. The
BFV A3, which currently includes the Infantry Fighting Vehicle,
the Cavalry Fighting Vehicle and Fire Support Vehicle variants,
is the most modern version of the vehicle and provides enhanced
situation awareness capability and improved lethality,
survivability and sustainability. The BFVA3 has a fully
integrated digital architecture and is adaptable to the
Armys emerging network architecture as it transforms its
current force into the future force. The U.S. Army is in the
process of upgrading 595 older version BFVs to the A3
configuration, with annual funding allocations over the
seven-year period between FY1997-2003. We had been awarded four
single year contracts for A3 upgrades (FY1997-2000) for a total
of 206 vehicles, and in May 2001, we received a multi-year
contract (FY2001-2003) for an additional 389 vehicles. Of these
595 vehicles, 91 were delivered in 2003 and 228 in prior years.
Production under the BFV A3 multi-year contract is expected to
be completed by June 2005.

In September of 2003, Congress added
$221 million to the FY2004 budget to provide for the
procurement of an additional 144 Bradleys. These vehicles will
be an improved version of the BFV A2 (known as the A2 OIF) that
will incorporate many of the lessons learned during Operation
Iraqi Freedom (OIF). Production of these vehicles is expected to
start in the second quarter of 2005 and end in the third quarter
of 2006.

The Administrations FY05 budget does not
propose further funding for the BFV and other current force
systems. Unless a different approach results from the
legislative process, such as the addition of funds for BFV work,
we believe that our BFV production work would be reduced
significantly following the completion of the 144 vehicles added
to the FY2004 budget.

BFV Derivatives and
Support.The BFV has served as a
platform for a number of derivative vehicles we have developed.
One such derivative, the Multiple Launch Rocket System
(MLRS) carrier, was developed to provide a carrier
for a long-range rocket artillery system and is outfitted with
rockets, a launcher and fire control system developed and
produced by Lockheed Martin Missiles and Fire Control. We were
awarded a contract to initiate an MLRS remanufacture program,
with the first delivery completed in August 1997. Another
derivative, the Fire Support Vehicle, supports armor and
mechanized forces by pinpointing enemy targets using laser
technology, which allows more accurate and timely calls for fire
to the artillery batteries. We provided 22 kits to convert BFVs
under a workshare arrangement with Red River Army Depot to
produce Fire Support Vehicles. Another such vehicle is the
Command and Control Vehicle (C2V). The C2V is a
self-contained vehicle used for communications and operational
control of forces that keeps pace with armored maneuver forces
while providing the crew with a protected environment. We were
awarded a three-year production contract for C2V variants in
December 1998 which were completed in May 2001.
Although the Army removed additional production funding for the
C2V in FY01 and cancelled the FY00 award, we retained and
maintained all of the C2Vs produced under the original contract.
At the outset of Operation Iraqi Freedom we fielded 15 vehicles
to the Army under an urgent need statement. In addition to the
C2V, we developed and fielded the Bradley Command Vehicle
(BCV) to fulfill an urgent requirement prior to
Operation Iraqi Freedom. The BCV is a derivative vehicle of the
turreted Bradley.

In addition to the development and manufacture of
BFV derivatives, we provide BFV upgrade kits and field services.
Kits allow for the upgrade of BFVs to incorporate advances in
technology. We also deploy experts to provide on-site training
and advice to customers, complete maintenance and repairs, and
assess the necessity of replacement parts. We are under contract
with the U.S. Armys Simulation, Training and

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Instrumentation Command for the development and
demonstration of a multi-purpose simulator/trainer for the BFV
family of vehicles. An award for the production and installation
of 13 Bradley Advanced Training Systems (BATS) was
received in July 1999 and deliveries were completed in
2002. A second year production contract for a follow on quantity
of 11 BATS was awarded in May 2002, and deliveries were
completed in January 2004.


Mk45 Naval Gun System
(Mk45).United Defense is
the original equipment manufacturer and sole source producer for
the Navys 5-inch Mk45 gun system for the Navys
current class of destroyers, the Arleigh Burke DDG 51 class
(DDG51). We are under contract through FY03
requirements. The U.S. Navy currently plans to continue building
DDG51 class ships through at least FY05. We are also the prime
contractor for the Naval Surface Fire Support (NSFS)
program. This NSFS program includes upgrading the Mk45 gun
system with the capability to fire precision munitions. Due to
the NSFS program, we have received contracts to upgrade eight
Mk45 guns for the Navys Ticonderoga class ships from
Mod0/1 to Mod4 configuration, which extends the Mk45s
range and improves surface fire capability. Furthermore, the
U.S. Government supports allied navies having compatible
armaments, and provides us assistance in efforts to place Mk45s
on foreign ships. We believe the improvements included in the
Mod4 configuration, which provide significantly greater range,
will make the Mk45 more competitive internationally. We are
presently executing Mk45 contracts for Australia, Denmark, and
Korea.

Advanced Gun System
(AGS).The U.S. Navy is
currently developing its next-generation destroyer, the DD(X),
with land attack as its primary mission. We are the sole-source
developer of the 155 mm AGS, the primary gun weapon system on
DD(X), acting as a subcontractor to Northrop Grumman Ship
Systems, as well as the source selection authority for
development of the Long Range Land Attack Projectile
(LRLAP).

The 155-mm AGS with LRLAP will support the U.S.
Navy and Marine Corps expeditionary and Joint Operations
warfighters in the littorals and deep inland, capable of a
maximum sustained firing rate of 10 rounds per minute to deliver
high-volume 155-mm LRLAP fires at ranges of up to 100 nautical
miles. The high-capacity, fully automated 155-mm AGS and below
deck ammunition handling and storage system allows for an
uninterrupted and sustained high-volume of fire. Each of the
DD(X) destroyers will have two of the AGS gun systems on board,
providing the equivalent firepower of two battalions of U.S.
Marine Corps M198 howitzers. Compared to the current Arleigh
Burke Class DDG-51 ships, the gun system sales per ship will
increase by 4 times for the DD(X).

Funded gun development was initiated in 1999,
with completion of development scheduled for 2006. We are
currently in System Development and Demonstration for the AGS.
Under this phase, we are developing Engineering Development
Models to demonstrate the feasibility of the technology and
reduce risks. We successfully completed Preliminary Design
Review and Critical Design Review for the Engineering
Development Models in 2003. Land based testing will begin in
2005. The prototype ship is scheduled to begin construction in
FY05.

The 155-mm LRLAP is a Global Positioning System/
Inertial Measurement Unit-guided and rocket assisted munition
capable of delivering a unitary high-explosive warhead at
extreme range. In 2003, we selected Lockheed Martin to develop
the Engineering Development Model for the LRLAP. This projectile
effort is currently funded through FY05.

Deepwater.The
United States Coast Guard (USCG) is a key
element in supporting the United States national security
strategy by maintaining the nations economic, social,
environmental, and military security in the maritime
environment. High and medium endurance cutters are expected to
operate in 14 legislatively mandated USCG missions. For these
increasing mission requirements and to account for materiel
obsolescence, the USCG established the Deepwater Capability
Replacement Project to extend the lifecycle of existing systems
and to establish future USCG cutters. The Deepwater National
Security Cutter (NSC) will be designed to perform
the several major integrated Deepwater System missions and to
serve as a host for others.

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Deepwater System missions are the key application
for a new Gun Weapon System (GWS) and the need for a
modern medium-caliber gun system with a fire control system has
been identified. The Bofors 57mm Mk 3 gun, with its 3P
ammunition, forms an all-purpose naval gun system combining
extremely high anti-aircraft and anti-missile kill probability
with high effectiveness against surface and shore targets. This
compact, lightweight gun is unmanned and fully automatic with
computerized, hydraulically operated, automatic reloading from
two ship-mounted hoists. These features, combined with the 3P
ammunition, greatly enhance firepower and endurance against
aerial, surface, and shore targets with a maximum range of
17,000 meters. The gun is operated remotely from the fire
control system and incorporates computer-assisted aiming and
firing limitation systems.

The Deepwater program is currently in the design
phase with the contract for the first National Security Cutter
(NSC-1) awarded in September, 2003. United Defense
is teamed with Northrop Grumman Ship Systems and has been
awarded an order for the first Bofors 57mm gun. The Bofors 57mm
Mk 3 is undergoing gun and ammunition qualification in
Louisville, KY and Dahlgren, VA for installation on NSC-1 in
December, 2006.

Littoral Combat
Ship.We have provided competitive
proposals for the Bofors 57mm Gun System to the three competing
teams for the Littoral Combat Ship program. The Littoral Combat
Ship program plan is to procure one or two ships from one or two
teams in Flight 0, test the ships, then procure Flight 1 ships
starting in 2008. We anticipate that there will be one 57mm gun
per ship. There are 57 ships planned for the LCS program, with
procurement rates reaching as high as six per year. The Bofors
57mm Gun System is an excellent fit for the Littoral Combat
Ship, given its size, weight, performance and commonality with
the US Coast Guards Integrated Deepwater System National
Security Cutter selection of the Bofors 57mm Gun System.

Minor Caliber Gun
System.The US Navy is currently
establishing requirements to develop and field stabilized Minor
Caliber Guns (MCG) to provide protection against
small boat surface threats. United Defense is actively involved
in two MCG programs that have significant domestic and
international market potential. The first program is to develop,
test, and field a .50 caliber stabilized MCG system for short
range defense called the EX-45. United Defense is working on
this program cooperatively with the U.S. Navy, Louisville,
Kentucky In-Service-Engineering-Agency (ISEA). Three
EX-45 units are under contract from the Louisville ISEA for
development testing in 2004.

The second MCG program is to develop, test, and
field a 25mm stabilized gun system with on-mount sensors. This
system will be remotely operated and replace existing Mk 38 guns
on-board U.S. Navy DDG class destroyers. A solicitation has been
released by the U.S. Navy to procure 25mm MCGs in 2004. United
Defense has teamed with two companies to compete for this
program. The two companies will be submitting proposals with
United Defense as the prime contractor using existing MCG
solutions modified to meet specific U.S. Navy requirements.
These two MCG systems are considered the major competitors to
win the competition. The winning MCG system will be adopted by
the U.S. Navy as the baseline 25mm MCG system for the fleet with
significant potential business in other domestic and
international markets.

Submarine Propulsor.We are the sole-source prime contractor of U.S. submarine
propulsors, which enables a submarine to meet stealth mission
requirements. We are currently under contract to produce six
propulsors for Virginia Class submarines for delivery through
2004. The first four systems have been delivered ahead of
schedule. In addition, we have been selected to be the sole
source prime contractor for the follow-on multi-year propulsor
contract.

Launching Systems.The MK 41 Vertical Launching System (MK 41 VLS) is
the U.S. and nine allied navies primary multi-mission,
multi-missile launcher on surface combatant warships such as
destroyers and cruisers. The MK 41 VLS launches the anti-air
threat Standard Missile, strike mission-related Tomahawk cruise
missile, vertical launch anti-submarine rocket, and ship
self-defense Sea Sparrow missile. We manufacture all the major
structural assemblies and electrical cables for the MK 41 VLS
launcher under subcontracts to Lockheed Martin Corporation, the
prime contractor of the MK 41 VLS launcher. We have an MK 41 VLS
teaming agreement with Lockheed Martin, which covers both U.S.
and foreign sales through December 31, 2011. The U.S. Navy
installs the VLS, like the Mk45, on all DDG51s, each of which
contains

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twelve 8-cell VLS modules. The DDG51 program plan
calls for deliveries to be completed by 2010. We signed a
three-year launcher production contract with Lockheed Martin in
2002, with deliveries extending through mid-2006. We are the
designated mechanical design agent for the VLS launcher and the
design agent for all VLS canisters. We are the sole-source,
prime contractor of VLS canisters to the US Navy and foreign
navies. We signed the 2003 canister production contract with
deliveries extending into 2005, and have just completed
negotiations on the 2004 canister production requirements. We
are the canister depot for the US and Allied Navies, and as such
perform refurbishment and renewal of fired and damaged
canisters. We are currently converting old Tomahawk canisters to
be compatible with the new Tactical Tomahawk missile, and we
anticipate starting the refurbishment of fired Tomahawk
canisters from Operation Iraqi Freedom in 2004. There is a
potential to refurbish and convert up to 700 fired Tomahawk
canisters over 5 years. We are under contract to design an
MK 21 canister modification to launch the Standard Missile 3 for
Ballistic Missile Defense missions. Our prototype canisters have
been used in the recent successful Standard Missile ballistic
missile defense tests.


As indicated above, the U.S. Navy awarded the
initial design contract for the next-generation destroyer, the
DD(X) to Northrop Grumman. We are a teammate and subcontractor
to Raytheon Corporation for the systems engineering of the next
generation Mk57 VLS for the DD(X), and will design and fabricate
the mechanical portions of the Mk57 VLS engineering development
model. The contract is scheduled to be completed in 2005, with
the follow-on production start slated to begin in 2005 after the
DD(X) Critical Design Review.

M88 Armored Recovery Vehicle
(M88).We have been the
sole-source, prime contractor of the M88 to the U.S. Army since
1960. The M88 currently has an installed base of more than 3,325
vehicles in 19 countries throughout the world. The M88 performs
towing, lifting and winching tasks in the recovery of impaired
tanks or in basic tracked vehicle maintenance. In preparation
for the deployment of heavier M1 tanks by the U.S. Army, in 1986
we began the development effort for the M88A2
(HERCULES) upgrade, in order to handle 70-ton
vehicles. The enhanced capabilities of HERCULES enable a single
system with three crewmembers to lift a tank turret or upright
and tow an M1A1/ A2 tank, tasks which would otherwise require
eight soldiers and two recovery vehicles. The U.S. Army has been
awarding annual contracts for M88 upgrades since 1994.
Additionally, in 2000 we began to supply M88 upgrades to the
U.S. Marine Corps (USMC). We are currently under
contract to deliver 32 vehicles to the U.S. Army and USMC
through October 2004. We are working with the USMC to
define the requirements for a FY04 contract, which may be
additional vehicles, spares and support. Under the
Administrations proposed FY04 budget, further procurement
for HERCULES production would cease after these contracts are
completed. We also have an ongoing co-production contract with
Egypt for 66 M88A2 kits through March 2004. In addition, we
have just received a long lead funding award for 21 additional
vehicles to be co-produced with Egypt through 2006. This vehicle
has also been fielded in both Thailand and Kuwait.

M109 Self-Propelled Howitzer
(M109).The M109 has been
the most widely used field artillery howitzer for the U.S.
military and certain foreign governments since we first produced
it in 1974. The M109 is recognized for its ability to deliver
rapid and high volume artillery support and to maximize
survivability through mobility. The latest generation is the
M109A6 Paladin. We completed deliveries of 7 Paladins in 2001
and received a follow-on order for 18 additional units in
January 2002. We have various non-production activities on
Paladin, specifically engineering and training contracts. We
also design and produce unique configurations of the M109 and
offer M109 upgrade kits, servicing and training to various
foreign governments. In July 2003 we received a Foreign Military
Sales (FMS) contract for $46M from the US Army
to refurbish 201 M109 series self-propelled howitzers for the
Government of Egypt. Production is expected to run through
November of 2005.

Objective Force Indirect Fire,
Non-Line-of-Sight Cannon (NLOS-C).The NLOS-C program has been
incorporated into the FCS Development and Demonstration program
described below.

Assault Amphibious Vehicle
(AAV).The AAV has been
the U.S. Marine Corps assault amphibious vehicle for over
two decades with more than 1,500 vehicles delivered. In
July 1998, we were awarded a

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$158 million four year contract to perform
upgrades to a portion of the fleet in partnership with U.S.
Marine Corps depots. We received a $22.0 million extension
to this contract in 2003 and may receive further extensions in
2004 and 2005 as well at which time the active fleet would be
entirely upgraded. We have had recent sales for the AAV and
upgrades in Brazil, Spain, Italy, Korea, and most recently,
Taiwan. The Taiwan AAV contract, currently in final
negotiations, will be approximately $100 million.


M113 Armored Personnel Carrier
(M113).The M113 has been
the main troop transport vehicle used by the U.S. military and
allied governments throughout the world, with more than 80,000
units delivered since initial production in 1960. We have
produced several M113 models in cooperation with U.S. allies,
including various configurations of the Armored Infantry
Fighting Vehicle, previously produced in Europe and currently
produced by our Turkish affiliate, FNSS. The U.S. Army, which
received our last delivery of new M113s in 1992, continues to
upgrade its M113s to the latest A3 configuration. This upgrade
work currently occurs in our Anniston, Alabama facility. The
upgrade work is performed in a partnering arrangement with the
Anniston Army Depot. We are currently under contract for 77
vehicles to be delivered in 2004, with a potential for an
additional 80 in 2004 and 2005. Other contracts include vehicles
for Egypt and Israel.

In 2002, we were awarded a contract to produce
Opposing Forces Main Battle Tank vehicles
(OPFOR-MBT), an M113A2 converted to the A3
configuration with visual modifications, bringing the total to
date to 62 such vehicles. If the two remaining options are
awarded, 113 OPFOR-MBT vehicles will have been produced over the
life of the contract.

In addition, we are supplying kits for the
Canadian Army to upgrade their M113A2 vehicles to the latest
M113A3 configuration and to produce the new improved Mobile
Tactical Vehicle Light (MTVL). The MTVL variant,
which is a patented UDLP M113 derivative, has significantly more
cross-country mobility, payload capacity and under armor volume
than the standard M113A3.

Future Combat
Systems.The Future Combat Systems, or
FCS program, is the Armys planned means by which its
future combat force is to be developed and produced. FCS is
intended to provide an electronically linked network of
surveillance, command and control, and combat capabilities,
including manned and unmanned vehicles, by which the Army would
prosecute future combat missions. As such, it is expected to
embrace the missions historically performed by Army combat
systems such as our Bradley, artillery (M109/ FAASV and
Crusader), and battlefield transport (M113) systems. In
March 2002 the Army selected a contractor team led by The
Boeing Company to act as the so-called Lead Systems Integrator
in managing the initial phase of the FCS program. Ground combat
vehicles, planned as a mixture of manned and unmanned types, are
to comprise a major element of FCS.

(a) FCS Manned Ground Vehicles. In
January 2003 the Army announced that the development and
integration of the manned ground combat vehicles
(MGVs) for FCS would be performed by a team composed
of ourselves and General Dynamics. Since the Army anticipates
spending approximately $15 billion on the FCS program over
the next six years, the critical role envisioned for us on the
programs MGV component is of long-term significance to our
revenues and potential profits.

In December 2003, United Defense was awarded
two subcontracts by Boeing totaling $2.2 billion for the
System Development and Demonstration
(SDD) phase of MGV. MGV is a family of eight
mission variants with a common-design platform that operate
within the FCS family of systems via networked battle command.
Our role on the integrated design team for MGV is overall
responsibility for five variants (the non-line of sight cannon
or NLOS-C, the non-line of sight mortar or NLOS-M, the infantry
carrier vehicle or ICV, the medical vehicle or MV, and the
maintenance/recovery vehicle or MRV, as well as for leading the
software architecture and design development for the common
design and the mission packages, and finally, within common
design, for leading integrated product teams in the areas of
propulsion, crew stations, survivability, and armor development.
The SDD contract includes the design, construction and
full-scale testing of prototype vehicles leading up to (but not
inclusive of) low-rate initial production.

(b) FCS Armed Robotic Vehicle
(ARV). One of three unmanned ground vehicles in FCS,
the ARV was awarded to us as a subcontract from Boeing in
November 2003 on the basis of our competitive proposal
offering. However, for reasons of development cost and
technology maturity, the onset of full SDD

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development was deferred by two years to FY06.
The Armys intent is to develop and introduce the ARV as a
so-called spiral upgrade to the first increment of fielded FCS
units of action. Our initial systems engineering subcontract is
valued at $8 million with an SDD option valued at approximately
$225 million.


Bofors Defence.United Defense acquired Bofors Weapon Systems, a Swedish
Company, in September 2000 from Celsius AB. Subsequent to
the acquisition, the name was changed to Bofors Defence. During
2003, Bofors continued to refocus business areas to emphasize
Precision Strike and Intelligent Systems. Bofors major
business areas consist of: Intelligent Ammunition, Launching
Systems, Technology Studies, and System Design and Integration.
Bofors has retained key competencies in precision strike and
intelligent systems and modeling and simulation. In 2003 Bofors
was designated as the competency center for Non-Nuclear Electro
Magnetic Pulse warheads for Sweden.

During 2003 Bofors entered serial production for
the BONUS Munition. BONUS is a Sensor-Fuzed Weapon capable of
defeating armored targets at long range. Work continued in the
Cooperative Program (United States and Sweden) for the
development of the Intelligent Munition Program, Excalibur,
currently under development for the U.S. Army. This work is
being carried out by Bofors in conjunction with their U.S.
partner, Raytheon Company. They also received a contract to
commence the manufacture of an improved sensor for the BONUS
Munition.

Bofors achieved significant breakthroughs with
its naval guns in 2003, having entered two key markets, one of
which is the United States, with its modern Naval Guns and their
companion intelligent ammunition. In the area of Intelligent
Systems, Bofors recently received a development contract from
the Swedish Government to begin the development of the new
Swedish Precision Engagement Field Artillery System and to
deliver two prototype systems for test and evaluation. Bofors
entered 2004 with a backlog of $172M.

Munitions.In 2003,
United Defense formed a team comprised of members with specific
expertise in the areas of munitions development, program pursuit
and program execution to address the increasing need to focus
the US integration of technologies from Bofors Defense and
emerging technologies which could have a significant impact on
our core businesses.

Significant effort was expended on the Course
Corrector Fuze, a fuze used in place of existing artillery fuzes
to increase the accuracy of existing projectiles. The accuracy
improvement is accomplished using simple aerodynamic brakes
deployed by a UDLP developed guidance algorithm. In 2003, we
also initiated a program to transfer the Bofor Defence/ Giat
BONUS Sensor Fuzed Munition to the United States and we entered
an exclusive teaming agreement with AeroVironment, Inc. for the
development of a gun-launched UAV that will provide
significant improvements in the observation and targeting at an
organic level. Development of all of these products will
continue in 2004.

Military Vehicle
Tracks.Most U.S. combat vehicles use
a track system composed of linked track shoes which have a steel
core and an external rubber surface for traction. We produce the
steel components for the tracks on many of the Armys
principal vehicles, including the M1 tank, the BFV, and the
M113. Production orders for various track types typically result
from DoD programs to build or overhaul the corresponding
vehicles, and also from wear and damage occurring in training
and military deployments. We typically provide track components
as a subcontractor to Goodyear Tire and Rubber Company, which
provides the rubber elements and then sells the completed track
assembly to the government.



| |                                        
| | ---------------------------------------
| | Ship Repair and Maintenance
    Segment

Ship Repair and
Maintenance.United States Marine
Repair, Inc. (USMR) was acquired in July 2002
and its operations comprise our Ship Repair and Maintenance
segment. USMR operates a total of six shipyards serving
government and commercial customers. Norfolk Shipbuilding and
Drydock Corporation (Norshipco) located in Norfolk,
Virginia serves the Navys Atlantic Fleet, Military Sealift
Command (MSC), and numerous commercial customers
including Disney Cruise Lines and Maersk Lines. Southwest
Marine, Inc. (SWM) maintains two shipyards in
California, one in Texas, and one at Pearl Harbor, Hawaii.
SWMs San Diego shipyard primarily serves the Navys
Pacific Fleet and also performs some commercial and MSC work.
SWMs San Pedro shipyard performs small commercial
projects. SWMs Ingleside, Texas

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shipyard serves the Navys mine warfare
community and recently won a third consecutive five-year phased
maintenance contract. SWMs Hawaii shipyard serves the
Navys Pacific fleet at Pearl Harbor, HI, and recently won
a five year Post Shakedown Availability contract for DDG Class
ships as a subcontractor to Bath Iron Works. Finally, San
Francisco Drydock, Inc. located in San Francisco, California
provides services to MSC and a commercial customer base
including several cruise lines.


USMRs shipyards perform a full scope of
ship repair, overhaul, and ship modernization services. The
projected repairs to restore a ship to its design parameters can
be grouped into two main categories. The first category is
topside repairs that are performed without lifting the ship out
of the water. The second category, called drydock repairs,
require that the vessel be raised out of the water in order to
access underwater parts of the vessel. Topside jobs include
repair or replacement of superstructure plating, restoration of
internal piping systems, pump overhauls, ventilation system
maintenance, overhauling engines, and preservation of decks and
superstructure. Drydock repairs include inspection and repair of
tanks, underwater hull valves, ships rudder, main
propulsion shaft bearings, and sonar domes. In addition, most
drydocking projects require blasting and painting of the
underwater hull with marine coating systems.

In addition to repair work, USMR also performs
ship modernization to upgrade vessels with new capabilities. The
key capabilities required for both repair and modernization
contracts include machinery work, electrical work, steel
fabrication, piping, and renewal of marine coatings. This work
requires us to employ skilled tradesmen such as shipfitters,
welders, sheet metal workers, machinists, pipe fitters, and
electricians.

USMRs largest customer is the U.S. Navy
which accounted for approximately 92% and 95% of sales volume in
2002 and 2003, respectively. Contracts with the U.S. Navy
include work on military vessels as well as cargo vessels under
the control Military Sealift Command. In addition, USMR performs
ship repair services for U.S. Coast Guard, U.S. Maritime
Administration (MARAD), U.S. Army, and numerous
commercial customers.

Contracts with the U.S. Navy are predominately
for repairs, maintenance, and modifications on surface ships
including aircraft carriers (CV or CNV, guided missile cruisers
(CG), destroyers (DDG), frigates (FFG), amphibious assault ships
(LHA or LHD), amphibious ships (LSD or LPD), minesweepers (MCM
or MHC), as well as other less numerous hull classes. The Navy
awards most ship repair contracts on a competitive basis using a
best value award criteria which considers factors such as the
contractors proposed price, past performance on similar
work, record of quality, planning capabilities, available
capacity, and projected final cost. For most Navy work,
USMRs competitors are limited to shipyards within a
designated home port area in order for the Navy to limit the
travel required by the vessel and its crew during repair
downtime.

Navy ship repair contracts may have either
fixed-price or cost-reimbursement terms and may cover only
discreet work on a single ship, or multiple tasks on multiple
ships over multiple years. Increasingly, the Navy has moved
towards multi-ship, multi-year contracts where the shipyard is
engaged to perform almost continuous maintenance on specific
ships for up to five years. Repair work includes topside and
drydock maintenance, vessel modifications and upgrades, as well
as non-scheduled emergency repairs. Contracting in this manner
allows the Navy to benefit from use of a single supplier of ship
repair services for each vessel as well as more consistent
levels of quality, faster turnaround for emergency work, and
reduced costs associated with learning curves and the
shipyards familiarity with the vessel. Multi-ship,
multi-year contracts have cost-reimbursement terms. During 2002
and 2003 USMR was the prime contractor on multi-ship, multi-year
programs covering LPD, LSD, and DDG class vessels in San Diego,
LSD class vessels in Norfolk, and MCM class vessels in
Ingleside, Texas.

In addition to Navy contracts, USMR competes for
work on most other classes of government vessels including
preposition and sealift ships controlled by Military Sealift
Command, U.S. Coast Guard vessels, ready reserve fleet vessels,
U.S. Army support vessels, and other government owned craft. The
most significant contracts during 2002 and 2003 were with
Military Sealift Command and included major repair and
maintenance work on the vessels USNS Shasta, USNS Diehl in San
Francisco and the USNS Lenthall in Norfolk.

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Non-government work includes commercial work on
vessels ranging in size from harbor bound tugs and barges to
cruise ships, oil tankers, and container ships. The largest
commercial contracts performed by USMR during 2002 and 2003
consisted of drydocking work on cruise ships that call on U.S.
ports including the Carnival Elation, Disney
Magic, and Royal Caribbean Vision of the
Seas. A number of factors have hampered commercial sales
revenue during 2002 and 2003 including the value of the U.S.
dollar and the previous commitments of drydock capacity to the
U.S. Navy, particularly in Norfolk. Recent declines in the U.S.
dollar have made USMR more competitive with foreign shipyards,
particularly those in European countries.

Joint Ventures

We have a joint venture located in Turkey. In
March 2002, we sold our 51% interest in a joint venture in
Saudi Arabia described below. The joint ventures are accounted
for using the equity method, as we do not control them due to
our partners veto rights over most operating decisions,
but we do have the ability to exercise influence over their
operating and financial policies.

FNSS-Turkey.The
FNSS Savunma Sistemleri A.S. (FNSS) joint venture
was formed in 1987 to manufacture and sell armored combat
vehicles to the Turkish Army. We own 51% of FNSS. Following
completion of an initial contract for 1,698 armored combat
vehicles, we received a follow-on contract for 551 additional
vehicles in 2000, with deliveries beginning at the end of 2001.
In 1998, FNSS signed its first export contract with the United
Arab Emirates (Abu Dhabi) to provide 133 vehicles comprised of a
mix of forward observation vehicles, engineer squad vehicles and
recovery vehicles, with deliveries starting mid 1999 and ending
in early 2001. In August 2000, FNSS signed a second major
export order to supply 211 vehicles in eleven configurations to
the government of Malaysia. This contract also includes
co-production through a sublicensee company in Malaysia. The
orders for the Turkish government and the Malaysian government
provide FNSS with backlog through 2004.

FNSS is pursuing new business opportunities with
the Turkish government for additional armored combat vehicles,
wheeled combat vehicles, amphibious vehicles, self-propelled
howitzers and tanks, and recovery vehicles. FNSS is also
pursuing additional orders with the Jordan and Malaysia which
could potentially occur in the near term and orders with the UAE
and Saudi Arabia, which would occur in the out years and other
export opportunities within its licensed territory.

United Defense
Systems-Arabia
(UDS). For several years, we owned 51% of United
Defense Systems, Ltd., a Saudi Arabian company, in partnership
with Al-Hejailan Projects Company, Ltd.
(Al-Hejailan).

Following the completion of various contracts
involving the provision of services to the Saudi government
regarding armored combat vehicles, we determined that worsening
Saudi financial constraints would continue to diminish the
prospects of this joint venture. Accordingly, in March 2003
we completed the sale of our interest in the venture to
Al-Hejailan for $405,000. Under the terms of the sale agreement,
we ceased receiving any share of the ventures earnings beginning
on March 1, 2002.

Research and Development and Engineering
Capabilities

Our Defense Systems segment conducts research and
development of new technologies for application to weapon
systems and upgrades. Our ability to compete for new Defense
Systems contracts depends to a large extent on the success and
innovation of our research and development programs.

The engineering capability of the Defense Systems
segment has been a critical component of its success. Extensive
experience in simulation, systems integration, armor, mobility,
survivability and armaments, as well as our software
development, engineering and electronics capabilities, have
allowed us to stay at the forefront of the development,
manufacture and upgrade of our products and to apply our
technologies to other products.

A recent example of this occurred in 2002, when
our Defense Systems segment competed for and won a contract for
the development of add-on-armor for the Stryker vehicles that
another contractor is producing for the U.S. Army. The contract,
which continued through 2003, included design and qualification
testing,

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production of 59 surrogate armor kits, and
manufacturing planning for production. The contract contains
options for the production of up to 1,000 armor kits for the
Stryker vehicles.


In 2003 we devoted resources to developing two
exciting new products that we expect to mature further in 2004.
Eagle Vision, which we developed with Sarnoff
Laboratories, provides 360 degrees of electronic, panoramic
viewing from inside a closed space or from a remote location. By
using multiple cameras that are seamlessly blended and displayed
on a head tracked helmet viewing system or other display device,
Eagle Visionis able to provide enhanced situational
awareness for the entire vehicle crew. Another key feature of
Eagle Vision is its ability to detect and track moving
objects within a 360 degree area around the vehicle regardless
of where the user is looking.

WaterSentry, which we have developed with
Oak Ridge National Laboratory, offers a continuous detection
capability against waterborne toxins by innovatively monitoring
the natural activity of green algae and providing a capability
to detect a toxins presence at the levels anticipated
during military conflicts, terrorist attacks on civilian water
supplies, or regulatory violations.

We expended $23.7 million,
$27.7 million and $29.8 million on research and
development in 2001, 2002 and 2003, respectively, a substantial
portion of which was included in overhead allocable to both U.S.
Government and foreign government contracts.

Competition

In the markets we serve, we face a variety of
major domestic and foreign competitors. In the Defense Systems
segment, competitors include Alvis-Vickers, Ltd., The Boeing
Company, General Dynamics Corporation, GIAT, Krauss Maffei
Wegmann, Lockheed Martin Corporation, Oto Melara, Raytheon
Company, Steyr Daimler Puch, and Textron. In the Ship Repair and
Maintenance segment, competitors include General Dynamics
Corporation, Northrop Grumman Corporation, Metro Machine
Corporation, Todd Shipyards Corporation, Earl Industries, Inc.,
Marine Hydraulics International, Inc., and Deytens Shipyards,
Inc.

We believe that we will continue to be able to
compete successfully based upon the quality, technological
advancement and cost competitiveness of our products and
services. As the electronic and software content of our products
increases, we expect to encounter increased competition from
electronics and aerospace companies whose activities
historically have been largely unrelated to our products and
programs. Our ability to compete for new Defense Systems segment
contracts depends to a large extent on the success and
innovation of our research and development programs, our
capability as a systems integrator, whether we can partner with
military industrial facilities owned by DoD (known as depots),
our ability to offer best value to our government customers, our
success in obtaining subcontracts on those programs where we are
not the prime contractor, and our readiness in facilities,
equipment and personnel to undertake the programs for which we
compete. Major factors involved in competition for the Ship
Repair and Maintenance segment include the geographic proximity
of the ship repair facility and the vessel, technical skills,
price, and facility requirements such as dry-docks, cranes, and
berthing capabilities.

In some instances, Defense Systems programs are
sole-sourced by the U.S. Government to a single supplier, and in
other cases involve a prime contractor and multiple suppliers.
In cases where we are the sole-source provider, there may be
other suppliers who have the capability to compete for the
programs involved, but they can only enter or reenter the market
if the U.S. Government should choose to reopen the particular
program to competition. Our customers, particularly the
industrial facilities operated by the DoD, often compete with us
for aftermarket business, such as upgrade work and various
overhaul and servicing work we perform.

Major Customers

Our sales are predominantly derived from
contracts with agencies of the U.S. Government. See Note 13 to
the Consolidated Financial Statements, included in Item 8.

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Backlog

As of December 31, 2003, our funded backlog
was approximately $2.1 billion, of which 93% was associated with
our Defense Systems segment and 7% with our Ship Repair and
Maintenance segment. Funded backlog does not include the awarded
but unfunded portion of total contract values. This backlog
provides management with a useful tool to project sales and plan
its business on an on-going basis. We expect to earn as revenues
a substantial majority of the backlog at December 31, 2003
by the end of 2004.

Intellectual Property

Although we own a number of patents and have
filed applications for additional patents, we do not believe
that our operations depend significantly upon our patents. In
addition, our U.S. Government contracts generally license us to
use patents owned by others. Similar provisions in the U.S.
Government contracts awarded to other companies make it
impossible for us to prevent the use by other companies of our
patents in most domestic work. Additionally, we own certain data
rights in our products under certain of our government
contracts. The protection of data developed by us from use by
other government contractors is from time to time a source of
negotiation between us and the U.S. Government, and the extent
of our data rights in any particular product generally depends
upon the degree to which that product was developed by us,
rather than with U.S. Government funds. We routinely enter into
confidentiality and non-disclosure agreements with our employees
to protect our trade secrets.

Employees

At December 31, 2003, we had approximately
7,300 employees and approximately 600 contract workers
(excluding employees of our Turkish joint venture).
Approximately 2,000 of our employees at nine locations are
represented by eleven unions, including the Glass, Molders,
Pottery, Plastics and Allied Workers (Anniston, Alabama); the
International Association of Machinists (Louisville, Kentucky
and Santa Clara, California); the United Automobile, Aerospace
and Agricultural Implement Workers (Minneapolis, Minnesota); the
International Guards (Minneapolis); the International
Brotherhood of Teamsters (Santa Clara); the United Steelworkers
(York, Pennsylvania); Armament Systems Guards Firefighters
(Minneapolis); the International Brotherhood of Boilermakers,
Iron Ship Builders, Blacksmiths, Forgers and Helpers (Norfolk,
Virginia); the Pacific Coast Metal Trades District Council (San
Francisco, California); the Swedish Trade Union Cooperation
(Sweden); and the Federation of Salaried Employees in Industry
and Services (Sweden). While we have from time to time
experienced strikes by our unionized employees, we believe that
our relations with such employees are generally good.

Sources and Availability of Raw
Materials

Our manufacturing operations require raw
materials, primarily aluminum and steel, which are purchased in
the open market and are normally available from a number of
suppliers. We purchase a variety of electronic and mechanical
components for which we have multiple commercial sources. We
have not experienced any significant delays in obtaining timely
deliveries of essential raw materials.

Environmental Matters

Our operations are subject to federal, state and
local laws and regulations relating to, among other things,
emissions to air, discharges to water, the handling and disposal
of hazardous and solid wastes and the cleanup of hazardous
substances (Environmental Laws). We continually
assess our compliance status and believe that our operations
currently are in compliance with Environmental Laws.

Operating and maintenance costs associated with
environmental compliance and prevention of pollution at our
facilities are a normal, recurring part of operations, are not
significant relative to total operating costs or cash flows, and
are generally allowable as contract costs under our contracts
with the U.S. Government (Allowable Costs). Such
costs have not been material in the past and, based on
information presently available to us and on U.S. Government
environmental policies relating to Allowable Costs in effect at
this time (all of which are subject to change), are not expected
to have a material adverse effect on us.

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Under existing U.S. environmental laws, so-called
potentially responsible parties may be jointly and severally
liable and, therefore, we are potentially liable to the
government or third parties for the full cost of remediating
contamination at our sites or at third party sites. In the
unlikely event that we were required to fully fund the
remediation of a site, the statutory framework would allow us to
pursue rights of contribution from other potentially responsible
parties for their share.

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consists of Allowable Costs. As of
December 31, 2003, we had accrued approximately
$33 million to cover any investigation and/or remediation
costs that may not be Allowable Costs under U.S. Government
contracts. The amount accrued is based on reasonable estimates,
although there is a possibility that amounts in excess of
amounts accrued may be incurred. The most significant of the
estimated liabilities are related to ongoing remediation efforts.

One of USMRs largest facilities is located
in San Diego, California. Pursuant to a demand from the
California Regional Water Quality Control Board, we completed a
study of sedimentary contamination in San Diego Bay and we are
continuing to perform testing of the contaminated areas for the
purpose of establishing clean-up criteria for future remediation
work. Once definitive clean-up criteria are established, we
expect that we will be required to begin remediation procedures
with respect to the contamination. We anticipate that the total
cost associated with the remediation phase will range from $6 to
$9 million, although it is conceivable that costs could be as
high as $30 million if the most stringent clean-up standard
were to be adopted. Up to $9 million of such remediation
cost, to the extent the costs are not recovered on USMRs
government contracts or from other responsible parties, may be
recoverable from USMRs former shareholders, under an
escrow arrangement established in 1997 when the San Diego
operation was acquired by USMR. Also a further $15 million
escrow fund was established in our 2002 acquisition of USMR,
which may be available in respect of USMRs sediment
exposure. We have asserted claims against both escrow funds,
primarily on account of the potential remediation exposure of
San Diego.

Pursuant to the terms of the 1997 acquisition of
United Defense, L.P., FMC Corporation and Harsco Corporation
(collectively, the Sellers) are required to
reimburse us for 75% of certain remediation costs that are
Non-Allowable Costs through the year 2007 for environmental
losses we have previously identified to the Sellers.
Accordingly, we have recorded a receivable for $1.2 million for
which we expect to be reimbursed by the Sellers over
approximately the next four years under the terms of the 1997
acquisition agreement.

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

Available Information  Corporate
Governance Materials

We make available free of charge on our internet
website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K,
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission. You can find these reports, together with our Code
of Ethics, the charters of the committees of our Board of
Directors, and other corporate governance information on our
website at www.uniteddefense.com under the
Investors heading.

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Risk Factors



| |                                           
| | ------------------------------------------
| | Our government contracts entail
    risks.

We are a sole-source, prime contractor for many
different military programs with the U. S. Department of Defense
(DoD). We depend heavily on the government contracts
underlying these programs. Over its lifetime, a program may be
implemented by the award of many different individual contracts
and subcontracts. The funding of government programs is subject
to congressional appropriation. Although multi-year contracts
may be authorized in connection with major procurements,
Congress generally appropriates funds on a fiscal year basis
even though a program may continue for several years.
Consequently, programs are often only partially funded and
additional funds are committed only as Congress makes further
appropriations. The governments termination of, or failure
to fully fund, one or more of the contracts for our programs,
would have a negative impact on our operating results and
financial condition. We also serve as a subcontractor on several
military programs that, in large part, involve the same risks as
prime contracts.



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on key contracts with U.S.
    Government entities for a significant portion of our sales. A
    substantial reduction in these contracts would materially
    adversely affect our operating results.

We derive revenues predominantly from contracts
with agencies of, and prime contractors to, the DoD.
Approximately 77% of our sales for the year ended
December 31, 2003, were made directly or indirectly to
agencies of the U.S. Government, excluding U.S. Foreign Military
Sales contracts. Any significant disruption or deterioration in
our relationship with the U.S. Government and a corresponding
reduction in these contracts would significantly reduce our
revenues. See, for example, Results of Operations 
Emerging Trends and Uncertainties under Item 7,
Managements Discussion and Analysis, below.



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in defense procurement models may
    make it more difficult for us to successfully bid on projects as
    a prime contractor and limit sole-source opportunities available
    to us.

In recent years, the trend in combat system
design and development appears to be evolving towards the
technological integration of various battlefield components,
including combat vehicles, command and control network
communications, advanced technology artillery systems and
robotics. If the U.S. military procurement approach continues to
require this kind of overall battlefield combat system
integration, we expect to be subject to increased competition
from aerospace and defense companies who have significantly
greater resources than we do. This trend could create a role for
a prime contractor with broader capabilities that would be
responsible for integrating various battlefield component
systems and potentially eliminating or reducing the role of
sole-source providers or prime contractors of component weapon
systems. For example, the U.S. Army recently awarded the prime
contractor role in its FCS program (discussed below) to The
Boeing Company in the capacity of overall integrator for FCS,
instead of awarding separate prime contracts for major FCS
elements such as ground vehicles, air vehicles, and network
electronics.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The ultimate results of the U.S.
    Armys transformation effort are uncertain, and the scale
    of the effort has reduced and may further reduce funding for
    other U.S. Army programs in which we participate.

See Results of Operations  Emerging
Trends and Uncertainties under Item 7, Managements
Discussion and Analysis, below, for a discussion of the
potential impact of the FCS program on our other U.S. Army
programs and our overall business prospects.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Government contracts contain termination
    provisions unfavorable to us and are subject to audit and
    modification by the government at its sole
    discretion.

As a company engaged primarily in supplying
defense-related equipment and services to the U.S. Government,
we are subject to business risks specific to our industry. These
risks include the ability of the U.S. Government to unilaterally:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | suspend or permanently prevent us from receiving
    new contracts or extending existing contracts based on
    violations or suspected violations of procurement laws or
    regulations;

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| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | terminate our existing contracts;                                                               
|
| |  | reduce the value of our existing contracts;                                                     
|
| |  | audit and object to our contract-related costs
    and fees, including allocated indirect costs;
|
| |  | control, and under certain circumstances,
    prohibit the export of our products; and          
|
| |  | change certain terms and conditions in our
    contracts.                                       

The U.S. Government can terminate any of its
contracts with us either for its convenience or if we default by
failing to perform. Termination for convenience provisions
generally enable us to recover only our costs incurred or
committed, and settlement expenses and profit on the work
completed, prior to termination. Termination for default
provisions do not permit these recoveries and make us liable for
excess costs incurred by the U.S. Government in procuring
undelivered items from another source. Our contracts with
foreign governments may contain similar provisions.

As a U.S. Government contractor, we are subject
to financial audits and other reviews by the U.S. Government of
our costs and performance, accounting and general business
practices relating to these contracts. Like most large
government contractors, we are audited and reviewed on a
continual basis. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees,
including allocated indirect costs. Although adjustments arising
from government audits and reviews have not had a material
adverse effect on our results of operations in the past, there
can be no assurance that future audits and reviews would not
have such effects. In addition, under U.S. Government purchasing
regulations, some of our costs, including most financing costs,
amortization of goodwill and other intangible assets, portions
of our research and development costs, and some marketing
expenses may not be reimbursable or allowed in our negotiation
of fixed-price contracts. Further, as a U.S. Government
contractor, we are subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower
lawsuits and other legal actions and liabilities to which purely
private sector companies are not, the results of which could
have a material adverse effect on our operations.

Our policy is to cooperate with governmental
investigations and inquiries regarding compliance matters, and
we also make voluntary disclosure of compliance issues to
governmental agencies as appropriate. We are currently providing
information on compliance matters to various agencies, and we
expect to continue to do so in the future. For example, on
August 8, 2002 we were served with a grand jury subpoena
issued by the United States District Court for the Eastern
District of Virginia. The subpoena seeks information relating to
a 2000 contract between us and the Italian government for the
upgrading of certain amphibious assault vehicles. We believe
that the grand jury investigation is directed toward
ascertaining whether any violation of the Foreign Corrupt
Practices Act occurred in connection with the Italian contract.
While management is not aware of any such violation, it is too
early for us to determine whether the ultimate outcome of the
investigation would have a material adverse impact on our
results of operation or financial position.



| |                                                             
| | ------------------------------------------------------------
| | Government contracts are subject to
    competitive bidding.

We obtain many of our U.S. Government contracts
through a competitive bidding process that subjects us to risks
associated with:



| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the frequent need to bid on programs in advance
    of the completion of their design, which may result in
    unforeseen technological difficulties and/or cost overruns;                                                                                                               
|
| |  | the substantial time and effort, including
    design, development and marketing activities, required to
    prepare bids and proposals for contracts that may not be awarded
    to us, such as the contract for the U.S. Armys IAV program
    (now known as the Stryker program); and
|
| |  | the design complexity and rapid rate of
    technological advancement of defense related products.                                                                                                                                                                                       

In addition, in order to win the award of
developmental programs, we must be able to align our research
and development and product offerings with the governments
changing concepts of national defense and defense systems. For
example, in recent years, there has been a trend in military
procurement toward

15



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increasing the use of wheeled combat vehicles,
exemplified in the U.S. Armys announced procurement of
over 2,000 wheeled vehicles in November 2000 for the
Stryker program, a competition in which we unsuccessfully
offered tracked vehicle candidates. To the extent that future
armored vehicle procurements emphasize wheeled designs, we may
remain at a competitive disadvantage if we are unable to offer a
competitive wheeled vehicle design. (However, we are under
contract to design and develop approximately 50% of the FCS
manned ground vehicles, whether the Army selects a tracked or
wheeled version. Historically, our experience is that such
involvement is likely to lead to corresponding production
contracts, if and when the system reaches production.) Moreover,
there is no assurance that we will continue to win competitively
awarded contracts or that awarded contracts will generate sales
sufficient to result in profits.




| |                                                                                
| | -------------------------------------------------------------------------------
| | Our fixed-price and cost-plus contracts may
    commit us to unfavorable terms.

We provide our products and services primarily
through fixed-price, cost-plus and time and materials contracts.
For the year ended December 31, 2003, fixed-price contracts
provided 61% of our revenues, and cost-plus contracts, including
time and material contracts, provided 39%.

In a fixed-price contract, we must fully absorb
cost overruns, notwithstanding the difficulty of estimating all
of the costs we will incur in performing these contracts and in
projecting the ultimate level of sales that we may achieve. Our
failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed-price
contract may reduce the profitability of a fixed-price contract
or cause a loss.

In a cost-plus contract, we are allowed to
recover our approved costs plus a fee. The total price on a
cost-plus contract is based primarily on allowable costs
incurred, but generally is subject to a maximum contract funding
limit. U.S. Government regulations require us to notify our
customer of any cost overruns or underruns on a cost-plus
contract. If we incur costs in excess of the funding limitation
specified in the contract, we may not be able to recover those
cost overruns.

On our time and materials contracts, we recover a
specific amount per hour worked, the cost of direct materials
and subcontracts, and a mark-up on direct materials and
subcontracts. Time and materials contracts may provide for
not-to-exceed price ceilings as well as the potential that we
must partially absorb cost overruns.

Although we believe that we have recorded
adequate provisions in our financial statements for losses on
our fixed-price and cost-plus contracts, as required under U.S.
generally accepted accounting principles, there is no assurance
that our contract loss provisions will be adequate to cover all
actual future losses.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Intense competition could limit our ability
    to win and retain government contracts.

The defense and private-sector ship repair
industries are highly competitive and we encounter significant
domestic and international competition for government contracts
from other companies, some of which have substantially greater
financial, technical, marketing, manufacturing and distribution
resources than we do. Our ability to compete for these contracts
depends on:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | the effectiveness of our research and development
    programs;                                                 
|
| |  | our ability to offer better program performance
    than our competitors at a lower cost to the U.S. Government;
|
| |  | the location of our ship repair facilities in
    relation to U.S. Navy homeports; and                          
|
| |  | the readiness of our facilities, equipment and
    personnel to undertake the programs for which we compete.    

Additionally, our U.S. Government programs must
compete with programs managed by other defense contractors for
limited funding. Our competitors continually engage in efforts
to expand their business relationship with the U.S. Government
and are likely to continue these efforts in the future. For
example, in the private-sector ship repair industry, as the U.S.
Navy moves toward greater use of multi-ship, multi-year
contracts, the larger size of the contracts to be awarded may
attract additional competitors to our market,

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including companies that have traditionally
focused on shipbuilding rather than repair. The U.S. Government
may choose to use other defense contractors for its limited
number of defense programs. In addition, defense programs
compete with non-defense spending of the U.S. Government for
funding. Budget decisions made by the U.S. Government are
outside of our control and can have long-term consequences for
our size and structure.


In some instances, the U.S. Government directs to
a single supplier all work for a particular program, commonly
known as a sole-source program. In those instances, other
suppliers who might otherwise be able to compete for various
components of the program can only do so if the U.S. Government
chooses to reopen the program to competition. While we have
derived most of our historical revenues from sole-source
programs, we derive and expect to derive a portion of our sales
through competitive bidding. In addition, although the U.S.
Government has historically awarded certain programs to us on a
sole-source basis, it may in the future determine to open such
programs to a competitive bidding process. There is no assurance
that we will continue to be the sole-source contractor on
various programs, that we will compete successfully for specific
program opportunities or, if we are successful, that awarded
contracts will generate sufficient sales to be profitable. The
failure or failures to do so would have a material adverse
effect on our business, prospects, financial condition and
results of operations.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot guarantee the success of our
    strategy to pursue multi-ship, multi-year contracts awarded by
    the U.S. Navy for work on Atlantic Fleet surface
    ships.

We expect the U.S. Navy to increase the use of
multi-ship, multi-year contracts for the repair and maintenance
of the Atlantic Fleet, and the aggressive pursuit of these
contracts is an important part of our business strategy. Our
ability to win these contracts will depend on a variety of
factors, including our cost structure, past performance under
these types of contracts on both the East and West Coasts, and
our access to additional shipyard facilities for overflow work.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | The maintenance and establishment of
    teaming agreements is important to our business.

In our Ship Repair and Maintenance segment, we
currently engage in teaming and other agreements that involve
either general arrangements with other ship repair companies to
allow us access to facilities and employees, or whereby we take
subcontracting responsibility for a specific aspect of a larger
prime contract. We recently acquired a second dry dock at our
Norfolk facility from another area shipyard. The acquisition
permits the continued use of the dry dock by the other company
and also provides that the U.S. Navy may require us to unwind
the acquisition if the subsequent dry dock use does not achieve
expected efficiencies. We believe that the ability to
participate in many of the U.S. Navys future contracts
will depend on our ability to maintain and enter into successful
agreements within the industry. There is no assurance that our
current arrangements would not be terminated or renewed when
they expire.

In our Defense Systems segment, we also make
frequent use of teaming agreements. For example, we recently
entered into a teaming agreement with Boeing and General
Dynamics regarding our role on the manned ground combat vehicle
portion of the FCS program. We cannot assure you that we will
continue to be selected as a teaming participant, or that we
will be able to identify and successfully work with other
companies. Failure to maintain or enter into future teaming
agreements may have a material adverse effect on our business
and future prospects.



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating performance is heavily
    dependent upon the timing of manufacturing and delivery of
    products under our U.S. Government contracts.

Our operating results and cash flow are
dependent, to a material extent, upon the timing of
manufacturing and delivery of products under our government
contracts. For example, under recent Bradley production
contracts, we do not recognize sales on a unit until we deliver
or field such unit. This extends the period of time
during which we carry these vehicles as inventory and may result
in an uneven distribution of revenue from these contracts
between periods.

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As a result, our period-to-period performance may
fluctuate significantly, and you should not consider our
performance during any particular period as necessarily
indicative of longer-term results. See Managements
Discussion and Analysis of the Results of Operations and
Financial Condition  Overview, Item 7 below.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The operating performance of our Ship
    Repair and Maintenance business segment is heavily dependent on
    the deployment and maintenance schedules of the U.S. Navy, as
    well as the U.S. Government budgetary cycle.

The timing and extent of the maintenance and
repair of U.S. Navy vessels depends on the maintenance and
deployment schedules established by the U.S. Navy for each
vessel. While the U.S. Navy tries to evenly distribute repairs
throughout the year in a given port, this is not always
possible. Therefore, the level of activity in our repair and
maintenance facilities and the financial results of our Ship
Repair and Maintenance segment can vary significantly from
period to period. In addition, U.S. defense-related agencies,
including the U.S. Navy, have historically allocated the
majority of their budgets during their first and second fiscal
quarters, which correspond with our fourth and first fiscal
quarters. The timing of these allocations has caused and will
likely continue to cause fluctuations in our revenues,
profitability, and cash flows.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | A reduction in the U.S. defense budget
    could result in a decrease in our revenue.

The reduction in the U.S. defense budget that
began in the early 1990s caused most defense-related government
contractors, including our predecessor company, to experience
decreased sales, reduced operating margins and, in some cases,
net losses. A significant decline in U.S. military expenditures
in the future could materially adversely affect our sales and
earnings. The loss or significant reduction in government
funding for any large program in which we participate could also
materially adversely affect our sales and earnings and thus our
ability to meet our financial obligations.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not successful in integrating the
    new and complex technologies to be used in our products, our
    business could be materially and adversely
    affected.

The integration of diverse technologies involved
in producing our products is a complex task, which in many
instances has not been previously attempted.

In addition, our ability to integrate the new and
complex technologies involved in our products is subject to
risks associated with uncertain costs and availability of
resources, including:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | frequent need to bid on programs before their
    design is completed, which may result in unforeseen engineering
    difficulties and/or cost overruns;
|
| |  | delays in delivery of necessary components or
    their scarcity; and                                                                                   
|
| |  | limitations on the availability of human
    resources, such as software engineers and information technology
    professionals.                        



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our international operations and foreign
    joint venture subject us to risks that could materially
    adversely affect our results of operations and financial
    condition.

We participate in an unconsolidated joint venture
in Turkey and in co-production programs in several other
countries. We recognized earnings from our joint venture of
$19.8 million for the year ended December 31, 2003.
Our export sales, which include U.S. direct foreign sales, U.S.
Foreign Military Sales and our revenues from our Bofors Defence
subsidiary, totaled $442.8 million for the year ended
December 31, 2003 representing approximately 22% of our
total revenues for that period. Our strategy includes expansion
of our international operations and export sales. In connection
with these international operations and sales we are subject to
risks, including the following:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | devaluations and fluctuations in currency
    exchange rates;                                        
|
| |  | the ability to obtain distributions of cash which
    require the approval of joint venture partners;

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| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in, or changes in interpretations of,
    foreign regulations that may adversely affect our ability to
    sell certain products or repatriate profits to the United States;                                                                    
|
| |  | imposition of limitations on conversions of
    foreign currencies into U.S. dollars;                                                                                                                                                                   
|
| |  | imposition or increase of withholding and other
    taxes on remittances and other payments by foreign subsidiaries;                                                                                                                                    
|
| |  | hyperinflation or political instability in the
    countries in which we operate or sell;                                                                                                                                                               
|
| |  | imposition or increase of investment and other
    restrictions by foreign governments;                                                                                                                                                                 
|
| |  | the potential imposition of trade or foreign
    exchange restrictions or increased tariffs;                                                                                                                                                            
|
| |  | U.S. arms export control regulations and policies
    that restrict our ability to supply foreign affiliates and
    customers; and                                                                                                                     
|
| |  | local political pressure to shift from majority
    to minority ownership positions in joint ventures, which could
    further reduce our ability to influence the conduct, strategy
    and profitability of these ventures.                           
|
| |  | changes in overall diplomatic and security
    relationships between the United States and various foreign
    countries such as the strains that emerged with respect to
    Turkey in the context of U.S. military operations in Iraq during
    2003.

If we expand our international operations, these
and other associated risks are likely to become more significant
to us. Although these risks have not had a material adverse
effect on our financial condition or results of operations in
the past, there is no assurance that these risks will not have a
material adverse effect on our results of operations and
financial position in the future.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not have the ability to make
    acquisitions, develop strategic alliances, expand or implement
    new joint ventures, or successfully implement and maintain
    co-production programs.

As part of our growth strategy, we intend to
expand our current joint ventures and pursue new strategic
alliances, selected acquisitions and co-production programs. We
consider strategic transactions from time to time and may be
evaluating acquisitions, alliances or co-production programs or
engaged in negotiations at any time. We compete with other ship
repair and defense-related businesses for these opportunities.
There is no assurance, therefore, that we will be able to effect
transactions with strategic alliance, acquisition or
co-production program candidates on commercially reasonable
terms or at all. If we enter into these transactions, we also
cannot be sure that we will realize the benefits we anticipate.
In addition, we cannot be sure that we will be able to obtain
additional financing for these transactions.

The integration of any strategic alliances,
acquisitions, teaming agreements or co-production programs into
our business may result in unforeseen operating difficulties and
may require significant financial and managerial resources that
would otherwise be available for the ongoing development or
expansion of our existing operations. Consummating these
transactions could result in the incurrence of additional debt
and related interest expense, as well as unforeseen contingent
liabilities, all of which could have a material adverse effect
on our financial condition and operating results. In addition,
we may be required to enter into novation agreements with the
U.S. Government in order to succeed to the U.S. Government
contracts of any acquired entity. Novation can be a lengthy
process that often occurs after the consummation of an
acquisition. Accordingly, our failure to obtain any required
novation could have a material adverse effect on the value to us
of an acquired business.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Significant risks are inherent in the
    day-to-day operations of our ship repair and maintenance
    business.

The day-to-day activities of our ship repair and
maintenance business involves the repair, maintenance and
modernization of large steel structures, the operation of cranes
and other heavy machinery and other operating hazards. As a
result, our operations can cause personal injury or loss of
life, severe damage to and destruction of property and
equipment, and interruption of our business. The structural or
mechanical failure of a vessel after it leaves one of our
shipyards can result in similar injuries and damages and could
result in

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liabilities to us. We could be named as a
defendant in a lawsuit asserting large claims on the occurrence
of any of these events. Although we maintain insurance
protection in amounts we consider to be adequate, we cannot
assure you that this insurance will be sufficient in coverage or
effective under all circumstances or against all hazards to
which we may be subject. If we are not fully insured against a
successful claim, there could be a material adverse effect on
our financial condition and result of operations.




| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | We may experience labor disruptions
    associated with the expiration of our collective bargaining
    agreements.

As of December 31, 2003, we had
approximately 7,300 employees and 600 contract workers.
Approximately 2,000 of our employees are covered by collective
bargaining agreements with various unions. (See Item 1,
Description of Business, Employees for additional
detail regarding our unionized locations.) Our union agreements
typically have a term of three years and thus regularly expire
and require renegotiation in the course of our business. The
next scheduled expiration of such agreements will be in
June 2004, regarding approximately 150 USMR workers in San
Francisco, California and in September, 2004, regarding
approximately 120 workers in Minneapolis, Minnesota. Although we
believe that our relationships with these unions are good, there
can be no assurance that we will not experience labor
disruptions associated with the expiration or renegotiation of
collective bargaining agreements or otherwise.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to receive or retain the
    necessary licenses or authorizations required for us to sell our
    products overseas.

U.S. Government licenses are required for us to
export our products. In the case of certain sales of defense
equipment to foreign governments, the U.S. Governments
Executive Branch must notify Congress at least 15 to
30 days, depending on the location of the sale, prior to
authorizing these sales. During this time, Congress may take
action to block the proposed sale. We cannot be sure of our
ability to obtain any licenses required to export our products
or to receive authorization from the Executive Branch for sales
to foreign governments. Failure to receive required licenses or
authorization would hinder our ability to sell our products
outside the United States.



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Our significant level of debt may adversely
    affect our financial and operating activity.

At December 31, 2003, we had approximately
$577 million in outstanding term loans under our secured
credit facility as well as letters of credit in the amount of
approximately $115 million. Approximately $85 million
remains available under the credit facility. In the future, we
may borrow more money, subject to the limitations imposed on us
by our senior secured credit facility.

Our level of indebtedness has important
consequences to investors in our common stock. For example, our
level of indebtedness may:



| |   |                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require us to use a substantial portion of our
    cash flow from operations to pay interest and principal on our
    debt, thereby reducing the availability of that cash flow for
    other purposes such as capital expenditures, research and
    development, and other investments;                                                
|
| |  | limit our ability to obtain additional financing
    for acquisitions, investments, working capital and other
    expenditures, which may limit our ability to carry out our
    business strategy;                                                                                                                                      
|
| |  | result in higher interest expense if interest
    rates increase on our floating rate borrowings;                                                                                                                                                                                                                                        
|
| |  | heighten our vulnerability to downturns in our
    business or in the general economy and restrict us from making
    acquisitions, introducing new technologies and products, or
    exploiting business opportunities; or                                                                                                              
|
| |  | subject us to covenants that limit our ability to
    borrow additional funds, dispose of assets or pay cash
    dividends, or that require us to maintain or meet specified
    financial ratios or tests, with any failure by us to comply with
    those covenants potentially resulting in an event of default on
    that debt and a

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| |  |                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | foreclosure on the assets securing that debt,
    which would have a material adverse effect on our financial
    position and results of operations.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on key management and personnel
    and may not be able to retain those employees or recruit
    additional qualified personnel.

We believe that our future success will be due,
in part, to the continued services of our senior management
team. Losing the services of one or more members of our
management team could adversely affect our business and our
expansion efforts. In addition, competition for some qualified
employees, such as software engineers or other advanced
engineering professionals, has intensified in recent years and
may become even more intense in the future. Our ability to
implement our business plan is dependent on our ability to hire
and retain technically skilled workers. Our failure to recruit
and retain qualified employees could adversely affect our
results of operations, and may impair our ability to obtain
future contracts.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Environmental laws and regulations may
    subject us to significant liabilities.

Our operations are subject to U.S. federal, state
and local environmental laws and regulations, as well as
environmental laws and regulations in the various countries in
which we operate, relating to the discharge, storage, treatment,
handling, disposal and remediation of certain materials,
substances and wastes. New laws and regulations, stricter
enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new
clean-up requirements may require us to incur substantial costs
in the future. Although a significant portion of our ongoing
environmental costs are recoverable from other parties or
allowable as costs under the terms of many of our contracts,
there is no assurance that we will not incur material
unrecoverable or unallowable costs in the future. In addition,
there is no assurance that environmental costs we expect to be
reimbursed by other parties or allowed as charges in U.S.
Government contracts will be reimbursed or allowed. A decline in
such reimbursement or allowability could have a material adverse
effect on our financial condition and results of operations.

Stringent fines and penalties may be imposed for
non-compliance and many environmental laws impose joint and
several strict liability for remediation of spills
and releases of oil and hazardous substances, without regard to
negligence or fault on the part of the person being held
responsible. Financial responsibility for the clean-up or other
remediation of contaminated property or for natural resource
damages can extend to previously owned or used properties,
waterways and properties owned by unrelated companies or
individuals, as well as properties currently owned and used by
us regardless of whether the contamination is attributable to
other potentially responsible parties. Many of our facilities
have been used for ship repair and related activities for
several decades. The nature of ship repair operations requires
the storage, use and handling of hazardous materials. The
extensive use and handling of these materials has resulted in
their release in our shipyards and the adjacent waterways and
may do so in the future. Accordingly, we make capital
expenditures and incur operating expenses for clean-up,
mitigation and other environmental matters arising from the
condition of our shipyards and the adjacent waterways and from
our daily operations.

See Environmental Matters discussion
in Item 1, Description of Business, above, for a more
detailed description of certain environmental matters and our
related potential liability.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We may need to raise additional capital on
    terms unfavorable to our stockholders.

Based on our current level of operations, we
believe that our cash flow from operations, together with
amounts we are able to borrow under our senior secured credit
facility, will be adequate to meet our anticipated operating,
capital expenditure and debt service requirements for the
foreseeable future. We do not have complete control over our
future performance because it is subject to economic, political,
financial, competitive, regulatory and other factors affecting
the defense industry. It is possible that our business may not
generate sufficient cash flow from operations and we may not
otherwise have the capital resources to allow us to service our
debt and make necessary capital expenditures. If this occurs, we
may have to sell assets, restructure our debt or obtain
additional equity capital, which could be on terms dilutive to
our stockholders.

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We cannot be sure that we would be able to take
any of the foregoing actions or that we could do so on terms
favorable to us or you.




| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Acting in a subcontractor role on FCS may
    reduce our control over and financial results from the
    program.

On most of our programs with the Army, we have
historically participated in the role of the prime contractor,
meaning that we have overall contractual responsibility for the
final product or system sold to Army, and subcontract to others
for various components and services which we incorporate in the
final product. For example, we are or have been the prime
contractor on the U.S. Armys Bradley, Crusader, M109/
FAASV, M113, M88 Hercules, and ACE programs. By contrast, on the
FCS program, including the NLOS-C system (both of which are
discussed above under Item 1, Description of Business,
Defense Systems Segment), we participate as a subcontractor, at
least during the development phases of the program, which is
scheduled to last several years. Historically, we have sought
the role of prime contractor on our military programs because of
both the heightened visibility and extensive customer interface
which prime contractors tend to possess. The overall effect of
participating in FCS as a subcontractor rather than as a prime
contractor is uncertain, but it may lessen our ability to obtain
adequate funding for elements of the program in which we
participate, and/or to influence the technological direction,
nature, scope, and ultimate production and fielding of those
elements in which we participate. Any such diminution could
reduce our revenues and profits from FCS participation, and/or
render us subject to greater competition from other current or
potential participants in the program.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Decline in the value of the securities held
    by our employee retirement plans would adversely affect our
    retiree benefit expense and funding levels.

Our employee retirement benefit plans hold a
significant amount of equity securities. Declines in the market
values of these securities would increase our retiree benefit
expense and, as a result, adversely affect our profitability. In
addition, a continued decline in such asset values could cause
our plans, which in the aggregate were adequately funded as of
December 31, 2003, to become underfunded.






|        |           
|------- | ----------
|ITEM 2. | Properties

The principal manufacturing and research and
development activities for our Defense Systems segment are
located in four main facilities: Fridley, Minnesota; York,
Pennsylvania; Louisville, Kentucky; and Santa Clara, California.
We currently own 326,023 square feet and have historically used
the attached 1,712,240 square foot Fridley facility under a
facility-use agreement with the U.S. Government. Our current
such agreement expires on June 30, 2004, and we are currently in
negotiations with the U.S. Government to amend and/or extend the
agreement. The York facility consists of 1,006,906 square feet
and is owned by United Defense. We lease our 633,609 square foot
Louisville facility pursuant to a lease expiring in June 2005.
The main Santa Clara facility occupies 124,940 square feet under
a lease that expires in October 2011. In addition, we own
or lease approximately 25 additional administrative offices,
manufacturing facilities, and warehouse locations throughout the
U.S. and in Sweden.

Our Ship Repair and Maintenance segment owns or
leases a total of seven ship repair facilities in the
continental United States and Hawaii. The two largest facilities
are full service shipyards located in Norfolk, Virginia and San
Diego, California. The San Diego shipyard includes 5 repair
piers with 2,800 feet of berthing space, two dry-docks, various
workshops, warehouses and offices located on 23 acres. All
waterfront property in San Diego is occupied under a long-term
ground lease that expires in 2034. The Norfolk shipyard is
located on approximately 109 acres and includes 4 piers with
3,000 feet of berthing space, a 52,000 ton floating dry-dock, a
14,000 ton floating dry-dock, and numerous workshops,
warehouses, and offices. We own the Norfolk property. In
addition, our Ship Repair and Maintenance segment also leases
five other shipyard facilities located in California, Texas,
Hawaii, and Florida.

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|        |                  
|------- | -----------------
|ITEM 3. | Legal Proceedings

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

As a government contractor, we are subject to the
audit, review, and investigative authority of various U.S.
Government agencies. Depending upon the particular
jurisdictional statute, violations of federal procurement rules
may result in contract price reductions or refunds, civil
penalties, and/or criminal penalties. Government contractors
that violate the False Claims Act and/or other applicable laws
may be suspended or debarred from receiving further government
contracts. Given our dependence on U.S. Government contracts,
suspension or debarment is an inherent risk that could readily
have a material adverse effect on us. Our policy is to cooperate
with governmental investigations and inquiries regarding
compliance matters, and we also make voluntary disclosures of
compliance issues to governmental agencies as appropriate. In
the ordinary course of business, we provide information on
compliance matters to various government agencies, and we expect
to continue to do so in the future.






|        |                                                        
|------- | -------------------------------------------------------
|ITEM 4. | Submission of Matters to a Vote of Security
    Holders

None.

PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our sole class of common equity is our $0.01 par
value common stock, which is traded on the New York Stock
Exchange (NYSE) under the symbol UDI.
Trading in our common stock commenced on the NYSE on
December 14, 2001. As of February 13, 2004, there were
22 shareholders of record with approximately 18,933 beneficial
shareholders of our common stock.

The table below shows, for the quarters indicated
the reported high and low trading prices of our common stock on
NYSE.

|                    |                                        |      |   |       |  |  |   |       | 
|------------------- | -------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                    |                                        | High |   | Low  
|                    |                                        |      |   |      
|Calendar Year 2002: |                                        |      |   |       |  |  |   |      
|                    | First Quarter                          |      | $ | 28.47 |  |  | $ | 19.60 | 
|                    | Second Quarter                         |      |   | 29.85 |  |  |   | 19.70 | 
|                    | Third Quarter                          |      |   | 24.35 |  |  |   | 17.60 | 
|                    | Fourth Quarter                         |      |   | 24.35 |  |  |   | 18.65 | 
|Calendar Year 2003: |                                        |      |   |       |  |  |   |      
|                    | First Quarter                          |      | $ | 24.75 |  |  | $ | 20.06 | 
|                    | Second Quarter                         |      |   | 27.12 |  |  |   | 21.00 | 
|                    | Third Quarter                          |      |   | 29.69 |  |  |   | 25.19 | 
|                    | Fourth Quarter                         |      |   | 34.15 |  |  |   | 28.33 | 
|Calendar Year 2004: |                                        |      |   |       |  |  |   |      
|                    | First Quarter (as of January 30, 2004) |      | $ | 34.31 |  |  | $ | 28.72 | 

As part of the recapitalization transaction
described in Item 7 below, we paid two dividends in 2001.
The first dividend of $289.7 million at $7.11 per share was
paid on August 13, 2001. The second dividend of
$92.0 million, or $2.22 per share was paid on
November 26, 2001. We did not pay any dividends in 2002 or
2003 and have not determined whether to pay dividends in the
foreseeable future. In addition, our $800 million senior
secured credit agreement includes provisions restricting our
ability to pay dividends.

We sold no unregistered securities during 2003.

23



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|        |                                         
|------- | ----------------------------------------
|ITEM 6. | Selected Consolidated Financial
    Data

The following tables set forth our selected
consolidated financial data for the periods indicated. We have
derived our consolidated statements of operations and our
balance sheet data for each of the five years ended December 31,
2003 from our audited consolidated financial statements. The
historical results presented are not necessarily indicative of
future results. You should read the information set forth below
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and their related
notes included elsewhere in this document.

On September 6, 2000, we acquired all of the
outstanding stock of Bofors Defence, and on July 2, 2002,
we acquired all of the outstanding stock of United States Marine
Repair. Accordingly, the financial statements reflect the
results of operations of the acquired entities since the
respective dates of acquisition. These acquisitions affect the
comparability of the financial data for the periods presented.

|                                                 |                                            |                                       |           |            |  |      |           |            |  |      |           |            |  |   |           |            |  |   |           |            | 
|------------------------------------------------ | ------------------------------------------ | ------------------------------------- | --------- | ---------- |  | ---- | --------- | ---------- |  | ---- | --------- | ---------- |  | - | --------- | ---------- |  | - | --------- | ---------- | 
|                                                 |                                            |                                      
|                                                 |                                            | Year ended December 31,              
|                                                 |                                            |                                      
|                                                 |                                            | 1999                                  |           | 2000       |  | 2001 |           | 2002       |  | 2003
|                                                 |                                            |                                       |           |            |  |      |           |            |  |     
|                                                 |                                            |                                      
|                                                 |                                            | (In thousands, except per share data)
|Net sales                                        |                                            | $                                     | 1,213,526 |            |  | $    | 1,183,886 |            |  | $    | 1,318,538 |            |  | $ | 1,725,346 |            |  | $ | 2,052,591 |           
|Net income                                       |                                            |                                       | 2,938     |            |  |      | 18,845    |            |  |      | 8,776     |            |  |   | 134,576   |            |  |   | 140,648   |           
|Total assets                                     |                                            |                                       | 853,142   |            |  |      | 895,820   |            |  |      | 925,118   |            |  |   | 1,453,970 |            |  |   | 1,591,164 |           
|Long term debt, including current portion        |                                            |                                       | 349,843   |            |  |      | 269,577   |            |  |      | 430,900   |            |  |   | 590,000   |            |  |   | 576,989   |           
|Cash dividends declared per common share         |                                            |                                       |          |            |  |      |          |            |  | $    | 9.33      |            |  |   |          |            |  |   |          |           
|Per Share Data:                                  |                                            |                                       |           |            |  |      |           |            |  |      |           |            |  |   |           |            |  |   |           |           
|Earnings per common share  basic
    Net income |                                            | $                                     | 0.07      |            |  | $    | 0.46      |            |  | $    | 0.21      |            |  | $ | 2.62      |            |  | $ | 2.71      |           
|                                                 |                                            |                                       |           |            |  |      |           |            |  |      |           |            |  |   |           |            |  |   |           |           
|                                                 | Weighted average common shares outstanding |                                       |           | 40,593,348 |  |      |           | 40,584,049 |  |      |           | 41,264,914 |  |   |           | 51,348,889 |  |   |           | 51,945,921 | 
|                                                 |                                            |                                       |           |            |  |      |           |            |  |      |           |            |  |   |           |            |  |   |           |           
|Earnings per common share  diluted              |                                            |                                       |           |            |  |      |           |            |  |      |           |            |  |   |           |            |  |   |           |           
|                                                 | Net income                                 |                                       | $         | 0.07       |  |      | $         | 0.44       |  |      | $         | 0.20       |  |   | $         | 2.55       |  |   | $         | 2.66       | 
|                                                 |                                            |                                       |           |            |  |      |           |            |  |      |           |            |  |   |           |            |  |   |           |           
|                                                 | Weighted average common shares outstanding |                                       |           | 42,052,127 |  |      |           | 42,419,473 |  |      |           | 43,203,511 |  |   |           | 52,796,680 |  |   |           | 52,942,622 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should be
read in conjunction with the financial statements and related
notes and the other financial information included elsewhere in
this report. This discussion contains forward-looking statements
about our business and operations. Our actual results could
differ materially from those anticipated in such forward-looking
statements.

Overview

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

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The Carlyle Group (Carlyle) formed
United Defense Industries, Inc. in October 1997 to
facilitate the acquisition of United Defense, L.P., our
predecessor entity. As of February 27, 2004, Carlyle had
sold major portions of their original investment in our company,
and presently owns approximately 8.5% of our outstanding common
stock. In July 2002 we acquired USMR from Carlyle.

We had a firm funded backlog of approximately
$2.1 billion as of December 31, 2003, a substantial
majority of which was derived from sole-source, prime contracts.
Approximately 77% of our sales for the year ended
December 31, 2003 were to the U.S. Government, primarily to
agencies of the DoD (excluding Foreign Military Sales), or
through subcontracts with other government contractors.

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

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototypes, and some other matters are typically
cost-plus arrangements, under which we are reimbursed for
approved costs and also receive a fee. Our production contracts
are typically fixed-price arrangements under which we assume the
risk of cost overruns and receive the benefit of cost savings.
Our repair and maintenance contracts are a mix of fixed-price
and cost-plus arrangements with a recent trend toward cost-plus.
All of our DoD contracts, whether we are the prime contractor or
a subcontractor, are subject to audit and cost controls. As a
result, the DoD has the right to object to our costs as not
allowable or as unreasonable, which can preclude recovery of
these costs on both cost-plus and negotiated fixed-price
contracts.

Emerging Trends and Uncertainties

Fundamentally, our business results are governed
by the degree to which pertinent defense programs are funded by
the U.S. government (and, for export and foreign sales, by
foreign governments); the priorities and acquisition strategies
chosen by the Department of Defense and its foreign
counterparts; and our success in obtaining contracts and
performing them to the satisfaction of our customers.
Additionally, as described below, other factors distinctive to
United Defense and its financial structure and situation also
tend to influence our financial performance.

The current geopolitical climate and its
interpretation by the U.S. Government has affected, and will
likely to continue to affect, our overall business performance
in sometimes conflicting ways. In general, the concern for U.S.
military security was dramatically increased by the
September 11, 2001 attack, and the consequent heightened
attention was focused in particular ways by the ensuing U.S.
military operations in Afghanistan and Iraq. The primary initial
impact of these events was to generate a significant political
consensus for increased defense spending, which in turn raised
the DoD budget in all three areas of principal interest to us:
procurement, research and development (R&D), and operations
and maintenance (O&M). We tend to benefit from increased
procurement appropriations because they provide the principal
source of funding for production of our established systems such
as the Bradley, naval guns, and naval missile launchers. R&D
spending by contrast tends to support the development of new
weapon systems in which we frequently have a lead role, such as
vehicles for the Armys FCS program, new artillery systems
(such as the Crusader, prior to its cancellation, and
subsequently its NLOS-C replacement), and new naval weapons such
as the AGS. O&M spending frequently translates into
increased revenues for us in such areas as replacement track
shoes for land combat vehicles, and more frequent ship repair
and maintenance work. (References below to FY05 and
the like refer to the U.S. Governments
October 1  September 30 fiscal years, which
are the periods for which federal funds are appropriated and
spent.)

However, the nations recent military
challenges have brought with them a potentially far-reaching
reexamination of the structure, organization, and equipment
appropriate to future warfighting, particularly as it affects
the U.S. Army, which for decades was our largest single
customer. Additionally, the greatly expanded scale of DoD
operations in the Middle East has tended to elevate the
importance of funding current

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operations, which with their in-the-field urgency
tend to enjoy a priority over longer-term DoD objectives in
procurement and R&D. Thus the general political
receptiveness to higher defense spending does not necessarily
translate into uniformly improved financial performance for us,
particularly given that the production of existing systems has
historically produced our highest profit margins.


In 2002 and 2003, the aggregate effect of the
foregoing factors was to significantly improve the results of
our Ship Repair and Maintenance segment, missile canister
business, and replacement track business for combat vehicles. At
the same time, as discussed in greater detail below, DoDs
strategic reexamination of the U.S. military force structure,
conducted under the general heading of
transformation, tended to reduce procurement
spending on what have been our mainstay combat vehicle programs
while increasing R&D spending on the proposed next
generation of combat weapons, particularly the FCS program and
the Navys new surface ship programs, the DD(X) and
Littoral Combat Ship. We expect these influences to continue in
2004 and beyond.

In terms of the overall U.S. Government budget,
we are uncertain as to how the larger national competing
priorities will impact our overall business environment. DoD
competes for federal funding with all of the Governments
nondefense agencies, and DoDs overall budgetary allocation
could accordingly be capped or driven downward in FY05 and
beyond by such factors as the rising federal deficit, a
perception that the U.S. has been victorious in Iraq and may now
safely revert to a pattern of peacetime spending priorities, and
the competing claims of such nondefense areas as health care and
education. Conversely, defense spending would likely be pushed
up by new terrorist attacks, increased geopolitical tensions
regarding North Korea or Taiwan, or new difficulties in the
Middle East. We claim no special insight as to how such
competing priorities will ultimately be resolved, but we do
believe that with nearly 100% of our revenues and profits
deriving from defense programs, our aggregate results and
financial condition will continue to be significantly affected
by the overall allocation of government spending toward or away
from defense.

Land Combat Vehicles

Historically, the largest portion of our revenues
and profits derived from the development and production of land
combat vehicles. In 2003, our revenues from such programs
totaled $835.0 million, or 41% of our total revenue. Of
such totals, approximately 73% came from U.S. Army programs.
Since 1998 the Army has been developing and implementing a
long-term transformational plan. While the pace and specific
elements of the Armys plan have been the subject of
ongoing adjustments, which we believe are likely to continue,
the overall approach has involved three principal areas of
focus: (1) maintenance of the so-called Current Force,
consisting largely of tracked, armored combat vehicles such as
the Bradley, the Hercules recovery vehicle, and the Paladin
artillery systems produced and upgraded by our company;
(2) rapid fielding of a lighter-weight, wheeled family of
combat vehicles (the Stryker, formerly known as the Interim
Armored Vehicle, or IAV), as an interim step toward the more
rapidly deployable future force; and (3) development of a
long-term future fighting force of digitally linked air and land
reconnaissance and combat elements known as the FCS program. We
do not participate significantly in the Stryker program, but we
have major positions in both the Current Force and FCS.

Because FCS is conceptually ambitious, requires
significant technological advances, and is envisioned ultimately
to encompass major portions of the Armys major combat
equipment, the Army has proposed long-term FCS expenditures on a
record scale. The Administration proposes to spend
$14.6 billion on FCS from FY05 through FY09, including
$3.2 billion in FY05 alone, or approximately 29.6% of total
Research and Development spending during those years. The Army
selected United Defense for a principal role in the development
of FCS manned ground vehicles (FCS-MGVs), and we
accordingly entered into implementing agreements with General
Dynamics Land Systems, the Armys designated co-developer
for FCS-MGVs, and The Boeing Company, which the Army selected in
2002 as the lead system integrator for the FCS program as a
whole. In December 2003 we received our largest development
contract ever, in the form of a $2 billion subcontract
award from Boeing for system design and development work on
FCS-MGVs. Our work, which is to be performed over the period
2003  2011, will consist primarily of the development
of (1) certain major common elements to be used on all
FCS-MGVs, consisting of crew stations, propulsion, armor, active
protection, signature management, defensive armament, and
software architecture; and (2) five of the eight

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types of FCS-MGVs, consisting of the NLOS-M, ICV,
MV, MRV, and the NLOS-C artillery vehicle.


The Army has established CY2010 as its intended
commencement date for fielding FCS combat units, which would
imply that volume production of FCS-MGVs may not begin until
2009. In the FY03 and FY04 legislative cycles, Congress imposed
a requirement that the NLOS-C be fielded by 2008, which would
require commensurately earlier production. Discussions regarding
overall FCS program management, budgetary control, and schedule
are ongoing between Congress and the Army, the outcome of which
is yet unknown. The Army has also indicated that, particularly
in view of the intense pace of combat operations in Iraq and the
need to maintain the Current Force until perhaps 2025, the
Current Force vehicles will require further rebuild and
modernization efforts. In FY04, Congress appropriated
$211 million for continued Bradley modernization, which
will provide us with production work into 2006. Given the
various factors described above, we cannot yet foresee with
precision what mix of combat vehicle business may be under
contract beyond 2005, and of course export orders which we are
also pursuing may have a significant bearing on this aspect of
our business, but we recognize the potential risk of a
production gap in our combat vehicle facilities if our Current
Force work should wind down or terminate before FCS production
work were to commence. A prolonged suspension of production
could reduce our workforce and employee skill base and
necessitate the contraction of our manufacturing facilities.

Naval Weapon Systems

For several decades, the mainstays of our naval
weapon systems business have been the development and production
of guns and missile launching systems for surface warships. Our
principal product lines for at least the last ten years have
been the U.S. Navys 5-inch, Mk 45 gun system and the Mk 41
Vertical Launch System (VLS), either or both of
which have been installed on virtually all of the cruisers and
destroyers built by the Navy during that period. We have also
sold Mk 45 and VLS products to certain foreign navies, and our
naval sales have also included VLS canisters (used for each
missile launch from the VLS), submarine propulsors, and rebuild
and overhaul work on other weapon systems for surface ships. We
participate in the Mk 45 program as a prime contractor, and in
the VLS program as a subcontractor to Lockheed Martin Company.
In 2003 our naval weapon system sales (which include R&D,
production, and rebuild work) totaled $355.3 million, or
17.3% of our total revenue.

As with the other military services, the Navy is
engaged in substantial planning and development efforts for its
future force. One of the Navys largest ship development
programs is known as DD(X), which is envisioned as the
construction of at least 24 new surface warships to replace many
of the Navys existing destroyers. We participate in the
DD(X) program as the provider of the two major weapon systems
for the vessels: the AGS gun, and the next generation VLS, known
as the Mk 57. The Navy awarded the DD(X) design contract to
Northrop Grumman Corporation (NGC), and we
(1) are NGCs subcontractor responsible for the design
and development of the AGS and (2) act as a subcontractor
for the Mk 57 to Raytheon Company, who is in turn the system
subcontractor to NGC. The scale and complexity of the DD(X)
program, combined with ongoing political oversight from the
Administration and Congress, result in uncertainty regarding the
ultimate development schedule, production scale, and spending
level for DD(X). However, current Navy budgetary estimates allow
approximately $170 million for the systems we would provide
on the lead ship, a figure which would presumably decline on a
per-ship basis if DD(X) reaches regular production, but which
would nonetheless provide at least twice the per-ship revenue we
receive on current Navy destroyers. Our existing AGS and
Mk 57 subcontracts would provide approximately
$470 million in revenue for development work to be
completed by 2009.

We expect to continue to build Mk 45 guns
and Mk 41 VLS subsystems for the Navys currently
produced DDG51 class of destroyers, six more of which are
projected for completion by 2010. We also expect to continue to
build VLS canisters, submarine propulsors, and other current
naval systems for approximately the next 20 years, if not
longer. Also, the Navy has expressed significant interest in
using our Bofors 57mm gun on the LCS, a class of smaller surface
ships which may involve the construction of 56 or more vessels,
and the U.S. Coast Guard has selected the 57 mm gun for its new
class of 8 National Security Cutters in its new Deepwater
program. All such programs, together with the substantial
emerging development work on the

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AGS and the Mk 57 VLS, indicate that our
naval weapon system business will continue to increase, both in
terms of absolute revenue and profit volume, and as a proportion
of our Defense Systems segment.


Ship Repair and Maintenance

In recent years, an important element of the
success of our Ship Repair and Maintenance segment has been our
practice of locating its principal facilities at the same
locations where the U.S. Navy home-ports major portions of its
fleet. This proximity accommodates the Navys preference to
have ship repair work performed at locations where most or all
of the ships crew reside. Additionally, we have benefited
both from the Navys practice of extending the service
lives of major vessels, which tend to require more extensive
work as they age, and from the intensified pace of naval
operations for the U.S. military campaigns in Afghanistan and
Iraq. To the extent that the Navys operations decline in
the wake of the regime changes in those countries, our ship
repair business may decline.

In the overall allocation of DoD budgetary
resources referred to earlier, the Navy must in turn determine
how to apportion its funding between building new vessels and
upgrading and repairing older ones. The Navy has decided to
retire some of its older ships ahead of schedule in order to
free up funds for new construction, and the tradeoff between
these competing priorities is generally subject to attentive
political oversight. While we are unable to predict the ultimate
apportionment of funding between new and existing ships, we are
aware that a pronounced shift to new construction could result
in the further retirement of older naval vessels and a
corresponding decline in overall repair requirements. We do not
expect such developments to significantly affect the results of
our Ship Repair and Maintenance segment during 2004, but their
possible impact in 2005 and beyond is unclear.

Turkish Joint Venture

As we do not consolidate the results of our
Turkish joint venture entity, FNSS, its contribution to our
financial results are primarily through payments of royalties
and dividends. Since FNSS commenced production in the early
1990s, with the exception of two or three years it has
been major a contributor to our profits, and expected to be so
again in 2004. However, FNSS has always been heavily dependent
on armored combat vehicle production work for the Turkish armed
forces, and its current contract, which commenced in 2001 and
involves the production of 551 vehicles, is scheduled to be
completed by the end of 2004, as is another FNSS contract
involving the production of 211 armored combat vehicles for the
government of Malaysia. FNSS is currently pursuing further
production contracts for Turkey, Malaysia, and elsewhere,
without which its operations might be substantially curtailed in
2005 or 2006. Just as in the United States, the award of
military contracts in these countries is substantially dependent
on the larger political process by which national budgets are
allocated between civilian and military agencies, and within the
military sphere among various competing program priorities.
Additionally, even if one or more of these countries allocates
budgetary funds for combat vehicle programs, FNSS may face
competition from other combat vehicle suppliers. Accordingly, we
are currently unable to access the outcome of FNSS ongoing
business development efforts. Given the historical contribution
of FNSS to our financial results, however, we expect our results
to continue to be affected by its ongoing business fortunes.

Critical Accounting Policies

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. In particular, estimates are used for
contract costs and revenues in the earnings recognition process,
accruals related to environmental and other liabilities, and
pension and other retirement costs. Actual results could differ
from those estimates.

Revenue and Cost Recognition.We recognize sales on fixed-price
production contracts when the risks and rewards of ownership
have been transferred to the customer. For our DoD production
contracts, those criteria are typically met when the manufacture
of the product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. However, under recent Bradley and M113 production
contracts, sales are not recognized until the vehicles are
fielded to individual U.S. Army units because it is at that
point that the risks and rewards of ownership are transferred.
Fielding a vehicle refers

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to the final deprocessing activity such as
checking for proper running condition, installing on board
equipment, and getting the certified customer acceptance at
their site of operation. This contractual provision extends the
period of time during which these vehicles are carried as
inventory and may result in an uneven distribution of revenue
from these contracts between periods.


For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. We tend to deliver products to our foreign customers
in lots, which also results in an inventory build-up pending
delivery.

Under fixed-price ship repair and maintenance
contracts, contract costs are expensed as incurred and sales are
recognized simultaneously based on the ratio of direct labor
inputs and other costs incurred to date compared with estimated
total direct labor inputs and total costs. Sales under cost-plus
contracts for research, engineering, prototypes, ship repair and
maintenance and certain other contracts are recorded as costs
are incurred and include estimated fees in the proportion that
costs incurred to date bear to total estimated costs.

We use the long-term contract method of
accounting for our fixed-price contracts and therefore record
gross margin on each unit produced at the time a sale is
recognized, based on an estimate of the margin that will be
realized over the life of the related contract. We currently
evaluate estimates of gross margin periodically during the year
and use the cumulative catch-up method to recognize changes in
estimates of sales and gross margins during the period in which
those changes are determined. We charge any anticipated losses
on a contract to operations as soon as those losses are
determined.

The principal components of cost of sales for our
production and ship repair and maintenance contracts are
materials, subcontractor costs, labor and overhead. The
principal components of cost of sales for engineering and
development contracts are compensation costs for the engineers
and designers and related overhead necessary to support those
personnel. All of these costs are charged to inventory as
incurred except for Ship Repair and Maintenance costs, which are
expensed as incurred. We use the last-in, first-out, or LIFO,
method of accounting for the majority of our inventory, which
generally results in higher cost of sales in periods when
current costs of the inventory are higher than comparable costs
in prior periods and a periodic charge to earnings to reflect
changes in the costs of components of inventory. We expense
selling, general, administrative, and research and development
costs in the period incurred. The major components of these
costs include compensation, overhead and amortization of
intangibles.

Investments in Affiliated Companies.Our investment in our 51% owned
foreign joint venture in Turkey, FNSS, is accounted for by using
the equity method because we do not control the joint venture
due to our partners veto rights over major operating
decisions. This same accounting treatment was used for our joint
venture in Saudi Arabia, UDS, prior to the sale of our interest
in the company.

Accrued Environmental Liabilities.We record financial statement accruals
for environmental matters in the period that it becomes probable
that a liability has been incurred and the amounts can be
reasonably estimated. Judgment is required when we develop
assumptions and estimate costs expected to be incurred for
environmental remediation activities due to, along with other
factors, difficulties in assessing the extent of environmental
remediation to be performed, complex environmental regulations
and remediation technologies, and agreements between potentially
responsible parties to share in the cost of remediation. Given
the level of judgment and estimation which has to occur as
described above, it is likely that materially different amounts
could be recorded if different assumptions were used or if
circumstances were to change (e.g., a change in environmental
standards).

Pension and Other Retirement Costs.Most employees are covered by defined
benefit pension plans, and we provide health care and life
insurance benefits to eligible retirees. Our earnings may be
positively or negatively impacted by the amount of income or
expense we record for our employee benefit plans. This is
particularly true with income or expense for qualified defined
benefit plans (pension plans) because those calculations are
sensitive to changes in several key economic assumptions and
workforce demographics.

We use actuarial valuations to compute the income
or expense for the plans. These valuations include many
assumptions, including assumptions we make relating to financial
market and other economic conditions. Changes in key economic
indicators can result in changes in the assumptions we use. The
key year-

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end assumptions used to estimate pension income
or expense for the following fiscal year are the discount rate,
the expected long-term rate of return on plan assets and the
rate of increase in future compensation levels.


We use judgment in selecting these assumptions
each year because we have to consider not only current market
conditions, but also make judgments about future market trends,
changes in interest rates and equity market performance. We also
have to consider factors like the timing and amounts of expected
contributions to the plans and benefit payments to plan
participants.

Results of Operations

The following table summarizes key income
statement financial results:

|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |           |           |  
|--------------------------------------------------------- | --------------------------- | ------------------------------------------------------ | ------ | --------- | --------- | ---- | ------- | --------- | --------- | - | ------- | --------- | --------- | -
|                                                          |                             |                                                       
|                                                          |                             | Year ended December 31,                               
|                                                          |                             |                                                       
|                                                          |                             | 2001                                                   |        | 2002      |           | 2003
|                                                          |                             |                                                        |        |           |           |     
|                                                          |                             |                                                       
|                                                          |                             | (in thousands)                                        
|Revenue:                                                  |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          | Defense Systems             |                                                        | $      | 1,318,538 |           |      | $       | 1,469,961 |           |   | $       | 1,507,253 |          
|                                                          | Ship Repair and Maintenance |                                                        |        |          |           |      |         | 255,385   |           |   |         | 545,338   |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Total Revenue                                          |        |           | 1,318,538 |      |         |           | 1,725,346 |   |         |           | 2,052,591 |  
|Cost of sales:                                            |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          | Defense Systems             |                                                        |        | 1,059,687 |           |      |         | 1,172,450 |           |   |         | 1,161,598 |          
|                                                          | Ship Repair and Maintenance |                                                        |        |          |           |      |         | 216,166   |           |   |         | 478,108   |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Total cost of sales                                    |        |           | 1,059,687 |      |         |           | 1,388,616 |   |         |           | 1,639,706 |  
|Gross Profit:                                             |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          | Defense Systems             |                                                        |        | 258,851   |           |      |         | 297,511   |           |   |         | 345,655   |          
|                                                          | Ship Repair and Maintenance |                                                        |        |          |           |      |         | 39,219    |           |   |         | 67,230    |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Total gross profit                                     |        |           | 258,851   |      |         |           | 336,730   |   |         |           | 412,885   |  
|Gross profit % of sales:                                  |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          | Defense Systems             |                                                        |        | 19.6      | %         |      |         | 20.2      | %         |   |         | 22.9      | %        
|                                                          | Ship Repair and Maintenance |                                                        |        |          |           |      |         | 15.4      | %         |   |         | 12.3      | %        
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Total gross profit % of sales                          |        |           | 19.6      | %    |         |           | 19.5      | % |         |           | 20.1      | %
|Selling, general and administrative expenses:             |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          | Defense Systems             |                                                        | $      | 179,714   |           |      | $       | 122,088   |           |   | $       | 125,448   |          
|                                                          | Ship Repair and Maintenance |                                                        |        |          |           |      |         | 20,718    |           |   |         | 38,017    |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Total selling, general and
    administrative expenses |        |           | 179,714   |      |         |           | 142,806   |   |         |           | 163,465   |  
|Research and development                                  |                             |                                                        | 23,666 |           |           |      | 27,673  |           |           |   | 29,810  |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|Income from operations                                    |                             |                                                        | 55,471 |           |           |      | 166,251 |           |           |   | 219,610 |          
|Earnings related to investments in
    foreign affiliates |                             |                                                        | 10,156 |           |           |      | 13,874  |           |           |   | 19,758  |          
|                                                          | Interest income             |                                                        |        | 5,781     |           |      |         | 4,218     |           |   |         | 3,911     |          
|                                                          | Interest expense            |                                                        |        | (56,732   | )         |      |         | (34,608   | )         |   |         | (28,030   | )        
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Net interest expense                                   |        |           | (50,951   | )    |         |           | (30,390   | ) |         |           | (24,119   | )
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          | Income before income taxes  |                                                        |        | 14,676    |           |      |         | 149,735   |           |   |         | 215,249   |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|Provision for income taxes                                |                             |                                                        | 5,900  |           |           |      | 15,159  |           |           |   | 74,601  |          
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          
|                                                          |                             | Net income                                             |        |           | 8,776     |      |         |           | 134,576   |   |         |           | 140,648   |  
|                                                          |                             |                                                        |        |           |           |      |         |           |           |   |         |          



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to Year Ended December 31, 2002

Revenue.Revenue for
2003 was $2,052.6 million, an increase of $327.2 million or
19% from $1,725.3 million for 2002. This increase is
attributable primarily to the inclusion of revenues from USMR
for a full twelve months versus only six months in 2002 as the
acquisition of USMR was completed on July 2, 2002. Ship Repair
and Maintenance 2003 sales of $545.3 million compare with
$255.4 million in 2002. In 2003

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USMR sales were higher than annualized 2002
levels due to primarily to approximately $50 million in new
work from a U.S. Navy contract in Mayport, Florida for the
overhaul of machinery spaces on the carrier USS John F.
Kennedy. We anticipate a sustained high level of maintenance
and repair through the first half of 2004 and a more normal
level of activity for the balance of the year. Defense Systems
segment 2003 sales of $1,507.3 million were 2.5% or
$37.3 million higher than the $1,470.0 million in 2002
with higher AAV deliveries to Italy and Korea, a step up in
activity for the Advanced Gun System, and higher Bofors sales
more than offsetting lower Bradley and M88 tank recovery vehicle
sales. Bradley sales were impacted by the Armys inability
to adhere to the contractual fielding schedule because of war
related priorities.


Gross Profit.Gross
profit increased $76.2 million, or 22.6%, to $412.9 million
for the year 2003 as a result of increased sales, higher award
fees and contract adjustments associated with productivity
improvements. Gross profit as a percent of sales was 20.1%, up
0.6% percentage point from 2002 despite having a full year of
lower margin ship repair business. The Defense Systems
segments gross profit as a percent of sales was 22.9% for
2003 compared with 20.2% for the year 2002. Major factors in the
higher profit margin for the Defense Systems segment were the
receipt of an $8.2 million award fee for the Crusader
program for work that had essentially been performed in previous
years, and contract adjustments for various production programs
due to efficiencies realized through productivity improvements.
The Ship Repair and Maintenance segments gross profit rate
for 2003 was 12.3% compared with 15.4% in 2002. This
segments lower margin in 2003 is a result of a change in
mix of business and the timing of award fees.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses for 2003 were $163.5 million, a
$20.7 million increase from $142.8 million for 2002.
The increase was due almost entirely to the inclusion of a full
year of USMR versus just six months in 2002.

Research and
Development.Research and development
costs were $29.8 million for 2003, an increase of
$2.1 million from the prior year due to higher spending
associated with a risk mitigation project.

Earnings from Foreign
Affiliates.Earnings from foreign
affiliates for 2003 were $19.8 million, a $5.9 million
increase from the prior year. This increase was due to increased
earnings from the joint venture in Turkey reflecting an increase
in deliveries which more than offset the fact that from
March 2002 onward, we no longer received a share of
earnings from our former joint venture in Saudi Arabia.

Net Interest
Expense.Net interest expense for 2003
was $24.1 million, a $6.3 million decrease from the
prior year. This decrease was the result of lower average
outstanding balances and lower amortization of financing costs
in 2003.

Provision for Income
Taxes.The provision for income taxes
for 2003 was $74.6 million, an increase of
$59.4 million from the prior year. The increase was due to
higher taxable income and the reversal of the valuation
allowance against deferred tax assets which substantially offset
income tax expense in 2002.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

During 2001 we had only one reportable segment.

Revenue.Revenue for
2002 was $1,725.3 million, an increase of $406.8 million or
30.9% from $1,318.5 million for 2001. This increase was
attributable to the inclusion of $255.4 million of USMR
results in our Ship Repair and Maintenance segment in 2002 which
did not exist in 2001, and $151.4 million in higher Defense
Systems segment sales in 2002 including a $60.2 million increase
in Bradley vehicles and a $52.8 million increase in M88
tank recovery vehicles.

Gross Profit.Gross
profit increased $77.9 million, or 30%, to $336.7 million
for the year 2002 as a result of increased sales. The Defense
Systems segments gross profit was 20.2% for 2002 compared
with 19.6% for the year 2001. The Ship Repair and Maintenance
segment gross profit rate for the year 2002 was 15.4%.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses for 2002 were $142.8 million, a
$36.9 million, or 20.5% decrease from $179.7 million
for 2001. The decrease was due to lower amortization costs of
intangibles and no amortization of goodwill due to the
non-amortization provision of FAS 142, and the absence of
significant non-recurring charges resulting from the initial
public offering and recapitalization that were incurred in 2001.
These decreases were partially offset by the inclusion of
$20.7 million of USMR selling, general and administration
costs for the last six months of 2002.

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Research and
Development.Research and development
costs were $27.7 million for 2002, an increase of
$4.0 million, or 16.9%, from the prior year. This increase
resulted from significant spending to develop and build a
wheeled vehicle prototype which could be a model for the wheeled
vehicle platform for the Future Combat Systems program.

Earnings from Foreign
Affiliates.Earnings from foreign
affiliates in the Defense Systems segment for 2002 were
$13.9 million, net of amounts paid to our Turkish partner,
a $3.7 million increase from the prior year. This increase
was primarily due to increased earnings from the joint venture
in Turkey as production continues to ramp up to meet contract
schedules, which more than offset the fact that we stopped
recording our share of earnings from our joint venture in Saudi
Arabia in March 2002 pursuant to an agreement to divest the
Saudi venture.

Net Interest
Expense.Net interest expense for 2002
was $30.4 million, a $20.6 million decrease from the
prior year.

Provision for Income
Taxes.The provision for income taxes
for 2002 was $15.2 million, an increase of
$9.3 million from the prior year. The increase was due to
higher taxable income, net of the impact of the reversal of the
valuation allowance against net deferred tax assets.

Liquidity, Capital Resources and Financial
Condition

Our primary source of liquidity is cash provided
by operations. We have generated annual positive cash flow from
operating activities since the formation of United Defense
Industries, Inc. in October 1997.

Our liquidity requirements depend on a number of
factors, including the timing of production under U.S.
Government and foreign sales contracts. Payments on these
contracts are typically received based on performance milestones
or when a specified percentage of contract expenses are
incurred. These advance payments help reduce the need to finance
working capital. However, working capital needs fluctuate
between periods as a result of changes in program status and the
timing of payments by program. For example, under the recent
production contract related to the Bradley program, the final
payment increment, which is about 10% of the total price for
each vehicle is not received until the U.S. Army fields the
vehicle, which may be significantly later than the time at which
we finish vehicle production.

Cash provided by operating activities for 2003
was $223.8 million, an increase of $44.5 million, or
24.8% from the prior period. The primary reasons for this
increase were higher net income, tax payments less than the tax
provision as we continued to enjoy a net operating loss of
$98.7 million in 2003, and receipt of higher earnings
distributions, net of taxes, from our joint venture in Turkey.

Cash provided by operating activities for 2002
was $179.3 million, an increase of $89.0 million, or
98.5% from the prior period. Increased net income primarily
drove the improved level of cash provided during the period.
Higher cash provided by operating activities was also due to
increased milestone payments from the U.S. Government mainly for
Bradley and VLS programs and advance payments from foreign
customers. This favorable cash variance was partially offset by
growth in trade receivables, due primarily to the timing of
Bradley deliveries and associated payments from the U.S.
government.

Cash used in investing activities was
$43.6 million in 2003 compared with $333.9 in the prior
year period. Capital expenditures of $43.6 million in 2003
were $20.8 million higher than in 2002 due primarily to the
purchase and installation of a drydock in Norfolk, Va.
Expenditures for manufacturing, ship repair, and computer
equipment and software primarily represent the balance of
capital spending and include a full year of USMR normal capital
expenditures versus six months in 2002. Cash used for investing
activities in 2002 included the acquisition of USMR for
$306.9 million (net of $7.3 million cash acquired) and
Cell ITS AB for $4.1 million.

Cash used in investing activities was
$333.9 million in 2002, compared with $22.4 million of
cash used in investing activities in 2001. The increase in cash
used in 2002 was mainly due to the purchase of USMR and Cell ITS
for $306.9 million and $4.1 million, respectively.
Generally our capital expenditures are for replacement of
manufacturing and computer equipment and software.

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On February 5, 2004, we completed the
acquisition of Kaiser Compositek, Inc. and on March 1, 2004
we completed the acquisition of Honolulu Shipyard, Inc. and
Cercom, Inc. An aggregate of approximately $46 million of
our cash is expected to be spent during the first quarter of
2004 for such acquisitions.

With regard to financing activities, on
July 2, 2002, we amended our credit facility to borrow an
additional $300 million for the purchase of USMR and
subsequently repaid $145.6 million. In 2001, cash provided
was primarily the result of the August 2001 refinancing of
indebtedness of $635.3 million and of proceeds from the
sale of common stock of $180.6 million. These funds were
used to make repayments of debt of $474.0 million, dividend
distributions of $381.7 million, and to pay for refinancing
costs and common stock issuance costs totaling
$50.3 million, resulting in a net use of cash of
$88.9 million in 2001.

On August 31, 2001, we refinanced all of our
existing indebtedness. In connection with the refinancing, we
entered into a new senior secured credit facility, consisting of
$600 million in term loans and a $200 million
revolving credit facility. On July 2, 2002 we amended the
credit facility to borrow an additional $300 million for
the purchase of USMR. Borrowings under the senior secured credit
facility are sensitive to changes in interest rates. As of
December 31, 2003, the interest rate on the
$88.8 million Term A borrowings and on the
$488.2 million Term B borrowings was 3.10%. Loans made
pursuant to the Term A and Term B loan facilities require equal
quarterly amortization payments. The payment schedule as of
December 31, 2003 is as follows (in thousands):

|               |       |                        |         |           |  |             |        |             |  |   |         |         |  |   |         |         | 
|-------------- | ----- | ---------------------- | ------- | --------- |  | ----------- | ------ | ----------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|               |       |                       
|               |       | Payments Due by Period
|               |       |                       
|               |       |                        |         | Less than |  |            
|Long-Term Debt |       | Total                  |         | 1 year    |  | 1 - 3 years |        | 4 - 5 years
|               |       |                        |         |           |  |             |        |            
|Term A         |       | $                      | 88,774  |           |  | $           | 25,365 |             |  | $ | 63,409  |         |  | $ |        |        
|Term B         |       |                        | 488,215 |           |  |             | 26,678 |             |  |   | 165,406 |         |  |   | 296,131 |        
|               |       |                        |         |           |  |             |        |             |  |   |         |         |  |   |         |        
|               | Total |                        | $       | 576,989   |  |             | $      | 52,043      |  |   | $       | 228,815 |  |   | $       | 296,131 | 
|               |       |                        |         |           |  |             |        |             |  |   |         |         |  |   |         |        

Based on the current level of operations and
anticipated growth, we believe that cash from operations,
together with other available sources of liquidity, including
borrowings available under the revolving credit facility, will
be sufficient to fund anticipated capital expenditures and
required payments of principal and interest on debt through at
least December 31, 2004. The growth and acquisition
strategy, however, may require substantial additional capital.

Other Factors

From 1997 through 2002, we had sufficient income
tax losses to offset nearly all federal and state income taxes
which would otherwise have applied to our operations. However,
our carry-forward of such losses was exhausted in 2002, with the
result that our income tax provision increased from
$5.9 million in 2001 to $15.2 million in 2002 to
$74.6 million in 2003. Barring unforeseen developments, for
2004 and beyond we expect to pay income taxes at essentially the
full corporate rate, net of credits, of approximately 37.5%, and
to such extent our net income would be reduced in comparison to
years prior to 2003 .

As of December 31, 2003 we held cash and
equivalents totaling approximately $287 million. Given that
growth through further defense sector acquisitions has been an
important element of our overall business strategy, we have been
accumulating cash partly for such use. Given our recently
completed acquisition transactions involving Kaiser Compositek,
Inc., Honolulu Shipyard, Inc. and Cercom, Inc., an aggregate of
approximately $46 million of our cash is expected to be
spent for such purposes during the first quarter of 2004. If we
do not use significant portions of the remaining cash balance
for further acquisitions, such funds may instead be used for
such purposes of debt prepayment and/or the repurchase of common
stock. Depending on the nature and extent of our choices in such
respects, our financial performance and/or the returns received
by our stockholders may differ from those in prior years. Given
the current dynamic conditions in our industry and the range of
significant variables which we would expect to bear on such
choices, we cannot yet ascertain the impact of such matters in
2004 or beyond.

Effective December 31, 2003, we lowered the
discount rate we use for actuarially determining pension and
other retirement benefit costs from 7.0% to 6.5%. Consequently,
the estimated expense for retirement benefits is expected to
increase by about $3.6 million in 2004 from the
$8.8 million that was incurred in 2003.

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The actual number could differ from this estimate
dependent on staffing levels, asset performance and other
factors.


Contractual Obligations

The following table summarizes our future
payments due, aggregated by type of contractual obligation, at
December 31, 2003:

|                          |       |                        |       |          |  |           |      |           |  |            |       |       |  |   |       |       |  |   |      |       | 
|------------------------- | ----- | ---------------------- | ----- | -------- |  | --------- | ---- | --------- |  | ---------- | ----- | ----- |  | - | ----- | ----- |  | - | ---- | ----- | 
|                          |       |                       
|                          |       | Payments due by period
|                          |       |                       
|                          |       |                        |       | 2009 and
|                          |       | Total                  |       | 2004     |  | 2005-2006 |      | 2007-2008 |  | thereafter
|                          |       |                        |       |          |  |           |      |           |  |           
|                          |       |                       
|                          |       | (in millions)         
|Long Term Debt            |       | $                      | 577.0 |          |  | $         | 52.1 |           |  | $          | 104.1 |       |  | $ | 322.1 |       |  | $ | 98.7 |      
|Capital Lease Obligations |       |                        |      |          |  |           |     |           |  |            |      |       |  |   |      |       |  |   |     |      
|Operating Leases          |       |                        | 87.9  |          |  |           | 17.2 |           |  |            | 19.9  |       |  |   | 15.3  |       |  |   | 35.5 |      
|Purchase Obligations (a)  |       |                        |      |          |  |           |     |           |  |            |      |       |  |   |      |       |  |   |     |      
|                          |       |                        |       |          |  |           |      |           |  |            |       |       |  |   |       |       |  |   |      |      
|                          | Total |                        | $     | 664.9    |  |           | $    | 69.3      |  |            | $     | 124.0 |  |   | $     | 337.4 |  |   | $    | 134.2 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Although we have significant other purchase
    obligations, most commonly in the form of purchase orders, the
    timing of the purchase is often variable rather than specific
    and the payments due are substantially reimbursed by the
    customer through overhead rates, progress payments, milestone
    payments, and cost reimbursable contract terms at substantially
    the same time as payment is made. Accordingly, these obligations
    are not included in the table above.

Commercial Commitments

Commercial commitments are funding commitments
that could potentially require us to perform in the event of
demands by third parties or if other contingent events occur. We
have a committed credit facility in place providing, in part,
for a $200.0 million revolving line of credit; further
providing for loans and letters of credit. As of
December 31, 2003, $85.5 million was available under this
revolving line of credit and we had standby letters of credit of
$114.5 million.






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    about Market Risk

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

Forward
Currency Exchange Risk

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

Interest
Rate Risk

Borrowings under our senior secured credit
facility are sensitive to changes in interest rates. As of
December 31, 2003 the weighted average interest rate on the
$88.8 million Term A borrowings and on the
$488.2 million Term B borrowings was 3.10%. Loans made
pursuant to the Term A loan facility require equal quarterly
amortization payments of $6.3 million beginning on
March 31, 2004, with a final payment due on August 13,
2007. Loans made pursuant to the Term B facility require
quarterly amortization payments of $6.7 million beginning on
March 31, 2004 until June 30, 2007, and
$49.4 million each quarter thereafter with a final payment
due on August 13, 2009. The weighted average interest rate
on all of our borrowings outstanding under the senior secured
credit facility as of December 31, 2003 was 3.10% per annum.

In January 2002, we entered into an interest
rate protection agreement to mitigate risks associated with
variable interest rate borrowings under our senior secured
credit facility. The specified contract amount of this interest
rate swap agreement is $173 million. The agreement entitles
us to pay a base interest rate of 3.45%, in

34



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return for the right to receive a floating
interest rate which is based on three-month LIBOR as of each
quarterly measurement date. In the event the three-month LIBOR
at the measurement date exceeds 6%, the base interest rate is
adjusted to the then effective LIBOR up to a maximum of 8%. USMR
had also entered into an interest rate protection agreement to
mitigate risks associated with variable interest rate
borrowings. The specified amount of the agreement is
$20 million which matured on January 29, 2004. The
agreement entitled us to pay a base interest rate of 3.77% in
return for the right to receive a floating interest rate that
was based on three month LIBOR as of each quarterly measurement
date. The net cash amounts paid or received on these agreements
are accrued and recognized as an adjustment to interest expense.







|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 8. | Consolidated Financial Statements and
    Supplementary Data

The following consolidated financial statements
of United Defense Industries, Inc. are provided in response to
the requirements of Item 8:

UNITED DEFENSE INDUSTRIES, INC.

|                                                                                                                                  |  |  |     | 
|--------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Auditors (Ernst &
    Young LLP)                                                                            |  |  | F-1 | 
|Independent Auditors Report (SERBEST
    MUHASEBECILIK MALI MUSAVIRLIK ANONIM SIRKETI, Member of
    Andersen Worldwide)         |  |  | F-2 | 
|Independent Auditors Report (Arthur
    Andersen & Co)                                                                           |  |  | F-3 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                                  |  |  | F-4 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2001, 2002 and 2003                                    |  |  | F-5 | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the Years ended
    December 31, 2001, 2002 and 2003 |  |  | F-6 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                                    |  |  | F-7 | 
|Notes to Consolidated Financial Statements                                                                                        |  |  | F-8 | 

35



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors

United Defense Industries, Inc.


We have audited the accompanying consolidated
balance sheets of United Defense Industries, Inc. as of
December 31, 2002 and 2003, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for each of the three years in the period ended
December 31, 2003. Our audits also included the financial
statement schedule in Item 15. These financial statements
and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. The 2001
financial statements of the Companys Turkish and Saudi
Arabian Joint Ventures (entities in which the Company has 51%
interests) and, as to the Saudi Arabian Joint Venture, whose
stand-alone financial statements are presented in accordance
with accounting principles generally accepted in Saudi Arabia,
have been audited by other auditors who have ceased operations
and whose reports dated January 24, 2002 and
February 17, 2002, respectively, have been furnished to us;
insofar as our opinion on the 2001 consolidated financial
statements relates to data included for the Turkish and Saudi
Arabian Joint Ventures used by the Companys management for
equity accounting purposes (before conversion to accounting
principles generally accepted in the United States as to the
Saudi Arabian Joint Venture), it is based solely on their
reports.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation (including the conversion of
the financial statements of the Saudi Arabian Joint Venture to
accounting principles generally accepted in the United States).
We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and, for 2001
the reports of other auditors, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of United Defense Industries,
Inc. at December 31, 2002 and 2003, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.

As discussed in Note 2 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill and intangible assets.

/s/ Ernst & Young LLP

McLean, Virginia

February 13, 2004


F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors of

FNSS SAVUNMA SISTEMLERI ANONIM SIRKETI:


We have audited the balance sheets of FNSS
Savunma Sistemleri Anonim Sirketi (a Turkish
corporation  the Company) as of December 31,
2001 and 2000, and the related statements of operations,
shareholders equity and cash flows for the years then
ended (not included herein). These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above (not included herein) present fairly, in all material
respects, the financial position of FNSS Savunma Sistemleri
Anonim Sirketi as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States.



| |                                                         
| | --------------------------------------------------------
| | /s/ A.A. AKTIF ANALIZ                                   
| | SERBEST MUHASEBECILIK MALI MUSAVIRLIK ANONIM
    SIRKETI
| | Member of Andersen Worldwide                            

Ankara, Turkey

January 24, 2002


Legend for Audit Opinion

This is a copy of the audit report previously
issued by SERBEST MUHASEBECILIK MALI MUSAVIRLIK ANONIM SIRKETI
(Member of Andersen Worldwide) in connection with United Defense
Industries, Inc.s filing of its Annual Report on
Form 10-K for the year ended December 31, 2001. This
audit report has not been reissued by SERBEST MUHASEBECILIK MALI
MUSAVIRLIK ANONIM SIRKETI (Member of Andersen Worldwide) in
connection with this Annual Report on Form 10-K. See
Exhibit 23.2 for further discussion.

F-2



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##### Table of Contents



To: The Partners of

UNITED DEFENSE SYSTEMS


We have audited the balance sheet of UNITED
DEFENSE SYSTEMS (a Saudi limited liability Company) as of
December 31, 2001 and the related statements of income,
changes in partners equity and cash flows for the year
then ended, and the notes from 1 to 12 which are an integral
part of these financial statements (not included herein). These
financial statements are the responsibility of the
Companys management and have been prepared by them in
accordance with Article (175) of the Companies Regulations.
Our responsibility is to express our opinion on these financial
statements based on our audit and the information and
explanations we obtained which we considered necessary for the
purposes of our audit.

We conducted our audit in accordance with
generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statements presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred
to above (not included herein):



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Present fairly, in all material respects, the
    financial position of United Defense Systems as of
    December 31, 2001 and the results of its operations and its
    cash flows for the year then ended based on the presentation and
    disclosure of the information included in the financial
    statements and in conformity with generally accepted accounting
    principles in Saudi Arabia suitable to the Companys
    operations as summarized in Note 2.
|
| | 2. | Comply with the financial statement preparation
    and presentation requirement of the Commercial Code and the
    Companys by-laws and are computerized in accordance with
    the related commercial books regulations and are maintained in
    Arabic in the Kingdom of Saudi Arabia.                                                                                                                                                                               

/s/ ARTHUR ANDERSEN & CO.

5 Dhu Al-Qaadah 1422H (February 17,
2002)

Riyadh, Saudi Arabia


Legend for Audit Opinion

This is a copy of the audit report previously
issued by Arthur Andersen & Co. in connection with United
Defense Industries, Inc.s filing of its Annual Report on
Form 10-K for the year ended December 31, 2001. This
audit report has not been reissued by Arthur Andersen & Co.
in connection with this Annual Report on Form 10-K. See
Exhibit 23.3 for further discussion.

F-3



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UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |         |           | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------- | ------------ | --------- | - | ------- | ------- | --------- | 
|                                                    |                                                                                                                                                                                   | December 31,                                             |         | December 31,
|                                                    |                                                                                                                                                                                   | 2002                                                     |         | 2003        
|                                                    |                                                                                                                                                                                   |                                                          |         |             
|                                                    |                                                                                                                                                                                   |                                                         
|                                                    |                                                                                                                                                                                   | (In thousands)                                          
|ASSETS                                             
|Current assets:                                     |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    | Cash and cash equivalents                                                                                                                                                         |                                                          | $       | 106,802      |           |   | $       | 286,730 |          
|                                                    | Trade receivables, net                                                                                                                                                            |                                                          |         | 192,166      |           |   |         | 168,625 |          
|                                                    | Long-term contract inventories                                                                                                                                                    |                                                          |         | 399,189      |           |   |         | 389,394 |          
|                                                    | Deferred tax asset                                                                                                                                                                |                                                          |         | 25,436       |           |   |         |        |          
|                                                    | Other current assets                                                                                                                                                              |                                                          |         | 15,458       |           |   |         | 20,127  |          
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    |                                                                                                                                                                                   | Total current assets                                     |         |              | 739,051   |   |         |         | 864,876   | 
|Property, plant and equipment, net                  |                                                                                                                                                                                   |                                                          | 170,378 |              |           |   | 181,283 |        
|Goodwill, net                                       |                                                                                                                                                                                   |                                                          | 341,962 |              |           |   | 342,843 |        
|Intangible assets, net                              |                                                                                                                                                                                   |                                                          | 32,624  |              |           |   | 14,222  |        
|Prepaid pension and postretirement
    benefit cost |                                                                                                                                                                                   |                                                          | 120,987 |              |           |   | 128,997 |        
|Restricted cash                                     |                                                                                                                                                                                   |                                                          | 10,120  |              |           |   | 12,244  |        
|Other assets                                        |                                                                                                                                                                                   |                                                          | 38,848  |              |           |   | 46,699  |        
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    |                                                                                                                                                                                   | Total assets                                             |         | $            | 1,453,970 |   |         | $       | 1,591,164 | 
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT) 
|Current liabilities:                                |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    | Current portion of long-term debt                                                                                                                                                 |                                                          | $       | 13,011       |           |   | $       | 52,043  |          
|                                                    | Accounts payable, trade and other                                                                                                                                                 |                                                          |         | 121,801      |           |   |         | 124,502 |          
|                                                    | Advanced payments                                                                                                                                                                 |                                                          |         | 491,217      |           |   |         | 462,304 |          
|                                                    | Deferred tax liability                                                                                                                                                            |                                                          |         |             |           |   |         | 16,280  |          
|                                                    | Accrued and other liabilities                                                                                                                                                     |                                                          |         | 140,914      |           |   |         | 133,963 |          
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    |                                                                                                                                                                                   | Total current liabilities                                |         |              | 766,943   |   |         |         | 789,092   | 
|Long-term liabilities:                              |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    | Long-term debt, net of current portion                                                                                                                                            |                                                          |         | 576,989      |           |   |         | 524,946 |          
|                                                    | Accrued pension and postretirement
    benefit cost                                                                                                                               |                                                          |         | 51,964       |           |   |         | 51,538  |          
|                                                    | Deferred tax liability                                                                                                                                                            |                                                          |         | 15,124       |           |   |         | 17,695  |          
|                                                    | Other liabilities                                                                                                                                                                 |                                                          |         | 72,655       |           |   |         | 80,812  |          
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    |                                                                                                                                                                                   | Total liabilities                                        |         |              | 1,483,675 |   |         |         | 1,464,083 | 
|Commitments and contingencies                       |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|Stockholders (deficit) equity:                     |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    | Common stock $.01 par value, 150,000,000 shares
    authorized; 51,695,114 and 52,220,189 issued and outstanding at
    December 31, 2002 and December 31,
    2003, respectively |                                                          |         | 517          |           |   |         | 522     |          
|                                                    | Additional paid-in-capital                                                                                                                                                        |                                                          |         | 177,740      |           |   |         | 183,337 |          
|                                                    | Deferred compensation                                                                                                                                                             |                                                          |         | (547         | )         |   |         | (197    | )        
|                                                    | Retained deficit                                                                                                                                                                  |                                                          |         | (194,952     | )         |   |         | (54,304 | )        
|                                                    | Accumulated other comprehensive loss                                                                                                                                              |                                                          |         | (12,463      | )         |   |         | (2,277  | )        
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    |                                                                                                                                                                                   | Total stockholders (deficit) equity                     |         |              | (29,705   | ) |         |         | 127,081   | 
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        
|                                                    |                                                                                                                                                                                   | Total liabilities and stockholders equity
    (deficit) |         | $            | 1,453,970 |   |         | $       | 1,591,164 | 
|                                                    |                                                                                                                                                                                   |                                                          |         |              |           |   |         |        

See accompanying notes.

F-4



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UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |           |           |  
|---------------------------------- | ---------------------------------------------------------------- | ---------------------- | ------ | --------- | --------- | ---- | ------- | --------- | --------- | - | ------- | --------- | --------- | -
|                                   |                                                                  |                       
|                                   |                                                                  | Year ended December 31
|                                   |                                                                  |                       
|                                   |                                                                  | 2001                   |        | 2002      |           | 2003
|                                   |                                                                  |                        |        |           |           |     
|                                   |                                                                  |                       
|                                   |                                                                  | (In thousands)        
|Revenue:                           |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   | Sales                                                            |                        | $      | 1,318,538 |           |      | $       | 1,725,346 |           |   | $       | 2,052,591 |          
|Costs and expenses:                |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   | Cost of sales                                                    |                        |        | 1,059,687 |           |      |         | 1,388,616 |           |   |         | 1,639,706 |          
|                                   | Selling, general and administrative expenses                     |                        |        | 179,714   |           |      |         | 142,806   |           |   |         | 163,465   |          
|                                   | Research and development                                         |                        |        | 23,666    |           |      |         | 27,673    |           |   |         | 29,810    |          
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   |                                                                  | Total expenses         |        |           | 1,263,067 |      |         |           | 1,559,095 |   |         |           | 1,832,981 |  
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|Income from operations             |                                                                  |                        | 55,471 |           |           |      | 166,251 |           |           |   | 219,610 |          
|Other income (expense):            |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   | Earnings (loss) related to investments in
    foreign affiliates |                        |        | 10,156    |           |      |         | 13,874    |           |   |         | 19,758    |          
|                                   | Interest income                                                  |                        |        | 5,781     |           |      |         | 4,218     |           |   |         | 3,911     |          
|                                   | Interest expense                                                 |                        |        | (56,732   | )         |      |         | (34,608   | )         |   |         | (28,030   | )        
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   |                                                                  | Total other expense    |        |           | (40,795   | )    |         |           | (16,516   | ) |         |           | (4,361    | )
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|Income before income taxes         |                                                                  |                        | 14,676 |           |           |      | 149,735 |           |           |   | 215,249 |          
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|Provision for income taxes         |                                                                  |                        | 5,900  |           |           |      | 15,159  |           |           |   | 74,601  |          
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   |                                                                  | Net income             |        | $         | 8,776     |      |         | $         | 134,576   |   |         | $         | 140,648   |  
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|Earnings per common sharebasic:   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   |                                                                  | Net income             |        | $         | 0.21      |      |         | $         | 2.62      |   |         | $         | 2.71      |  
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|Earnings per common sharediluted: |                                                                  |                        |        |           |           |      |         |           |           |   |         |          
|                                   |                                                                  | Net income             |        | $         | 0.20      |      |         | $         | 2.55      |   |         | $         | 2.66      |  
|                                   |                                                                  |                        |        |           |           |      |         |           |           |   |         |          

See accompanying notes.

F-5



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UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY (DEFICIT)

|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | -------------- | --- | ---------- |  | ------------ | ------- | -------- |  | ------------- | ---- | ----- |  | - | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                                  |  |                |     |            |  |              |         |          |  | Accumulated   |      |      
|                                                                                  |  |                |     | Additional |  |              |         |          |  | Other         |      |      
|                                                                                  |  | Common         |     | Paid-In    |  | Deferred     |         | Retained |  | Comprehensive |      |      
|                                                                                  |  | Stock          |     | Capital    |  | Compensation |         | Deficit  |  | (Loss)/Gain   |      | Total
|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |      
|                                                                                  |  |               
|                                                                                  |  | (In thousands)
|Balance, December 31, 2001                                                        |  | $              | 509 |            |  | $            | 167,457 |          |  | $             | (648 | )     |  | $ | (329,528 | ) |  | $ | (4,156  | ) |  | $ | (166,366 | )
|Amortization of deferred stock compensation                                       |  |                |    |            |  |              |        |          |  |               | 101  |       |  |   |         |   |  |   |        |   |  |   | 101      |  
|Exercise of stock options                                                         |  |                | 8   |            |  |              | 3,515   |          |  |               |     |       |  |   |         |   |  |   |        |   |  |   | 3,523    |  
|Tax benefit from stock options                                                    |  |                |     |            |  |              | 6,768   |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 6,768    |  
|Net foreign currency translation                                                  |  |                |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 4,400   |   |  |   | 4,400    |  
|Cumulative effect of change in accounting
    principle  foreign currency hedges |  |                |     |            |  |              |        |          |  |               |     |       |  |   |          |   |  |   |         |   |  |   |         |  
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |                |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | (2,165  | ) |  |   | (2,165   | )
|Minimum pension liability, net of tax                                             |  |                |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | (10,542 | ) |  |   | (10,542  | )
|Net income for the year ended
    December 31, 2002                               |  |                |    |            |  |              |        |          |  |               |     |       |  |   | 134,576  |   |  |   |        |   |  |   | 134,576  |  
|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |          |  
|Total comprehensive income                                                        |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 126,269  |  
|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |          |  
|Balance, December 31, 2002                                                        |  | $              | 517 |            |  | $            | 177,740 |          |  | $             | (547 | )     |  | $ | (194,952 | ) |  | $ | (12,463 | ) |  | $ | (29,705  | )
|Amortization of deferred stock compensation                                       |  |                |    |            |  |              |        |          |  |               | 350  |       |  |   |         |   |  |   |        |   |  |   | 350      |  
|Exercise of stock options                                                         |  |                | 5   |            |  |              | 2,847   |          |  |               |     |       |  |   |         |   |  |   |        |   |  |   | 2,852    |  
|Tax benefit from stock options                                                    |  |                |     |            |  |              | 2,750   |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 2,750    |  
|Net foreign currency translation                                                  |  |                |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 2,371   |   |  |   | 2,371    |  
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |                |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 478     |   |  |   | 478      |  
|Minimum pension liability, net of tax                                             |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   | 7,337   |   |  |   | 7,337    |  
|Net income for the twelve months ended
    December 31, 2003                      |  |                |    |            |  |              |        |          |  |               |     |       |  |   | 140,648  |   |  |   |        |   |  |   | 140,648  |  
|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |          |  
|Total comprehensive income                                                        |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 150,834  |  
|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |          |  
|Balance, December 31, 2003                                                        |  | $              | 522 |            |  | $            | 183,337 |          |  | $             | (197 | )     |  | $ | (54,304  | ) |  | $ | (2,277  | ) |  | $ | 127,081  |  
|                                                                                  |  |                |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |          |  

See accompanying notes.

F-6



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |         |        | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------ | ---- | -------- | -------- | ------ | - | ------- | ------- | ------ | 
|                                                                                  |                                                             |                                           
|                                                                                  |                                                             | Year ended December 31,                   
|                                                                                  |                                                             |                                           
|                                                                                  |                                                             | 2001                                       |         | 2002     |        | 2003
|                                                                                  |                                                             |                                            |         |          |        |     
|                                                                                  |                                                             |                                           
|                                                                                  |                                                             | (In thousands)                            
|Operating activities                                                              |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Net income                                                                        |                                                             | $                                          | 8,776   |          |        | $    | 134,576  |          |        | $ | 140,648 |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|                                                                                  |                                                             | Depreciation                               |         |          | 22,663 |      |          |          | 25,346 |   |         |         | 27,853 | 
|                                                                                  |                                                             | Amortization of software                   |         |          | 6,112  |      |          |          | 5,375  |   |         |         | 4,852  | 
|                                                                                  |                                                             | Amortization of other intangibles          |         |          | 40,483 |      |          |          | 10,533 |   |         |         | 15,297 | 
|                                                                                  |                                                             | Amortization of financing costs            |         |          | 3,938  |      |          |          | 3,414  |   |         |         | 3,283  | 
|                                                                                  |                                                             | Net loss from early extinguishment of debt |         |          | 28,246 |      |          |          | 2,833  |   |         |         |       | 
|                                                                                  |                                                             | Deferred tax provision                     |         |          |       |      |          |          | (1,239 | ) |         |         | 43,317 | 
|Changes in assets and liabilities:                                                |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|                                                                                  | Trade receivables                                           |                                            |         | 31,318   |        |      |          | (53,164  | )      |   |         | 28,253  |       
|                                                                                  | Inventories                                                 |                                            |         | (119,606 | )      |      |          | (4,711   | )      |   |         | 13,106  |       
|                                                                                  | Other assets                                                |                                            |         | (4,927   | )      |      |          | (3,716   | )      |   |         | (13,531 | )     
|                                                                                  | Prepaid pension and postretirement
    benefit cost         |                                            |         | (4,728   | )      |      |          | 6,841    |        |   |         | (8,010  | )     
|                                                                                  | Accounts payable, trade and other                           |                                            |         | 2,156    |        |      |          | 20,335   |        |   |         | (2,241  | )     
|                                                                                  | Advanced payments                                           |                                            |         | 52,377   |        |      |          | 58,867   |        |   |         | (35,431 | )     
|                                                                                  | Accrued and other liabilities                               |                                            |         | 29,541   |        |      |          | (10,469  | )      |   |         | 9,486   |       
|                                                                                  | Accrued pension and postretirement
    benefit cost         |                                            |         | (6,028   | )      |      |          | (15,522  | )      |   |         | (3,116  | )     
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Cash provided by operating activities                                             |                                                             |                                            | 90,321  |          |        |      | 179,299  |          |        |   | 223,766 |        
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Investing activities                                                              |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|                                                                                  | Capital expenditures                                        |                                            |         | (22,375  | )      |      |          | (22,772  | )      |   |         | (43,610 | )     
|                                                                                  | Purchase of Cell ITS, net of $0.2 million
    cash acquired |                                            |         |         |        |      |          | (4,135   | )      |   |         |        |       
|                                                                                  | Purchase of USMR, net of $7.3 million
    cash acquired     |                                            |         |          |        |      |          | (306,949 | )      |   |         |        |       
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Cash used in investing activities                                                 |                                                             |                                            | (22,375 | )        |        |      | (333,856 | )        |        |   | (43,610 | )      
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Financing activities                                                              |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|                                                                                  | Payments on long-term debt                                  |                                            |         | (473,972 | )      |      |          | (140,900 | )      |   |         | (13,011 | )     
|                                                                                  | Proceeds from senior secured facility                       |                                            |         | 635,295  |        |      |          | 300,000  |        |   |         |        |       
|                                                                                  | Payment of premium on retirement of
    subordinated debt   |                                            |         | (18,074  | )      |      |          |         |        |   |         |        |       
|                                                                                  | Proceeds from sale of common stock                          |                                            |         | 180,603  |        |      |          | 3,523    |        |   |         | 2,852   |       
|                                                                                  | Issuance costs for sale of common stock                     |                                            |         | (13,156  | )      |      |          |         |        |   |         |        |       
|                                                                                  | Payment of stockholders loans                              |                                            |         | 1,236    |        |      |          |         |        |   |         |        |       
|                                                                                  | Dividend payments                                           |                                            |         | (381,732 | )      |      |          |         |        |   |         |        |       
|                                                                                  | Payments for financing and transaction costs                |                                            |         | (19,058  | )      |      |          | (5,470   | )      |   |         |        |       
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Cash used in financing activities                                                 |                                                             |                                            | (88,858 | )        |        |      | 157,153  |          |        |   | (10,159 | )      
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Effect of exchange rate changes on cash                                           |                                                             |                                            | (1,910  | )        |        |      | 13,671   |          |        |   | 9,931   |        
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Increase in cash and cash equivalents                                             |                                                             |                                            | (22,822 | )        |        |      | 16,267   |          |        |   | 179,928 |        
|Cash and cash equivalents, beginning of year                                      |                                                             |                                            | 113,357 |          |        |      | 90,535   |          |        |   | 106,802 |        
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        
|Cash and cash equivalents, end of year                                            |                                                             | $                                          | 90,535  |          |        | $    | 106,802  |          |        | $ | 286,730 |        
|                                                                                  |                                                             |                                            |         |          |        |      |          |          |        |   |         |        

See accompanying notes.

F-7



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

United Defense Industries, Inc. is a global
leader in the design, development and production of combat
vehicles, artillery systems, naval guns, missile launchers and
precision munitions used by the U.S. Department of Defense and
allied militaries around the world, and through United States
Marine Repair, Inc. (USMR), is the leading provider
of non-nuclear ship repair, modernization and conversion
services to the U.S. Navy and related agencies. We believe our
operating results are driven principally by the business
activities related to our major military programs. Currently we
are the sole-source, prime contractor to the U.S. Department of
Defense for many of these programs. With the acquisition of USMR
on July 2, 2002, we now operate in two business segments:
Defense Systems and Ship Repair and Maintenance. The Defense
Systems program portfolio consists of a balanced mix of weapon
systems development, production, upgrade and life cycle support
programs. The Ship Repair and Maintenance business portfolio
consists of ship repair, maintenance, and modernization service
programs.

Our headquarters office is located in Arlington,
Virginia. Our operations are primarily situated in the United
States, with the exception of our Bofors subsidiary in Sweden
and our joint venture in Turkey.

The financial statements include our accounts and
the accounts of our subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform to the current year presentation. Such amounts
include the reclassification of extraordinary items in
accordance with FAS 145. We reclassified $28.2 million and
$1.7 million of extraordinary items and the related tax
effects to interest expense for the years ended
December 31, 2001 and 2002, respectively.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. In particular, estimates are used for
contract costs and revenues used in the earnings recognition
process, accruals related to environmental and other
liabilities, allowance for doubtful accounts, and pension and
other retirement costs. Actual results could differ from those
estimates.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of investments
with initial maturities of three months or less. The Company
invests a majority of its available cash in money market
securities with primarily one high credit quality financial
institution.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment are recorded at
cost. Depreciation is provided principally on the
sum-of-the-years digits, straight-line and double-declining
balance methods over estimated useful lives of the assets
(computer equipment and software  three to five
years; land improvements -twenty years; buildings 
twenty to thirty-five years; dry docks and piers -fifteen to
thirty years; and machinery and equipment two to twelve
years).

Maintenance and repairs are expensed as incurred.
Expenditures that extend the useful life of property, plant and
equipment or increase productivity are capitalized and
depreciated.

F-8



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Long-lived Assets

We evaluate our long-lived assets to be held and
used, including intangible assets subject to amortization, to
determine whether any events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. We base our evaluation on such impairment
indicators as the nature of the assets, the future economic
benefit of the assets, any historical or future profitability
measurements, the likelihood of sale or other significant
disposition before the end of its previously estimated useful
life, as well as other external market conditions or factors
that may be present. If such impairment indicators are present
or other factors exist that indicate that the carrying amount of
the asset may not be recoverable, we would use an estimate of
the undiscounted value of expected future cash flows to
determine whether the asset is recoverable and measure the
amount of any impairment as the difference between the carrying
amount of the asset and its estimated fair value. The fair value
would be estimated using valuation techniques such as market
prices for similar assets or discounted future cash flows.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill is
not amortized but is tested for impairment on an annual basis
and more frequently if indicators of impairment exist. In
assessing impairment of goodwill, we compare the estimated fair
value of each reporting unit to the carrying value of that
reporting unit as of October 1 our annual testing date. If
the carrying value is greater than the fair value of the
reporting unit, an impairment charge is recorded in accordance
with FAS 142. We have completed the required annual impairment
test of goodwill as of October 1, 2003 and determined that there
is no impairment of goodwill. Intangible assets are amortized on
the pattern in which the economic benefits of the intangible
asset are consumed or otherwise used up. If indicators of
impairment exist for intangible assets and future cash flows
were not expected to be sufficient to recover the assets
carrying amount, an impairment loss would be charged to expense
in the period identified. The following table summarizes the pro
forma net income effect of applying the provisions of
FAS 142.

|                                   |                                |                              |        |      |  |      |         |      |  |   |         |      | 
|---------------------------------- | ------------------------------ | ---------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                   |                                |                             
|                                   |                                | December 31                 
|                                   |                                |                             
|                                   |                                | 2001                         |        | 2002 |  | 2003
|                                   |                                |                              |        |      |  |     
|                                   |                                |                             
|                                   |                                | (In thousands, except shares
|                                   |                                | and per share data)         
|Reported net income                |                                | $                            | 8,776  |      |  | $    | 134,576 |      |  | $ | 140,648 |     
|Add back goodwill amortization     |                                |                              | 10,305 |      |  |      |        |      |  |   |        |     
|                                   |                                |                              |        |      |  |      |         |      |  |   |         |     
|Adjusted net income                |                                | $                            | 19,081 |      |  | $    | 134,576 |      |  | $ | 140,648 |     
|                                   |                                |                              |        |      |  |      |         |      |  |   |         |     
|Earnings per common sharebasic:   |                                |                              |        |      |  |      |         |      |  |   |         |     
|                                   | Reported net income            |                              | $      | 0.21 |  |      | $       | 2.62 |  |   | $       | 2.71 | 
|                                   | Add back goodwill amortization |                              | $      | 0.25 |  |      | $       |     |  |   | $       |     | 
|                                   |                                |                              |        |      |  |      |         |      |  |   |         |     
|                                   | Adjusted net income            |                              | $      | 0.46 |  |      | $       | 2.62 |  |   | $       | 2.71 | 
|                                   |                                |                              |        |      |  |      |         |      |  |   |         |     
|Earnings per common sharediluted: |                                |                              |        |      |  |      |         |      |  |   |         |     
|                                   | Reported net income            |                              | $      | 0.20 |  |      | $       | 2.55 |  |   | $       | 2.66 | 
|                                   | Add back goodwill amortization |                              | $      | 0.24 |  |      | $       |     |  |   | $       |     | 
|                                   |                                |                              |        |      |  |      |         |      |  |   |         |     
|                                   | Adjusted net income            |                              | $      | 0.44 |  |      | $       | 2.55 |  |   | $       | 2.66 | 
|                                   |                                |                              |        |      |  |      |         |      |  |   |         |     



| |                                               
| | ----------------------------------------------
| | Equity Investments in Affiliated
    Companies

Our investments in our 51% owned foreign joint
venture in Turkey, FNSS Savunma Sistemleri A.S. and the former
joint venture in Saudi Arabia are accounted for using the equity
method because we do not control them due to our partners
veto rights over most operating decisions, although we do have
the ability to exercise influence over their operating and
financial policies. Our share of the earnings from our
investments in Turkey

F-9



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

plus our former joint venture in Saudi Arabia was
$10.2 million, $13.9 million and $19.8 million
for the years ended December 31, 2001, 2002 and 2003,
respectively.

The following table reports financial results
from the joint ventures in Turkey and Saudi Arabia:

|                      |  |                |         |      |  |   |         | 
|--------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                      |  |               
|                      |  | December 31,  
|                      |  |               
|                      |  | 2002           |         | 2003
|                      |  |                |         |     
|                      |  |               
|                      |  | (in thousands)
|Current assets        |  | $              | 230,640 |      |  | $ | 174,023 | 
|Non-current assets    |  |                | 34,538  |      |  |   | 43,790  | 
|Current liabilities   |  |                | 216,596 |      |  |   | 184,816 | 
|Long-term liabilities |  |                | 3,850   |      |  |   |        | 

|              |  |              |        |      |  |      |         |  |  |   |         | 
|------------- |  | ------------ | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|              |  |             
|              |  | December 31,
|              |  |             
|              |  | 2001         |        | 2002 |  | 2003
|              |  |              |        |      |  |     
|Sales         |  | $            | 71,337 |      |  | $    | 198,123 |  |  | $ | 220,206 | 
|Cost of sales |  |              | 38,822 |      |  |      | 116,000 |  |  |   | 130,100 | 
|Net income    |  |              | 19,129 |      |  |      | 37,106  |  |  |   | 36,228  | 



| |                
| | ---------------
| | Restricted Cash

Restricted cash consists mainly of cash held in
escrow to support letters of credit as required under the Bofors
purchase agreement. The restriction will expire upon release of
the former owners of Bofors as guarantors under the letters of
credit.



| |                         
| | ------------------------
| | Deferred Financing Costs

The costs associated with obtaining financing
have been deferred and are amortized over the terms of the
underlying loan agreements using a method that approximates the
effective interest method. Deferred financing fee expense is
classified in interest expense and totaled $14.1 million,
$5.1 million, and $3.3 million for the years ended
December 31, 2001 and 2002 and 2003, respectively. The
deferred financing charges related to the unamortized deferred
financing costs associated with early extinguishment of debt are
included in the deferred financing fee expense.



| |                  
| | -----------------
| | Advanced Payments

Advanced payments by customers for deposits on
orders not yet billed and progress payments on
contracts-in-progress are recorded as current liabilities. The
payments are recorded as revenue when certain criteria are met
as described in the Revenue and Profit Recognition for
Contracts-in-Progress accounting policy.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The financial position and operating results of
our foreign operations are consolidated using the local
currencies of the countries in which they are located as the
functional currency. The balance sheet accounts are translated
at exchange rates in effect at the end of the period, and income
statement accounts are translated at average exchange rates
during the period. The resulting translation gains and losses
are included as a separate component of stockholders
equity. There was $2.5 million and $4.9 million of
gains included in accumulated other comprehensive income from
currency translation adjustments as of December 31, 2002
and 2003, respectively. Foreign currency transaction gains and
losses are included in our income statement in the period in
which they occur.

F-10



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | Inventories

The majority of our inventories are related to
contracts in process and are recorded at cost determined on a
last-in, first-out (LIFO) basis. Inventory costs
include manufacturing overhead. The current replacement cost of
LIFO inventories exceeded their recorded values by approximately
$16.1 million at December 31, 2001, $17.2 million
at December 31, 2002 and $23.6 million at
December 31, 2003.



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

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

At December 31, 2002 and 2003, included in
trade receivables are $38.3 million and $21.1 million
related to contractual revenue that had not been billed to
customers. These amounts are generally billable within the
following year. Receivables include U.S. Government holdbacks
for in-process ship repair and maintenance contracts of
$3.9 million and $6.5 million at December 31,
2002 and 2003. The allowance for doubtful accounts was
$2.3 million and $2.8 million at December 31, 2002 and
2003.



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

At December 31, 2003, we had a stock-based
employee compensation plan, which is described more fully in
Note 10. We account for the plan under the recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, we record compensation
expense over the vesting period in our consolidated statements
of operations if the option price is less than fair value of the
common stock at the date an option is granted. The compensation
recorded in the financial statements reflects the amortization
based on vesting of stock options. The following table
illustrates the effect on net income and earnings per share if
we had elected to apply the fair value recognition provisions

F-11



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | December 31                          
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | 2001                                  |        | 2002 |  | 2003
|                                                                                                                                                    |                       |                                       |        |      |  |     
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | (In thousands, except per share data)
|Reported net income                                                                                                                                 |                       | $                                     | 8,776  |      |  | $    | 134,576 |      |  | $ | 140,648 |     
|Add back : Compensation expense recorded, net of
    related tax effects                                                                            |                       |                                       | 162    |      |  |      | 61      |      |  |   | 466     |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                                       | (1,438 | )    |  |      | (878    | )    |  |   | (4,363  | )   
|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |     
|Pro forma net income                                                                                                                                |                       | $                                     | 7,500  |      |  | $    | 133,759 |      |  | $ | 136,751 |     
|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |     
|Earnings per share:                                                                                                                                 |                       |                                       |        |      |  |      |         |      |  |   |         |     
|                                                                                                                                                    | Basic  as reported   |                                       | $      | 0.21 |  |      | $       | 2.62 |  |   | $       | 2.71 | 
|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |     
|                                                                                                                                                    | Basic  pro forma     |                                       | $      | 0.18 |  |      | $       | 2.60 |  |   | $       | 2.63 | 
|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |     
|                                                                                                                                                    | Diluted  as reported |                                       | $      | 0.20 |  |      | $       | 2.55 |  |   | $       | 2.66 | 
|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |     
|                                                                                                                                                    | Diluted  pro forma   |                                       | $      | 0.17 |  |      | $       | 2.53 |  |   | $       | 2.58 | 
|                                                                                                                                                    |                       |                                       |        |      |  |      |         |      |  |   |         |     

The effect of applying Statement No. 123 on
the net income as stated above is not necessarily representative
of the effects on reported net income (loss) for future years
due to, among other things, the vesting period of the stock
options and additional stock options that may be granted in
future years.

The fair value of each option granted in 2001 was
estimated on the date of grant using the Black-Scholes model
with the following assumptions: dividend yield of 0%; risk-free
interest rate of 6.25%, expected life of the option term of
seven years; and volatility, where applicable, of 0.357. There
were no options granted in 2002. For 2003 options granted, the
fair value was also estimated using the Black-Scholes model with
the following assumptions: dividend yield of 0%; risk-free
interest rate of 3.5%, expected life of the option term of seven
years; and volatility, where applicable, of 0.254.

In 2003, we granted new stock options to purchase
2,215,323 common shares at a weighted average exercise price of
$23.16, which resulted in no additional compensation expense. In
addition the Board of Directors authorized the issuance of 1,372
shares of restricted stock.

On January 20, 2004, the Board of Directors
authorized the issuance of 141,000 shares of restricted stock
and new stock options to purchase 500,000 common shares at an
exercise price of $31.80.



| |             
| | ------------
| | Income Taxes

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



| |                                       
| | --------------------------------------
| | Derivatives and Hedging
    Activities

Effective January 1, 2001, we adopted SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. As a result, we recognize
all derivative financial instruments, such as foreign exchange
contracts, in the consolidated financial statements at fair
value regardless of the purpose or intent for

F-12



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

holding the instrument. Changes in the fair value
of derivative financial instruments are either recognized
periodically in the results of operations or in
stockholders equity as a component of other comprehensive
income, depending on whether the derivative financial instrument
qualifies for hedge accounting and, if so, whether it qualifies
as a fair value hedge or cash flow hedge. Generally, changes in
fair values of the derivatives accounted for as fair value
hedges are recorded in the results of operations along with the
portions of the changes in the fair values of the hedged items
that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent
they are effective as hedges, are recorded in other
comprehensive income. There was ($4.4) million and ($3.6)
million of cumulative losses included in other comprehensive
income (net of taxes of ($2.9) million and ($2.4) million)
from changes in fair value of foreign currency and interest rate
hedges as of December 31, 2002 and 2003, respectively.
Changes in fair values of derivatives not qualifying as hedges
are reported in the results of operations.



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

In April 2002, the FASB issued Statement
No. 145 (FAS 145),Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. FAS 145 rescinds
Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of the related income
tax effect. As a result, the criteria in APB 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, now
will be used to classify those gains and losses. Under APB 30,
gains and losses on early extinguishment of debt would only be
classified as extraordinary if the extinguishment is considered
unusual and infrequent.

Generally, the provisions of FAS 145 are
effective for financial statements issued for fiscal years
beginning after May 15, 2002. Effective January 1,
2003, the gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods that does
not meet the criteria in APB 30 for classification as an
extraordinary item is required to be reclassified as ordinary
income. The impact of adoption of this statement resulted in the
reclassification of gains and losses on extinguishment of debt
from extraordinary gains and losses to income before
extraordinary item in 2001 and 2002.

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

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

The disclosures for prior period presented, for
comparative purposes, were restated. See Note 7 to our
consolidated financial statements for the required disclosures.

F-13



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|3. | Acquisitions

On March 26, 2002, through our Bofors
subsidiary, we finalized the acquisition of 100% of the
outstanding stock of Cell ITS AB, a company incorporated under
the laws of Sweden and wholly owned by Cell Network AB. Cell ITS
specializes in interactive training and simulation. As
consideration for the purchase, we paid the former owner, Cell
Network AB, 45 million Swedish krona (SEK) (approximately
$4.3 million), of which 20 million SEK was held in
escrow as a lien for the fulfillment of certain receivables. The
transaction was accounted for as a purchase. Accordingly, the
financial statements reflect the results of operations of Cell
ITS from the date of acquisition.

Effective July 2, 2002, we completed the
acquisition of 100% of the outstanding stock of USMR from one of
our significant shareholders for $306.9 million (net of
$7.3 million of acquired cash), including the repayment of
approximately $105 million of USMR debt. The acquisition of
USMR balances and diversifies our portfolio, gives us a
strategic growth platform and expands our mission to support the
U.S. Navy with superior technology and services. As a result of
the transaction, USMR is now a wholly owned subsidiary. The
transaction was accounted for as a purchase. We financed the
acquisition with cash on hand and by amending our credit
facility to borrow an additional $300 million. We began to
consolidate the results of operations of USMR as of the
effective date of the transaction.

The following are the unaudited pro forma
consolidated results of our operations for the year ended
December 31, 2002 and our actual results of operations for
the year ended December 31, 2003, assuming the USMR
acquisition occurred on January 1, 2002.

|              |                                   |                           |           |      |  |   |           |      | 
|------------- | --------------------------------- | ------------------------- | --------- | ---- |  | - | --------- | ---- | 
|              |                                   |                          
|              |                                   | December 31              
|              |                                   |                          
|              |                                   | 2002                      |           | 2003
|              |                                   |                           |           |     
|              |                                   |                          
|              |                                   | (In thousands, except per
|              |                                   | share data)              
|Sales         |                                   | $                         | 1,976,589 |      |  | $ | 2,052,591 |     
|Cost of sales |                                   |                           | 1,604,266 |      |  |   | 1,639,706 |     
|Net income    |                                   | $                         | 137,328   |      |  | $ | 140,648   |     
|              | Earnings per common sharebasic   |                           | $         | 2.67 |  |   | $         | 2.71 | 
|              | Earnings per common sharediluted |                           | $         | 2.60 |  |   | $         | 2.66 | 

These unaudited proforma consolidated results are
not necessarily indicative of future outcomes.

Goodwill of $240.3 million resulting from
the USMR acquisition was assigned to the Ship Repair and
Maintenance segment.

In the first quarter of 2004, we completed the
acquisition of Kaiser Compositek, Inc. (KCI) for
$8.5 million. KCI, located in Brea, California, is a
provider to government and industry sectors with particular
emphasis on primary structures fabricated with polymeric
composites. The acquisition will enhance and expand the
development of highly advanced weapon systems and combat
vehicles for the armed forces.

In the first quarter of 2004, we completed the
acquisition of Honolulu Shipyard, Inc. for $16 million. The
acquisition, which is to be named Hawaii Shipyards, Inc.,
positions USMR as the largest private supplier of ship repair
and overhaul services for naval vessles stationed in the
Navys third largest homeport at Pearl Harbor, Hawaii. On
the same day we also completed the acquisition of Cercom, Inc.
of Vista, California for $21 million. Cercom is a producer
of advanced ceramic materials and supplier of light-weight
ceramic armor. The acquisition will boost our expertise in
designing survivability solutions that already include work in
specialty metals and composites.

F-14



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|4. | Property, Plant and Equipment

Property, plant and equipment consist of the
following:

|                                   |  |                |          |      |  |   |          |  
|---------------------------------- |  | -------------- | -------- | ---- |  | - | -------- | -
|                                   |  |               
|                                   |  | December 31   
|                                   |  |               
|                                   |  | 2002           |          | 2003
|                                   |  |                |          |     
|                                   |  |               
|                                   |  | (In thousands)
|Buildings                          |  | $              | 62,672   |      |  | $ | 65,784   |  
|Machinery and equipment            |  |                | 185,125  |      |  |   | 186,076  |  
|Dry docks and piers                |  |                | 54,079   |      |  |   | 72,232   |  
|Land and improvements              |  |                | 21,613   |      |  |   | 22,143   |  
|Software                           |  |                | 45,234   |      |  |   | 39,941   |  
|Construction in progress           |  |                | 9,290    |      |  |   | 14,790   |  
|                                   |  |                |          |      |  |   |          |  
|                                   |  |                | 378,013  |      |  |   | 400,966  |  
|Less: accumulated depreciation     |  |                | (207,635 | )    |  |   | (219,683 | )
|                                   |  |                |          |      |  |   |          |  
|Property, plant and equipment, net |  | $              | 170,378  |      |  | $ | 181,283  |  
|                                   |  |                |          |      |  |   |          |  



|   |                  
|-- | -----------------
|5. | Intangible Assets

Intangible assets consist of the following:

|                                           |                                |                |        |         |   |   |        |         |  
|------------------------------------------ | ------------------------------ | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                           |                                |               
|                                           |                                | December 31   
|                                           |                                |               
|                                           |                                | 2002           |        | 2003   
|                                           |                                |                |        |        
|                                           |                                |               
|                                           |                                | (In thousands)
|Contract rights and customer relationships |                                | $              | 29,527 |         |   | $ | 29,527 |        
|Non-compete agreements                     |                                |                | 29,000 |         |   |   | 29,000 |        
|Other                                      |                                |                | 3,850  |         |   |   | 690    |        
|                                           |                                |                |        |         |   |   |        |        
|                                           |                                |                | 62,377 |         |   |   | 59,217 |        
|                                           | Less: accumulated amortization |                |        | (29,753 | ) |   |        | (44,995 | )
|                                           |                                |                |        |         |   |   |        |        
|Intangible assets, net                     |                                | $              | 32,624 |         |   | $ | 14,222 |        
|                                           |                                |                |        |         |   |   |        |        

The contract rights and customer relationships
are being amortized based on when projected sales are expected
to occur and the non-compete agreement is amortized on a
straight-line basis. Intangible assets are written off when they
are fully amortized.

Amortization expense is estimated as follows:

| |       |                |  |   |        | 
| | ----- | -------------- |  | - | ------ | 
| |       | (In thousands)
| |       |               
| | 2004  |                |  | $ | 6,401  | 
| | 2005  |                |  |   | 5,089  | 
| | 2006  |                |  |   | 2,732  | 
| |       |                |  |   |        | 
| | Total |                |  | $ | 14,222 | 
| |       |                |  |   |        | 

F-15



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|6. | Accrued and Other Liabilities

Accrued and other liabilities consist of the
following:

|                             |  |                |         |      |  |   |         | 
|---------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                             |  |               
|                             |  | December 31   
|                             |  |               
|                             |  | 2002           |         | 2003
|                             |  |                |         |     
|                             |  |               
|                             |  | (In thousands)
|Accrued payroll and benefits |  | $              | 80,557  |      |  | $ | 73,838  | 
|Contract related reserves    |  |                | 24,628  |      |  |   | 27,220  | 
|Other accrued liabilities    |  |                | 35,729  |      |  |   | 32,905  | 
|                             |  |                |         |      |  |   |         | 
|Total                        |  | $              | 140,914 |      |  | $ | 133,963 | 
|                             |  |                |         |      |  |   |         | 



|   |                                               
|-- | ----------------------------------------------
|7. | Pensions and Other Postretirement
    Benefits

The majority of our domestic non-ship repair
employees are covered by retirement plans. Plans covering
salaried employees provide pension benefits based on years of
service and compensation. Plans covering hourly employees
generally provide benefits of stated amounts for each year of
service. Our funding policy is to make contributions based on
the projected unit credit method and to limit contributions to
amounts that are currently deductible for tax purposes. In
addition, we have two defined benefit deferred compensation
plans providing for payments upon retirement, death, or
disability that cover certain salaried employees at our Norfolk
shipyard.

With the exception of Bofors, most of our
non-ship repair employees are covered by postretirement health
care and life insurance benefit programs. Employees generally
become eligible to receive benefits under these plans after they
retire, to the extent that they meet minimum retirement age and
service requirements. The cost of providing most of these
benefits is shared with retirees. We have reserved the right to
change or eliminate these benefit plans.

Bofors has a statutory pension obligation of
$12.8 million and $16.1 million, which is included in
accrued pension and postretirement benefit cost on the
consolidated balance sheets at December 31, 2002 and
December 31, 2003, respectively. Bofors pension obligation
is administered by an agent of the Swedish government using
methods and assumptions different from those used to determine
domestic amounts. Accordingly, the following tables do not
include this liability.

We used December 31 as the measurement date
for the majority of the plans.

F-16



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The change in benefit obligation and plan assets
of the plans and prepaid or accrued pension and postretirement
costs recognized in the balance sheets at December 31, 2002
and 2003 are as follows:

|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |        |  
|-------------------------------------------------------------------- | --------------------------------------------------- | ---------------- | ------- | ----------------------- | - | ---- | ------- | ------- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                     |                                                     |                  |         |                        
|                                                                     |                                                     | Pension Benefits |         | Postretirement Benefits
|                                                                     |                                                     |                  |         |                        
|                                                                     |                                                     | 2002             |         | 2003                    |   | 2002 |         | 2003   
|                                                                     |                                                     |                  |         |                         |   |      |         |        
|                                                                     |                                                     |                 
|                                                                     |                                                     | (in thousands)  
|Change in benefit obligation                                         |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Benefit obligation at beginning of year                              |                                                     | $                | 540,720 |                         |   | $    | 658,527 |         |   | $ | 47,211 |        |   | $ | 50,572 |       
|Acquisition of USMR                                                  |                                                     |                  | 44,127  |                         |   |      |        |         |   |   | 2,530  |        |   |   |       |       
|Service cost                                                         |                                                     |                  | 16,647  |                         |   |      | 17,778  |         |   |   | 1,199  |        |   |   | 1,477  |       
|Interest cost                                                        |                                                     |                  | 38,584  |                         |   |      | 41,522  |         |   |   | 3,091  |        |   |   | 3,316  |       
|Net benefits paid, including settlements                             |                                                     |                  | (26,906 | )                       |   |      | (26,693 | )       |   |   | (4,389 | )      |   |   | (3,858 | )     
|Participant contributions                                            |                                                     |                  |        |                         |   |      |        |         |   |   | 129    |        |   |   |       |       
|Actuarial (gain) loss                                                |                                                     |                  | 44,157  |                         |   |      | 32,067  |         |   |   | (529   | )      |   |   | 5,500  |       
|Plan amendments                                                      |                                                     |                  | 1,198   |                         |   |      | 358     |         |   |   | 1,330  |        |   |   |       |       
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Benefit obligation at end of year                                    |                                                     | $                | 658,527 |                         |   | $    | 723,559 |         |   | $ | 50,572 |        |   | $ | 57,007 |       
|Change in plan assets                                                |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Fair value of plan assets at beginning
    of year                   |                                                     | $                | 608,701 |                         |   | $    | 578,806 |         |   | $ | 66,008 |        |   | $ | 60,328 |       
|Acquisition of USMR                                                  |                                                     |                  | 23,961  |                         |   |      |        |         |   |   |       |        |   |   |       |       
|Actual return on plan assets                                         |                                                     |                  | (30,629 | )                       |   |      | 142,938 |         |   |   | (3,267 | )      |   |   | 11,682 |       
|Employer contributions                                               |                                                     |                  | 3,679   |                         |   |      | 2,758   |         |   |   | 1,847  |        |   |   | 3,292  |       
|Employee contributions                                               |                                                     |                  |        |                         |   |      |        |         |   |   | 129    |        |   |   |       |       
|Net benefits paid, including settlements                             |                                                     |                  | (26,906 | )                       |   |      | (26,692 | )       |   |   | (4,389 | )      |   |   | (3,858 | )     
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Fair value of plan assets at end of year                             |                                                     | $                | 578,806 |                         |   | $    | 697,810 |         |   | $ | 60,328 |        |   | $ | 71,444 |       
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Funded status                                                        |                                                     | $                | (79,721 | )                       |   | $    | (25,749 | )       |   | $ | 9,756  |        |   | $ | 14,437 |       
|Unrecognized actuarial (gain) loss                                   |                                                     |                  | 157,387 |                         |   |      | 97,609  |         |   |   | (1,063 | )      |   |   | (2,047 | )     
|Unrecognized prior service cost                                      |                                                     |                  | 14,991  |                         |   |      | 13,557  |         |   |   | 1,194  |        |   |   | 1,059  |       
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Net amount recognized                                                |                                                     | $                | 92,657  |                         |   | $    | 85,417  |         |   | $ | 9,887  |        |   | $ | 13,449 |       
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Amounts recognized in the consolidated balance
    sheet consist of: |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|                                                                     | Prepaid pension and postretirement
    benefit cost |                  | $       | 108,660                 |   |      | $       | 113,251 |   |   | $      | 12,327 |   |   | $      | 15,746 |  
|                                                                     | Accrued pension and postretirement
    benefit cost |                  |         | (36,733                 | ) |      |         | (33,173 | ) |   |        | (2,440 | ) |   |        | (2,297 | )
|                                                                     | Intangible asset                                    |                  |         | 3,160                   |   |      |         |        |   |   |        |       |   |   |        |       |  
|                                                                     | Accumulated other comprehensive income              |                  |         | 17,570                  |   |      |         | 5,339   |   |   |        |       |   |   |        |       |  
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       
|Net amount recognized                                                |                                                     | $                | 92,657  |                         |   | $    | 85,417  |         |   | $ | 9,887  |        |   | $ | 13,449 |       
|                                                                     |                                                     |                  |         |                         |   |      |         |         |   |   |        |        |   |   |        |       

The accumulated benefit obligation for all
defined benefit pension plans was $639.1 million and
$572.2 million at December 31, 2003 and 2002,
respectively.

F-17



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information for
pension plans with an accumulated benefit obligation in excess
of plan assets:

|                               |  |                |         |      |  |   |        | 
|------------------------------ |  | -------------- | ------- | ---- |  | - | ------ | 
|                               |  |               
|                               |  | December 31   
|                               |  |               
|                               |  | 2002           |         | 2003
|                               |  |                |         |     
|                               |  |               
|                               |  | (In thousands)
|Projected benefit obligation   |  | $              | 102,288 |      |  | $ | 59,510 | 
|Accumulated benefit obligation |  |                | 101,105 |      |  |   | 55,348 | 
|Fair value of plan assets      |  |                | 66,797  |      |  |   | 24,519 | 

The following tables show the components of the
net periodic benefit cost:

|                                    |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|----------------------------------- |  | ---------------- | ------- | -------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                    |  |                  |         |               
|                                    |  | Pension Benefits |         | Other Benefits
|                                    |  |                  |         |               
|                                    |  | 2002             |         | 2003           |  | 2002 |         | 2003
|                                    |  |                  |         |                |  |      |         |     
|                                    |  |                 
|                                    |  | (in thousands)  
|Service cost                        |  | $                | 16,647  |                |  | $    | 17,778  |      |  | $ | 1,199  |   |  | $ | 1,477  |  
|Interest cost                       |  |                  | 38,584  |                |  |      | 41,521  |      |  |   | 3,092  |   |  |   | 3,316  |  
|Expected return on plan assets      |  |                  | (55,016 | )              |  |      | (54,235 | )    |  |   | (5,814 | ) |  |   | (5,200 | )
|Amortization of prior service cost  |  |                  | 1,732   |                |  |      | 1,792   |      |  |   | 135    |   |  |   | 136    |  
|Recognized net actuarial (gain)loss |  |                  | (453    | )              |  |      | 2,224   |      |  |   | (590   | ) |  |   | 2      |  
|                                    |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost           |  | $                | 1,494   |                |  | $    | 9,080   |      |  | $ | (1,978 | ) |  | $ | (269   | )
|                                    |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  

Additional information:

|                                                                         |  |                  |        |                |  |      |         |      |  |  |     |  |  |  |     | 
|------------------------------------------------------------------------ |  | ---------------- | ------ | -------------- |  | ---- | ------- | ---- |  |  | --- |  |  |  | --- | 
|                                                                         |  |                  |        |               
|                                                                         |  | Pension Benefits |        | Other Benefits
|                                                                         |  |                  |        |               
|                                                                         |  | 2002             |        | 2003           |  | 2002 |         | 2003
|                                                                         |  |                  |        |                |  |      |         |     
|Increase in minimum liability included in other
    comprehensive income |  | $                | 17,570 |                |  | $    | (12,231 | )    |  |  | N/A |  |  |  | N/A | 

The following table summarizes the assumptions
used to determine benefit obligations at December 31, 2003
and 2002.

|                              |  |          |     |          |  |      |     |      |  |  |     |   |  |  |     |  
|----------------------------- |  | -------- | --- | -------- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | -
|                              |  |          |     |         
|                              |  | Pension  |     | Other   
|                              |  | Benefits |     | Benefits
|                              |  |          |     |         
|                              |  | 2002     |     | 2003     |  | 2002 |     | 2003
|                              |  |          |     |          |  |      |     |     
|Discount rate                 |  |          | 6.5 | %        |  |      | 6.0 | %    |  |  | 6.5 | % |  |  | 6.0 | %
|Rate of compensation increase |  |          | 4.5 | %        |  |      | 4.0 | %    |  |  | 4.5 | % |  |  | 4.0 | %

The following table summarizes the assumptions
used to determine net periodic benefit costs for years ended
December 31, 2003 and 2002.

|                              |  |          |     |          |  |      |     |      |  |  |     |   |  |  |     |  
|----------------------------- |  | -------- | --- | -------- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | -
|                              |  |          |     |         
|                              |  | Pension  |     | Other   
|                              |  | Benefits |     | Benefits
|                              |  |          |     |         
|                              |  | 2002     |     | 2003     |  | 2002 |     | 2003
|                              |  |          |     |          |  |      |     |     
|Discount rate                 |  |          | 7.0 | %        |  |      | 6.5 | %    |  |  | 7.0 | % |  |  | 6.5 | %
|Expected return on assets     |  |          | 9.0 | %        |  |      | 8.5 | %    |  |  | 9.0 | % |  |  | 7.7 | %
|Rate of compensation increase |  |          | 4.5 | %        |  |      | 4.5 | %    |  |  | 4.5 | % |  |  | 4.5 | %

The expected long-term rate of return on assets
assumption for the pension plans was chosen from the range of
likely results of compound average annual returns over a 20-year
time horizon. The model was based on historical equity market
returns during the period 1926-2002. The assumed rate was
lowered from 9.0% in 2002 to 8.5% in 2003 to reflect a more
conservative view of future returns.

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The expected long-term rate of return on assets
assumption for the retirement benefit plans was chosen from the
range of likely results of compound average annual returns over
a 20-year time horizon. The model was based on historical equity
market returns during the period 1926-2002. The assumed rate was
lowered from 9.0% in 2002 to 7.7% in 2003 to reflect a more
conservative view of future returns.

Assumed health care cost trend rates at
December 31:

|                                     |                                                                                       |      |  |      |   |  |  |      |  
|------------------------------------ | ------------------------------------------------------------------------------------- | ---- |  | ---- | - |  |  | ---- | -
|                                     |                                                                                       | 2002 |  | 2003
|                                     |                                                                                       |      |  |     
|Defense Systems segment:             |                                                                                       |      |  |      |   |  |  |     
|                                     | Health care cost trend rate assumed for
    next year                                 |      |  | 8.0  | % |  |  | 7.0  | %
|                                     | Rate to which the cost trend rate is assumed to
    decline (the ultimate trend rate) |      |  | 5.0  | % |  |  | 5.0  | %
|                                     | Year that the rate reaches the ultimate
    trend rate                                |      |  | 2006 |   |  |  | 2006 |  
|Ship Repair and Maintenance segment: |                                                                                       |      |  |      |   |  |  |     
|                                     | Health care cost trend rate assumed for
    next year                                 |      |  | 10.0 | % |  |  | 9.0  | %
|                                     | Rate to which the cost trend rate is assumed to
    decline (the ultimate trend rate) |      |  | 5.25 | % |  |  | 5.25 | %
|                                     | Year that the rate reaches the ultimate
    trend rate                                |      |  | 2011 |   |  |  | 2011 |  

Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plans. A 1%-point change in assumed health care cost trend rates
would have the following effect:

|                                             |  |                |         |                |  |   |          |  
|-------------------------------------------- |  | -------------- | ------- | -------------- |  | - | -------- | -
|                                             |  | 1-Percentage   |         | 1-Percentage  
|                                             |  | Point Increase |         | Point Decrease
|                                             |  |                |         |               
|Effect on total of service and interest cost |  | $              | 39,167  |                |  | $ | (35,033  | )
|Effect on postretirement benefit obligation  |  |                | 492,177 |                |  |   | (440,941 | )

Plan
Assets

Our pension plans and postretirement benefit
plans asset allocations at December 31, 2003 and 2002, by
asset category are as follows:

|                  |       |                |      |                 |   |      |      |       |   |  |      |       |   |  |      |       |  
|----------------- | ----- | -------------- | ---- | --------------- | - | ---- | ---- | ----- | - |  | ---- | ----- | - |  | ---- | ----- | -
|                  |       |                |      |                 |   |     
|                  |       |                |      | Retiree Benefit
|                  |       | Pension Plan   |      | Plan           
|                  |       | Percentage of  |      | Percentage of  
|                  |       | Plan Assets    |      | Plan Assets    
|                  |       | at December 31 |      | at December 31 
|                  |       |                |      |                
|Asset Category    |       | 2002           |      | 2003            |   | 2002 |      | 2003 
|                  |       |                |      |                 |   |      |      |      
|Equity securities |       |                | 97.5 | %               |   |      | 97.2 | %     |   |  | 97.4 | %     |   |  | 98.8 | %    
|Debt securities   |       |                | 0.0  | %               |   |      | 0.0  | %     |   |  | 0.0  | %     |   |  | 0.0  | %    
|Real estate       |       |                | 2.2  | %               |   |      | 2.5  | %     |   |  | 0.0  | %     |   |  | 0.0  | %    
|Other             |       |                | 0.3  | %               |   |      | 0.3  | %     |   |  | 2.6  | %     |   |  | 1.2  | %    
|                  |       |                |      |                 |   |      |      |       |   |  |      |       |   |  |      |      
|                  | Total |                |      | 100.0           | % |      |      | 100.0 | % |  |      | 100.0 | % |  |      | 100.0 | %
|                  |       |                |      |                 |   |      |      |       |   |  |      |       |   |  |      |      

Our pension and employee welfare benefit plans
investment strategy is to invest primarily in domestic and
international equity securities to achieve an 8.5% annual
average rate of return, over a long term horizon. The majority
of the assets are invested with equity fund managers, however,
these fund managers have the flexibility to invest in interest
bearing instruments based on their evaluation of the market
conditions.

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Contributions

We expect to contribute $7.5 million and
$3.5 million to our pension plans and postretirement plans,
respectively, in 2004.



|   |               
|-- | --------------
|8. | Long-term Debt

Borrowings under long-term debt arrangements are
as follows:

|                                 |                       |                |         |        |  |   |         |        | 
|-------------------------------- | --------------------- | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                                 |                       |               
|                                 |                       | December 31,  
|                                 |                       |               
|                                 |                       | 2002           |         | 2003  
|                                 |                       |                |         |       
|                                 |                       |               
|                                 |                       | (in thousands)
|Senior secured credit facilities |                       | $              | 590,000 |        |  | $ | 576,989 |       
|                                 | Less: current portion |                |         | 13,011 |  |   |         | 52,043 | 
|                                 |                       |                |         |        |  |   |         |       
|                                 |                       | $              | 576,989 |        |  | $ | 524,946 |       
|                                 |                       |                |         |        |  |   |         |       

Senior
Secured Credit Facility

In August 2001, we entered into a credit
facility with various banks that included $600 million of
term loan facilities and a $200 million revolving credit
facility. On July 2, 2002 we amended the credit facility to
borrow an additional $300 million for the purchase of USMR
(see note 3). We incurred $5.5 million in additional
financing fees that have been deferred and amortized over the
remaining term of the credit facility using the effective
interest method.

Outstanding borrowings on the term loan
facilities were $590.0 million and $577.0 million at
December 31, 2002 and 2003, respectively. The facilities
bear interest at variable rates with a weighted average rate of
3.10% at December 31, 2003. These loans are due through
2009 and provide for quarterly principal and interest payments.
We also have interest rate swap agreements for
$173.0 million and $20.0 million providing for fixed
interest rates of 3.45% and 3.77% at December 31, 2003.

The revolving credit facility provides for loans
and letters of credit and matures in 2007. We had outstanding
letters of credit under the facility of approximately
$114.5 million at December 31, 2003, and there was
$85.5 million available under the revolving credit facility
at December 31, 2003. We are obligated to pay a fee of
0.375% on the unused revolving credit facility.

Amounts outstanding under the senior secured
credit facility are secured by a lien on all our assets and the
assets of our domestic subsidiaries.

The senior secured credit facility contains
customary covenants restricting the incurrence of debt,
encumbrances on and sales of assets, limitations on mergers and
certain acquisitions, limitations on changes in control, certain
restrictions on payment of dividends, provision for the
maintenance of certain financial ratios, and various other
financial covenants and restrictions. There were no events of
default as of December 31, 2003.

Pursuant to the terms of agreement entered into
under the senior secured credit facility, our applicable margin
for the term loans may be reduced if our leverage ratio (as
defined in the Agreement) decreases. Our results during the
years ended December 31, 2002 and 2003 exceeded the
required level ratio targets resulting in a reduction of the
margin in the interest rates and reduced pricing for letters of
credit, effective as of January 1, 2003 and 2004.

We made total debt repayments under the credit
facility of $474.0 million, $140.9 million and
$13.0 million during 2001, 2002 and 2003, respectively.
Cash paid for interest was $24.5 million,
$27.6 million and $25.2 million for the years ended
December 31, 2001, 2002 and 2003, respectively.

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Annual
Maturities

Annual maturities of long-term debt as of
December 31, 2003 are as follows:

|     |  |                |         | 
|---- |  | -------------- | ------- | 
|     |  | (in thousands)
|     |  |               
|2004 |  | $              | 52,043  | 
|2005 |  |                | 52,043  | 
|2006 |  |                | 52,043  | 
|2007 |  |                | 124,731 | 
|2008 |  |                | 197,420 | 
|2009 |  |                | 98,709  | 
|     |  |                |         | 
|     |  | $              | 576,989 | 
|     |  |                |         | 



|   |                              
|-- | -----------------------------
|9. | Commitments and Contingencies



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

The Crusader program commenced in 1994 to develop
for the U.S. Army an integrated and extensively automated
two-vehicle artillery system consisting of a 155mm,
self-propelled howitzer and a resupply vehicle. During the
lifetime of the program, we were the sole-source prime
contractor for its design and development. The Armys plan
called for fielding of 480 Crusader systems, but in
May 2002 the Secretary of Defense announced the termination
of the program. The Army gave us formal notice of termination on
August 7, 2002, and we have subsequently received Army
funding to accomplish an orderly closeout of Crusader activities
and to transition key Crusader technologies to the NLOS-C
program. To date, the Crusader termination has resulted in a
reduction to our workforce of approximately 180 employees.
Through the period ended December 31, 2003, we have invoiced the
U.S. Government and received full payment for $36.3 million
of termination costs and fees. In order to complete the Crusader
termination process, we are negotiating a final termination
settlement with the Army which we expect to conclude later in
2004.



| |                 
| | ----------------
| | Operating Leases

We lease office space, plants and facilities, and
various types of manufacturing, data processing and
transportation equipment. Rent expense for the years ended
December 31, 2001, 2002, and 2003 was $13.5 million,
$18.2 million and $21.6 million, respectively. Some of our
leases contain escalation clauses that increase rents based on
future increases in the Consumer Price Index. Minimum future
rentals under noncancellable leases are estimated to be
$17.2 million in 2004, $11.3 million in 2005,
$8.6 million in 2006, $8.1 million in 2007,
$7.3 million in 2008 and $35.5 million thereafter.



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

As a government contractor, we are subject to the
audit, review, and investigative authority of various U.S.
Government agencies. Depending upon the particular
jurisdictional statute, violations of federal procurement rules
may result in contract price reductions or refunds, civil
penalties, and/or criminal penalties. Government contractors
that violate the False Claims Act and/or other applicable laws
may be suspended or debarred from receiving further government
contracts. Given our dependence on U.S. Government contracts,
suspension or debarment is an inherent risk that could readily
have a material adverse effect on us. Our policy is to cooperate
with governmental investigations and inquiries regarding
compliance matters, and we also make voluntary disclosures of
compliance issues to governmental agencies as appropriate. In
the ordinary course of business, we provide information on
compliance matters to various government agencies, and we expect
to continue to do so in the future. For example, as previously
disclosed, in 2002 we were served with a grand jury subpoena
issued by the United States District Court for the Eastern
District of Virginia, seeking

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

information regarding a 2000 contract between us
and the Italian government for the upgrading of amphibious
assault vehicles. We believe that the grand jury investigation
seeks to ascertain whether any violation of the Foreign Corrupt
Practices Act occurred in connection with the Italian contract.
While management is not aware of any such violation, and we are
cooperating with the investigation, it is too early for us to
determine whether the ultimate outcome of the investigation
would have a material adverse impact on our results of operation
or financial position.

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



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

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

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consist of Allowable Costs. As of
December 31, 2003, we had accrued approximately
$33 million to cover any investigation and/or remediation
costs that may not be Allowable Costs under U.S. Government
contracts. The amount accrued is based on reasonable estimates,
although there is a possibility that amounts in excess of
amounts accrued may be incurred. The most significant of the
estimated liabilities are related to ongoing remediation efforts.

One of USMRs largest facilities is located
in San Diego, California. Pursuant to a demand from the
California Regional Water Quality Control Board, we completed a
study of sedimentary contamination in San Diego Bay and we are
continuing to perform testing of the contaminated areas for the
purpose of establishing clean-up criteria for future remediation
work. Once definitive clean-up criteria are established, we
expect that we will be required to begin remediation procedures
with respect to the contamination. We anticipate that the total
cost associated with the remediation phase will range from
$6 million to $9 million, although it is conceivable
that costs could be as high as $30 million if the most stringent
clean-up standard were to be adopted. Up to $9 million of such
remediation cost, to the extent the costs are not recovered on
USMRs government contracts or from other responsible
parties, may be recoverable from USMRs former
shareholders, under an escrow arrangement established in 1997
when the San Diego operation was acquired by USMR. Also a
further $15 million escrow fund was established in our 2002
acquisition of USMR, which may be available in respect of
USMRs sediment exposure. We have asserted claims against
both escrow funds, primarily on account of the potential
remediation exposure of San Diego.

Pursuant to the terms of the 1997 acquisition of
United Defense, L.P., FMC Corporation and Harsco Corporation
(collectively, the Sellers) are required to
reimburse us for 75% of certain remediation costs that are
Non-Allowable Costs through October 6, 2007 for
environmental losses we have previously identified to the
Sellers. Accordingly, we have recorded a receivable for $1.2
million for which we expect to be reimbursed by the Sellers over
approximately the next four years under the terms of the 1997
acquisition agreement.

Since approximately 1941, we (and, prior to our
formation, Northern Ordnance, Inc. and then FMC) have operated a
manufacturing and engineering facility in Fridley, Minnesota.
The majority of the Fridley facility is owned by the U.S. Navy
(the Navy property), but has been operated by us
under contract with and on behalf of the Navy. We own a portion
of the facility. Since 1991, the Navy has expended more than
$27 million in remediation costs, including site
investigation, on the Navy property, and the Navy has indicated
that it anticipates spending a further $8.9 million on such
matters at the site. The Navy has engaged us in discussions as
to whether we should pay a portion of such expenses, and offered
to resolve the matter if

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

we would pay 25% of such costs (approximately
$8.4 million). We dispute any responsibility for such
costs, and also believe that any remediation costs that we may
incur concerning the Navy property would constitute Allowable
Costs. However, there is substantial uncertainty regarding the
ultimate terms on which the matter might be resolved.



|    |                     
|--- | --------------------
|10. | Stockholders Equity



| |              
| | -------------
| | Stock Options

During 1998, we adopted the 1998 Stock Option
Plan (the Option Plan) under which 5,496,000 shares
of common stock were reserved for issuance at December 31,
2002. The options generally vest over a period of 10 years;
however, vesting may be accelerated over 5 years if certain
targets related to earnings and cash flow are met. On
April 1, 2002, we amended the Option Plan to increase the
number of shares of common stock available to 7,375,000 and
provide for the granting of restricted stock under the Option
Plan.

|                                       |  |                         |            |          |  |      |      |          |  |      |           |          |  |   |      |  |  |  |           |   |  |   |       | 
|-------------------------------------- |  | ----------------------- | ---------- | -------- |  | ---- | ---- | -------- |  | ---- | --------- | -------- |  | - | ---- |  |  |  | --------- | - |  | - | ----- | 
|                                       |  |                        
|                                       |  | Year ended December 31,
|                                       |  |                        
|                                       |  |                         |            | Weighted |  |      |      | Weighted |  |      |           | Weighted
|                                       |  |                         |            | average  |  |      |      | average  |  |      |           | average 
|                                       |  |                         |            | exercise |  |      |      | exercise |  |      |           | exercise
|                                       |  | 2001                    |            | price    |  | 2002 |      | price    |  | 2003 |           | price   
|                                       |  |                         |            |          |  |      |      |          |  |      |           |         
|Options outstanding, beginning of year |  |                         | 3,226,275  |          |  | $    | 4.63 |          |  |      | 2,221,178 |          |  | $ | 4.80 |  |  |  | 1,424,653 |   |  | $ | 4.91  | 
|Options granted                        |  |                         | 173,490    |          |  |      | 5.76 |          |  |      |          |          |  |   |      |  |  |  | 2,215,323 |   |  |   | 23.16 | 
|Options cancelled                      |  |                         | (93,150    | )        |  |      | 4.44 |          |  |      | (19,350   | )        |  |   | 4.44 |  |  |  |          |   |  |   |      | 
|Options exercised                      |  |                         | (1,085,437 | )        |  |      | 4.48 |          |  |      | (777,175  | )        |  |   | 4.58 |  |  |  | (525,075  | ) |  |   | 4.59  | 
|                                       |  |                         |            |          |  |      |      |          |  |      |           |          |  |   |      |  |  |  |           |   |  |   |       | 
|Options outstanding end of year        |  |                         | 2,221,178  |          |  |      | 4.80 |          |  |      | 1,424,653 |          |  |   | 4.91 |  |  |  | 3,114,901 |   |  |   | 17.95 | 
|                                       |  |                         |            |          |  |      |      |          |  |      |           |          |  |   |      |  |  |  |           |   |  |   |       | 
|Options exercisable end of year        |  |                         | 1,175,289  |          |  |      | 4.82 |          |  |      | 950,780   |          |  |   | 4.99 |  |  |  | 1,734,576 |   |  |   | 14.74 | 
|                                       |  |                         |            |          |  |      |      |          |  |      |           |          |  |   |      |  |  |  |           |   |  |   |       | 

The following table summarizes options data as of
December 31, 2003:

|                         |       |                     |           |                     |  |             |       |              |  |          |     |     |  |  |         |           |  |   |       |       | 
|------------------------ | ----- | ------------------- | --------- | ------------------- |  | ----------- | ----- | ------------ |  | -------- | --- | --- |  |  | ------- | --------- |  | - | ----- | ----- | 
|                         |       |                     |           |                    
|                         |       | Options Outstanding |           | Options Exercisable
|                         |       |                     |           |                    
|                         |       |                     |           | Weighted            |  |            
|                         |       | Number              |           | Weighted            |  | average     |       | Number       |  | Weighted
|                         |       | as of               |           | average             |  | remaining   |       | as of        |  | average 
|                         |       | December 31,        |           | exercise            |  | contractual |       | December 31, |  | exercise
|Range of exercise prices |       | 2003                |           | price               |  | life        |       | 2003         |  | price   
|                         |       |                     |           |                     |  |             |       |              |  |         
|$4.44                    |       |                     | 786,838   |                     |  | $           | 4.44  |              |  |          | 4.9 |     |  |  | 712,587 |           |  | $ | 4.44  |      
|$7.11  $8.89            |       |                     | 65,812    |                     |  |             | 8.51  |              |  |          | 5.5 |     |  |  | 53,999  |           |  |   | 8.43  |      
|$11.11                   |       |                     | 40,500    |                     |  |             | 11.11 |              |  |          | 3.9 |     |  |  | 34,199  |           |  |   | 11.11 |      
|$15.56                   |       |                     | 6,428     |                     |  |             | 15.56 |              |  |          | 7.4 |     |  |  | 6,428   |           |  |   | 15.56 |      
|$21.85  $24.98          |       |                     | 2,215,323 |                     |  |             | 23.16 |              |  |          | 9.1 |     |  |  | 927,363 |           |  |   | 23.15 |      
|                         |       |                     |           |                     |  |             |       |              |  |          |     |     |  |  |         |           |  |   |       |      
|                         | Total |                     |           | 3,114,901           |  |             |       | 17.95        |  |          |     | 7.9 |  |  |         | 1,734,576 |  |   |       | 14.74 | 
|                         |       |                     |           |                     |  |             |       |              |  |          |     |     |  |  |         |           |  |   |       |      

Options were granted at $4.44, $7.11, $8.89,
$11.11, and $15.56 during the year ended December 31, 2001
and had an estimated weighted average fair value on the date of
grant of $5.38. There were no options granted during the year
ended December 31, 2002. In 2003, we granted new stock
options to purchase 2,215,323 shares at a weighted average
exercise price of $23.16. In addition the Board of Directors
authorized issuance of 1,372 shares of restricted stock. We
recorded compensation cost of $0.1 million and
$0.8 million on December 31, 2002 and 2003 related to
options issued with exercise prices below the fair value of the
common

F-23



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

stock on the date of grant. On January 20,
2004, the Board of Directors authorized issuance of 141,000
shares of restricted stock and new stock options to purchase
500,000 common shares at an exercise price of $31.80.



|    |             
|--- | ------------
|11. | Income Taxes

Our provision for income taxes consists of the
following components:

|                 |  |      |       |      |  |      |        |  |  |   |        | 
|---------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                 |  | 2001 |       | 2002 |  | 2003
|                 |  |      |       |      |  |     
|Federal: current |  | $    | 570   |      |  | $    |       |  |  | $ | 19,874 | 
|deferred         |  |      |      |      |  |      | 6,333  |  |  |   | 34,976 | 
|Foreign: current |  |      | 2,222 |      |  |      | 2,533  |  |  |   | 5,769  | 
|deferred         |  |      |      |      |  |      |       |  |  |   |       | 
|State: current   |  |      | 3,108 |      |  |      | 5,384  |  |  |   | 8,985  | 
|deferred         |  |      |      |      |  |      | 909    |  |  |   | 4,997  | 
|                 |  |      |       |      |  |      |        |  |  |   |        | 
|Total: current   |  | $    | 5,900 |      |  | $    | 7,917  |  |  | $ | 34,628 | 
|deferred         |  |      |      |      |  | $    | 7,242  |  |  | $ | 39,973 | 
|                 |  |      |       |      |  |      |        |  |  |   |        | 
|                 |  | $    | 5,900 |      |  | $    | 15,159 |  |  | $ | 74,601 | 
|                 |  |      |       |      |  |      |        |  |  |   |        | 

Our current tax liability for all periods
consists of the current federal and state tax liabilities,
current state tax liabilities in jurisdictions that impose
minimum taxes or restrict use of net operating loss
carryforwards, the tax expense of our wholly-owned foreign
subsidiaries and foreign withholding taxes on dividends and
royalties. Deferred tax expense includes taxes payable to taxing
jurisdictions in future periods as well as the reversal of the
deferred tax asset valuation allowance more fully described
below.

Our effective tax rate differed from the
statutory federal income tax rate because of the following
differences:

|                                                      |  |      |       |      |  |      |       |    |  |  |      |   
|----------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ---- | --
|                                                      |  | 2001 |       | 2002 |  | 2003
|                                                      |  |      |       |      |  |     
|Statutory federal tax rate                            |  |      | 35.0  | %    |  |      | 35.0  | %  |  |  | 35.0 | % 
|Effect of taxes on joint
    venture/foreign earnings |  |      | 5.2   | %    |  |      | 0.6   | %  |  |  | 0.1  | % 
|Extraterritorial income exclusion benefit             |  |      | (5.1  | %)   |  |      | (1.5  | %) |  |  | (1.4 | %)
|Disallowed expenses and other                         |  |      | (25.6 | %)   |  |      | 4.3   | %  |  |  | 2.4  | % 
|Change in valuation allowance                         |  |      | (3.0  | %)   |  |      | (33.3 | %) |  |  | 0.2  | % 
|State income taxes                                    |  |      | 7.2   | %    |  |      | 4.9   | %  |  |  | 5.1  | % 
|Foreign tax credit                                    |  |      |      |      |  |      |      |    |  |  | (6.7 | %)
|                                                      |  |      |       |      |  |      |       |    |  |  |      |   
|Effective tax rate                                    |  |      | 13.7  | %    |  |      | 10.0  | %  |  |  | 34.7 | % 
|                                                      |  |      |       |      |  |      |       |    |  |  |      |   

F-24



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of the net deferred tax asset are
as follows:

|                                                        |  |                |         |      |  |   |         |  
|------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                        |  |               
|                                                        |  | December 31,  
|                                                        |  |               
|                                                        |  | 2002           |         | 2003
|                                                        |  |                |         |     
|                                                        |  |               
|                                                        |  | (in thousands)
|Deferred tax assets:                                    |  |                |         |      |  |   |         |  
|Alternative minimum tax credits                         |  | $              | 2,514   |      |  | $ |        |  
|Accrued expenses                                        |  |                | 22,631  |      |  |   | 8,439   |  
|Net operating loss carryforwards                        |  |                | 33,305  |      |  |   |        |  
|Depreciation                                            |  |                | 2,456   |      |  |   | 276     |  
|Pension liabilities                                     |  |                | 8,240   |      |  |   | 3,348   |  
|Currency hedges and interest rate swaps                 |  |                | 2,941   |      |  |   | 2,623   |  
|Tax LIFO provision                                      |  |                |        |      |  |   | 1,663   |  
|                                                        |  |                |         |      |  |   |         |  
|                                                        |  | $              | 72,087  |      |  | $ | 16,349  |  
|Deferred tax liabilities:                               |  |                |         |      |  |   |         |  
|Purchased fixed assets and intangibles                  |  |                | (18,311 | )    |  |   | (5,648  | )
|Intangibles, accrued compensation, and benefits         |  |                | (18,985 | )    |  |   | (23,884 | )
|Equity in affiliates foreign earnings                  |  |                | (7,249  | )    |  |   | (6,882  | )
|Tax LIFO provision                                      |  |                | (5,496  | )    |  |   |        |  
|Engineering expenses                                    |  |                | (10,430 | )    |  |   | (13,430 | )
|Other tax deductible items                              |  |                | (409    | )    |  |   |        |  
|                                                        |  |                |         |      |  |   |         |  
|                                                        |  |                | (60,880 | )    |  |   | (49,844 | )
|Net deferred tax asset (liability)                      |  |                | 11,207  |      |  |   | (33,495 | )
|Valuation allowance                                     |  |                |        |      |  |   | (480    | )
|                                                        |  |                |         |      |  |   |         |  
|Net deferred tax asset (liability) on
    balance sheet |  | $              | 11,207  |      |  |   | (33,975 | )
|                                                        |  |                |         |      |  |   |         |  

At December 31, 2003 the net deferred tax
liability of $34.0 million represents net current and net
non-current deferred tax liabilities of $16.3 million and
$17.7 million, respectively. The net deferred tax asset at
December 31, 2002 of $11.2 million represents net
current deferred tax assets of $25.4 million and net
non-current deferred tax liabilities of $14.2 million. In
assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
the temporary differences become deductible and any limitations
applied to the use of carryforward tax attributes. At
December 31, 2003 we established a $0.5 million
valuation allowance which offsets approximately
$1.2 million in capital loss carryovers. In 2002 we
concluded that it was more likely than not that sufficient
future taxable income would be generated to fully realize the
deferred tax assets. Accordingly we reversed the offsetting
valuation allowance in its entirety.

We paid $43.3 million and $4.4 million
for income taxes, net of refunds, in 2003 and 2002, respectively.



|    |                                    
|--- | -----------------------------------
|12. | Fair Value of Financial Instruments

The carrying amount of our financial instruments
included in current assets and current liabilities approximates
their fair value due to their short-term nature. The fair market
value of our long-term debt was estimated to be
$590.0 million and $577.0 million at December 31,
2002 and 2003, respectively, for the senior secured credit
facility.

F-25



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair values of the senior credit facility
represent our best estimates based on other financial
instruments with similar characteristics. Since the facility has
variable rate debt, its fair value approximates its carrying
amount.



|    |                                          
|--- | -----------------------------------------
|13. | Significant Customer and Export
    Sales

Sales to various agencies of the U.S. Government
aggregated $1,013.2 million, $1,361.5 million and
$1,575.4 million during the years ended December 31, 2001,
2002 and 2003, respectively.

At December 31, 2002 and 2003, trade
accounts receivable from the U.S. Government totaled
$123.4 million and $79.9 million, respectively.

Export sales, including sales to foreign
governments transacted through the U.S. Government, were
$182.4 million, $240.3 million and $332.2 million
during the years ended December 31, 2001, 2002 and 2003,
respectively. In addition there were sales to foreign
governments transacted by our foreign subsidiary of
$123.0 million, $107.2 million and $110.6 million
during the years ended December 31, 2001, 2002 and 2003,
respectively.



|    |                           
|--- | --------------------------
|14. | Related Party Transactions

In October 1997, The Carlyle Group
(Carlyle) formed United Defense Industries, Inc. as
a wholly-owned entity in order to acquire our predecessor,
United Defense, L.P. Beginning with our initial public offering
in December 2001, Carlyle began to sell major portions of it
United Defense holdings, with the most recent such sale being
concluded in February 2004. Following such sale, Carlyle
held 4.4 million shares, constituting 8.5% of our
outstanding shares. In connection with our initial public
offering, we entered into agreements with Carlyle pursuant to
which Carlyle entities had the right to designate up to four
nominees for our Board of Directors, so long as Carlyle owned
greater than 20% of our voting stock. By virtue of
Carlyles sales of United Defense shares to date, such
agreements have lapsed. Nonetheless, three individuals
affiliated with Carlyle (Messrs. Carlucci, Conway, and
Clare) have been nominated for re-election to our Board of
Directors at our annual meeting scheduled for April 13,
2004, and Carlyle may thereby continue to influence our
operations.

In accordance with the management agreement
between United Defense Industries and Carlyle, we accrued an
annual fee of $2 million for various management services
provided by Carlyle. This management service agreement will no
longer be in effect after the first quarter of 2004. We
compensated four of our directors an aggregate sum of $184,214
in 2003 for their services as directors.

We have entered into an agreement with CPU
Technology, Inc. (CPU/T) to purchase approximately
$1.5 million in component and design services regarding
electronic subsystems for the Bradley program. Certain Carlyle
affiliates are minority stockholders of CPU/T and collectively
have the right to appoint two of the six members of CPU/Ts
board.

We recognized $7.1 million and
$17.6 million of royalties, license fees and technical
service fees at December 31, 2002 and 2003, respectively,
from our Turkish joint venture. We have also entered into an
agreement with our Turkish joint venture to purchase
approximately $2.4 million in miscellaneous parts and kits
for our M113 vehicles and MK 25 canisters.



|    |                             
|--- | ----------------------------
|15. | Other Employee Benefit Plans

Substantially all of our domestic employees are
eligible to participate in defined contribution savings plans
designed to comply with the requirements of the Employee
Retirement Income Security Act of 1974 (ERISA) and
Section 401(k) of the Internal Revenue Code. Charges
against income for matching contributions to the plans were
$8.8 million in each of the years ended December 31,
2001 and 2002, respectively, and $8.7 million in the year
ended December 31, 2003.

F-26



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

USMR maintains defined contribution savings and
profit-sharing plans covering employees of its various locations
who are eligible to participate in its plans upon meeting
eligibility requirements. Costs charged to expense for these
plans were $1.1 million for the period July 2, 2002
through December 31, 2002, and $2.8 million in the
year ended December 31, 2003. During 2002, USMR also
maintained a defined contribution deferred compensation plan
covering certain executives. Total costs charged to expense were
$0.3 million for the period July 2, 2002 through
December 31, 2002. USMR made contributions to
union-sponsored trust funds, which provide health, welfare,
pension and other fringe benefits to employees covered by
collective bargaining agreements. Company contributions totaled
$1.2 million for the period July 2, 2002 through
December 31, 2002, and $2.9 million in the year ended
December 31, 2003.



|    |                   
|--- | ------------------
|16. | Earnings Per Share

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

|                                                                         |  |                              |        |      |  |      |         |  |  |   |         | 
|------------------------------------------------------------------------ |  | ---------------------------- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                                         |  |                             
|                                                                         |  | December 31                 
|                                                                         |  |                             
|                                                                         |  | 2001                         |        | 2002 |  | 2003
|                                                                         |  |                              |        |      |  |     
|                                                                         |  |                             
|                                                                         |  | (In thousands, except shares
|                                                                         |  | and per share data)         
|Net income:                                                              |  |                              |        |      |  |      |         |  |  |   |         | 
|Net income for basic and diluted computations                            |  | $                            | 8,776  |      |  | $    | 134,576 |  |  | $ | 140,648 | 
|                                                                         |  |                              |        |      |  |      |         |  |  |   |         | 
|                                                                        
|Average common shares outstanding:                                       |  |                              |        |      |  |      |         |  |  |   |         | 
|Average common shares outstanding for
    basic computations             |  |                              | 41,265 |      |  |      | 51,349  |  |  |   | 51,955  | 
|Dilutive stock optionsbased on the treasury
    stock method            |  |                              | 1,939  |      |  |      | 1,448   |  |  |   | 988     | 
|                                                                         |  |                              |        |      |  |      |         |  |  |   |         | 
|Average number of common shares outstanding for
    diluted computations |  |                              | 43,204 |      |  |      | 52,797  |  |  |   | 52,943  | 
|                                                                         |  |                              |        |      |  |      |         |  |  |   |         | 
|Earnings per share:                                                      |  |                              |        |      |  |      |         |  |  |   |         | 
|Earnings per common sharebasic                                          |  | $                            | 0.21   |      |  | $    | 2.62    |  |  | $ | 2.71    | 
|                                                                         |  |                              |        |      |  |      |         |  |  |   |         | 
|Earnings per common sharediluted:                                       |  | $                            | 0.20   |      |  | $    | 2.55    |  |  | $ | 2.66    | 
|                                                                         |  |                              |        |      |  |      |         |  |  |   |         | 



|    |                                 
|--- | --------------------------------
|17. | Information on Business Segments

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

F-27



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summary financial data for each of our business
segments for the three years ended December 30, 2001, 2002
and 2003 follow:

|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|-------------------------------------------------------------- |  | -------------- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                               |  |               
|                                                               |  | December 31,  
|                                                               |  |               
|                                                               |  | 2001           |           | 2002 |  | 2003
|                                                               |  |                |           |      |  |     
|                                                               |  |               
|                                                               |  | (in thousands)
|Sales:                                                         |  |                |           |      |  |      |           |   |  |   |           |  
|Defense Systems                                                |  | $              | 1,318,538 |      |  | $    | 1,469,961 |   |  | $ | 1,507,253 |  
|Ship Repair and Maintenance                                    |  |                |          |      |  |      | 255,385   |   |  |   | 545,338   |  
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|Total sales                                                    |  |                | 1,318,538 |      |  |      | 1,725,346 |   |  |   | 2,052,591 |  
|Earnings related to investments in foreign
    affiliates:     |  |                |           |      |  |      |           |   |  |   |           |  
|Defense Systems                                                |  |                | 10,156    |      |  |      | 13,874    |   |  |   | 19,758    |  
|Ship Repair and Maintenance                                    |  |                |          |      |  |      |          |   |  |   |          |  
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|Total earnings related to investments in foreign
    affiliate |  |                | 10,156    |      |  |      | 13,874    |   |  |   | 19,758    |  
|Depreciation and amortization:                                 |  |                |           |      |  |      |           |   |  |   |           |  
|Defense Systems                                                |  |                | 70,037    |      |  |      | 31,331    |   |  |   | 27,324    |  
|Ship Repair and Maintenance                                    |  |                |          |      |  |      | 9,787     |   |  |   | 20,513    |  
|Corporate                                                      |  |                | (779      | )    |  |      | 136       |   |  |   | 165       |  
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|Total depreciation                                             |  |                | 69,258    |      |  |      | 41,254    |   |  |   | 48,002    |  
|Capital spending:                                              |  |                |           |      |  |      |           |   |  |   |           |  
|Defense Systems                                                |  |                | 22,222    |      |  |      | 17,341    |   |  |   | 21,123    |  
|Ship Repair and Maintenance                                    |  |                |          |      |  |      | 5,385     |   |  |   | 22,425    |  
|Corporate                                                      |  |                | 153       |      |  |      | 46        |   |  |   | 62        |  
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|Total capital spending                                         |  |                | 22,375    |      |  |      | 22,772    |   |  |   | 43,610    |  
|Income before interest and taxes:                              |  |                |           |      |  |      |           |   |  |   |           |  
|Defense Systems                                                |  |                | 104,637   |      |  |      | 182,026   |   |  |   | 230,909   |  
|Ship Repair and Maintenance                                    |  |                |          |      |  |      | 18,501    |   |  |   | 30,839    |  
|Corporate                                                      |  |                | (39,010   | )    |  |      | (20,402   | ) |  |   | (22,380   | )
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|Total income before interest and taxes                         |  |                | 65,627    |      |  |      | 180,125   |   |  |   | 239,368   |  
|Interest, net                                                  |  |                | (22,705   | )    |  |      | (28,690   | ) |  |   | (24,119   | )
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  
|Income before income taxes                                     |  | $              | 42,922    |      |  | $    | 151,435   |   |  | $ | 215,249   |  
|                                                               |  |                |           |      |  |      |           |   |  |   |           |  

|                            |  |            |           |            |  |   |           | 
|--------------------------- |  | ---------- | --------- | ---------- |  | - | --------- | 
|                            |  | 12/31/2002 |           | 12/31/2003
|                            |  |            |           |           
|Total assets:(a)            |  |            |           |            |  |   |           | 
|Defense Systems             |  | $          | 884,261   |            |  | $ | 852,863   | 
|Ship Repair and Maintenance |  |            | 421,300   |            |  |   | 438,575   | 
|Corporate and eliminations  |  |            | 148,409   |            |  |   | 299,726   | 
|                            |  |            |           |            |  |   |           | 
|Total assets                |  | $          | 1,453,970 |            |  | $ | 1,591,164 | 
|                            |  |            |           |            |  |   |           | 



---



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

F-28



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                     
|--- | ------------------------------------
|18. | Quarterly Financial Data (Unaudited)

The following table of quarterly financial data
has been prepared from our financial records, without audit, and
reflects all adjustments which are, in our opinion, necessary
for a fair presentation of the results of operations for the
interim periods presented.

On July 2, 2002, we acquired all of the
outstanding stock of United States Marine Repair. Accordingly,
the financial statements reflect the results of operations of
the acquired entity since the date of acquisition. This
acquisition affects the comparability of the financial data for
the interim periods presented.

|                                  |  |                                      |       |              |  |              |       |              |  |   |       |  |  |   |       | 
|--------------------------------- |  | ------------------------------------ | ----- | ------------ |  | ------------ | ----- | ------------ |  | - | ----- |  |  | - | ----- | 
|                                  |  |                                     
|                                  |  | 2002                                
|                                  |  |                                     
|                                  |  | Three months                         |       | Three months |  | Three months |       | Three months
|                                  |  | ended                                |       | ended        |  | ended        |       | ended       
|                                  |  | March 31                             |       | June 30      |  | Sept 30      |       | Dec 31      
|                                  |  |                                      |       |              |  |              |       |             
|                                  |  |                                     
|                                  |  | (In millions, except per share data)
|                                  |  |                                     
|Sales                             |  | $                                    | 356.4 |              |  | $            | 318.0 |              |  | $ | 529.7 |  |  | $ | 521.2 | 
|Gross Profit                      |  |                                      | 59.8  |              |  |              | 69.9  |              |  |   | 102.7 |  |  |   | 104.3 | 
|Net income                        |  |                                      | 19.0  |              |  |              | 27.3  |              |  |   | 45.1  |  |  |   | 43.2  | 
|Per Share Data:                   |  |                                      |       |              |  |              |       |              |  |   |       |  |  |   |       | 
|Earnings per common sharebasic   |  | $                                    | 0.37  |              |  | $            | 0.53  |              |  | $ | 0.88  |  |  | $ | 0.84  | 
|Earnings per common sharediluted |  | $                                    | 0.36  |              |  | $            | 0.52  |              |  | $ | 0.85  |  |  | $ | 0.82  | 

|                                  |  |                                      |       |              |  |              |       |              |  |   |       |  |  |   |       | 
|--------------------------------- |  | ------------------------------------ | ----- | ------------ |  | ------------ | ----- | ------------ |  | - | ----- |  |  | - | ----- | 
|                                  |  |                                     
|                                  |  | 2003                                
|                                  |  |                                     
|                                  |  | Three months                         |       | Three months |  | Three months |       | Three months
|                                  |  | ended                                |       | ended        |  | ended        |       | ended       
|                                  |  | March 31                             |       | June 30      |  | Sept 30      |       | Dec 31      
|                                  |  |                                      |       |              |  |              |       |             
|                                  |  |                                     
|                                  |  | (In millions, except per share data)
|Sales                             |  | $                                    | 466.5 |              |  | $            | 553.5 |              |  | $ | 507.9 |  |  | $ | 524.7 | 
|Gross Profit                      |  |                                      | 103.9 |              |  |              | 106.3 |              |  |   | 107.6 |  |  |   | 95.1  | 
|Net income                        |  |                                      | 38.3  |              |  |              | 36.1  |              |  |   | 37.4  |  |  |   | 28.8  | 
|Per Share Data:                   |  |                                      |       |              |  |              |       |              |  |   |       |  |  |   |       | 
|Earnings per common sharebasic   |  | $                                    | 0.74  |              |  | $            | 0.70  |              |  | $ | 0.72  |  |  | $ | 0.55  | 
|Earnings per common sharediluted |  | $                                    | 0.73  |              |  | $            | 0.68  |              |  | $ | 0.71  |  |  | $ | 0.54  | 

On January 1, 2002, we adopted FAS 142 on
accounting for goodwill and other intangible assets and, as a
result, ceased the amortization of goodwill.

F-29



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|ITEM 9A. | Controls and Procedures

We maintain disclosure controls and procedures
designed to ensure that information required to be disclosed in
our Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Also, we have investments
in certain unconsolidated entities. As we do not control or
manage these entities, the disclosure controls and procedures
with respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated
subsidiaries.

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

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

PART III






|         |                                     
|-------- | ------------------------------------
|ITEM 10. | Directors and Executive
    Officers

The information with respect to directors and
executive officers required by this Item 10 is incorporated
in this report by reference to the information set forth under
the caption Election of Directors and
Executive Officers in our definitive Proxy Statement
for our 2004 Annual Meeting of Stockholders, which will be filed
with the Commission no later than April 30, 2004.
Information relating to certain filings on Forms 3, 4 and 5 is
contained in the Proxy Statement under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance.






|         |                       
|-------- | ----------------------
|ITEM 11. | Executive Compensation

The information required by this Item 11 is
incorporated in this report by reference to the information set
forth under the captions Executive Compensation and
Employment Agreements in our definitive Proxy
Statement for our 2004 Annual Meeting of Stockholders which will
be filed with the Commission no later than April 30, 2004.
The sections entitled Compensation Committee Report on
Executive Compensation and Performance Graph
in the Proxy Statement are not incorporated herein by reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|ITEM 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item 12 is
incorporated in this report by reference to the information set
forth under the caption Security Ownership of Certain
Beneficial Owners and Management in our definitive Proxy
Statement for our 2004 Annual Meeting of Stockholders which will
be filed with the Commission no later than April 30, 2004.






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | Certain Relationships and Related
    Transactions

The information required by this Item 13 is
incorporated in this report by reference to the information set
forth under the caption Certain Relationships and Related
Transactions in our definitive Proxy Statement

36



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##### Table of Contents



for our 2004 Annual Meeting of Stockholders which
will be filed with the Commission no later than April 30,
2004.







|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | Principal Accountant Fees and
    Services

The information required by this Item 14 is
incorporated in this report by reference to the information set
forth under the caption Relationship with independent
Public Accountants in our definitive Proxy Statement for
our 2004 Annual Meeting of Stockholders which will be filed with
the Commission no later than April 30, 2004.



PART IV




|         |                                                                    
|-------- | -------------------------------------------------------------------
|ITEM 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are included as
part of this Annual Report on Form 10-K:

1. The index of financial statements has been
included with Item 8.

2. Financial statement schedules:

Schedule II:

|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |        |        | 
|----------------------------- | -------------------------------------------- | ---------- | - | ---------- | ------ | ---------- | - | ----------- | ----- | ---------- | - | ----- | ------ |  | - | ----- | ------ |  | - | ------ | ------ | 
|                              |                                              |            |   |            |        |            |   |            
|                              |                                              |            |   | Additions  |        |            |   |            
|                              |                                              |            |   |            |        |            |   |            
|                              |                                              | Balance at |   | Charged to |        | Charged to |   |             |       | Balance at
|                              |                                              | Beginning  |   | costs &    |        | other      |   | Deductions/ |       | End of    
|Description                   |                                              | of Period  |   | expenses   |        | accounts   |   | Payments    |       | Period    
|                              |                                              |            |   |            |        |            |   |             |       |           
|Year Ended December 31, 2001: |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              | Reserve for remediation and compliance costs |            | $ | 14,255     |        |            | $ |            |       |            | $ |      |        |  | $ |      |        |  | $ | 14,255 |       
|                              | Restructuring reserve                        |            |   | 1,100      |        |            |   | 8,268       |       |            |   |      |        |  |   | 1,100 |        |  |   | 8,268  |       
|                              | Litigation reserve                           |            |   | 6,246      |        |            |   |            |       |            |   |      |        |  |   | 1,724 |        |  |   | 4,522  |       
|                              | Allowance for Doubtful Accounts              |            |   | 1,063      |        |            |   | 1,039       |       |            |   | 51    |        |  |   | 114   |        |  |   | 2,039  |       
|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              |                                              | Total      |   | $          | 22,664 |            |   | $           | 9,307 |            |   | $     | 51     |  |   | $     | 2,938  |  |   | $      | 29,084 | 
|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|Year Ended December 31, 2002: |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              | Reserve for remediation and compliance costs |            | $ | 14,255     |        |            | $ | 3,727       |       |            | $ | 9,500 |        |  | $ |      |        |  | $ | 27,482 |       
|                              | Restructuring reserve                        |            |   | 8,268      |        |            |   | 3,549       |       |            |   | 1,300 |        |  |   | 8,031 |        |  |   | 5,086  |       
|                              | Litigation reserve                           |            |   | 4,522      |        |            | $ | 540         |       |            |   |      |        |  |   | 1,869 |        |  |   | 3,193  |       
|                              | Allowance for Doubtful Accounts              |            |   | 2,039      |        |            |   | 459         |       |            |   | 629   |        |  |   | 795   |        |  |   | 2,332  |       
|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              |                                              | Total      |   | $          | 29,084 |            |   | $           | 8,275 |            |   | $     | 11,429 |  |   | $     | 10,695 |  |   | $      | 38,093 | 
|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|Year Ended December 31, 2003: |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              | Reserve for remediation and compliance costs |            | $ | 27,482     |        |            | $ | 7,388       |       |            | $ |      |        |  | $ | 1,707 |        |  | $ | 33,163 |       
|                              | Restructuring reserve                        |            |   | 5,086      |        |            |   | 843         |       |            |   |      |        |  |   | 1,781 |        |  |   | 4,148  |       
|                              | Litigation reserve                           |            |   | 3,193      |        |            |   |            |       |            |   |      |        |  |   | 3,193 |        |  |   |       |       
|                              | Allowance for Doubtful Accounts              |            |   | 2,332      |        |            |   | 376         |       |            |   | 102   |        |  |   | 7     |        |  |   | 2,803  |       
|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              |                                              | Total      |   | $          | 38,093 |            |   | $           | 8,607 |            |   |       | 102    |  |   | $     | 6,688  |  |   | $      | 40,114 | 
|                              |                                              |            |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       

All other schedules have been omitted because
they are inapplicable, not required, or the information is
included elsewhere in the consolidated financial statements or
notes thereto.

3. The index of exhibits is set forth below.

(b) Reports on Form 8-K filed in the
fourth quarter of 2002.

37



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| |  |                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On October 23, 2003 we filed a report on
    Form 8-K to include our third quarter 2003 earnings press
    release.                                                                                                                                                                      
|
| |  | On November 7, 2003 we filed a report on
    Form 8-K indicating we had entered into an Underwriting
    Agreement with J. P. Morgan Securities, Inc. in connection with
    the public offering of up to 1,500,000 shares of our common
    stock by certain named selling shareholders.

38



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##### Table of Contents



|        |          |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -------- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |                        
|No.     |          | Description of Exhibits
|        |          |                        
|        | 2.1(4)   |                         |  | Agreement and Plan of Merger by and among United
    Defense Industries, Inc., UDII Torch Acquisition Corporation,
    United States Marine Repair, Inc., and TC Group L.L.C. as
    representative dated May 27, 2002                                                                                                                                                                                                                                                                                                            
|        | 3.1(1)   |                         |  | Second Amended and Restated Certificate of
    Incorporation of United Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 3.2(1)   |                         |  | Second Amended and Restated Bylaws of United
    Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 4.1(1)   |                         |  | Form of stock certificate of common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.1(1)  |                         |  | Sub-Lease Agreement among the
    Louisville/Jefferson County Development Authority, Inc. and
    United Defense, L.P., as amended by that certain First Amendment
    to Sublease of Real and Personal Property Agreement among the
    Louisville/Jefferson County Development Authority, Inc. and
    United Defense, L.P., as supplemented by Modifications Nos. 1-12                                                                                                                                                         
|        | 10.2(6)  |                         |  | Modification No. 13 to the Sub-Lease Agreement
    among the Louisville/Jefferson County Development Authority,
    Inc. and United Defense, LP, as amended by that certain First
    Amendment to Sublease of Real and Personal Property Agreement
    among the Louisville/Jefferson County Development Authority,
    Inc. and United Defense, LP                                                                                                                                                                              
|        | 10.3(1)  |                         |  | Facilities contract number N00024-93-E-8521,
    dated November 16, 1992 among United Defense, L.P., Armament
    Systems Divisions and the U.S. Government Naval Sea Systems
    Command for the use of the government owned facility located at
    4800 East River Road, Minneapolis, MN 55421                                                                                                                                                                                                                                 
|        | 10.4(6)  |                         |  | Amendment dated June 6, 2003 to the Facilities
    contract number N00024-93-E-8521, dated November 16, 1992 among
    United Defense, LP, Armament Systems Divisions and the U.S.
    Government Naval Sea Systems Command                                                                                                                                                                                                                                                                                                       
|        | 10.5 (2) |                         |  | Management Agreement dated October 6, 1997 among
    United Defense Industries, Inc., United Defense, L.P. and TC
    Group Management, L.L.C.                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.6(6)  |                         |  | Employment Agreement with Alexander J. Krekich,
    dated as of December 12, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.7(3)  |                         |  | Employment Agreement with Thomas W. Rabaut, dated
    as of May 21, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.8 (1) |                         |  | First Amendment to Employment Agreement with
    Thomas W. Rabaut, dated as of July 18, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.9(3)  |                         |  | Employment Agreement with Francis Raborn, dated
    as of May 21, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.10(1) |                         |  | First Amendment to Employment Agreement with
    Francis Raborn, dated July 18, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.11(6) |                         |  | Amended and Restated Credit Agreement dated as of
    August 13, 2001 and amended and restated as of July 2, 2002
    among United Defense Industries, Inc., various lending
    institutions, Deutsche Bank Securities, Inc. and Lehman
    Brothers, Inc., as co-lead arrangers, Deutsche Bank Trust
    Company Americas, as Administrative Agent, Lehman Commercial
    Paper, Inc., as Syndication Agent and Citicorp USA, Inc., The
    Bank of Nova Scotia and Credit Lyonnais New York Branch, as
    Documentation Agents
|        | 10.12(2) |                         |  | United Defense 1998 Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.13(2) |                         |  | Form of Option Contract                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.14(5) |                         |  | Amendment No. 1 to United Defense Stock Option
    Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.15(5) |                         |  | Amendment No. 2 to United Defense Stock Option
    Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.16(1) |                         |  | Registration Rights Agreement by and between Iron
    Horse Investors, L.L.C. and United Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.17(1) |                         |  | Management Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.18(1) |                         |  | UDLP Employees Pension Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.19(1) |                         |  | UDLP Excess Pension Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.20(1) |                         |  | Form of Retention Bonus Plan Award Letter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.21(1) |                         |  | Severance Pay Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.22(6) |                         |  | First Amendment to Credit Agreement dated as of
    November 19, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 21.1(6)  |                         |  | Subsidiaries of United Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

39



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##### Table of Contents



|        |          |                         |  |                                                                                                                                                   
|------- | -------- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |                        
|No.     |          | Description of Exhibits
|        |          |                        
|        | 23.1(6)  |                         |  | Consent of Ernst & Young LLP                                                                                                                      
|        | 23.2(6)  |                         |  | Notice Regarding Lack of Consent of Independent
    Auditor SERBEST MUHASEBECILIK MALI MUSAVIRLIK ANONIM SIRKETI,
    Member of Andersen Worldwide
|        | 23.3(6)  |                         |  | Notice Regarding Lack of Consent of Independent
    Auditor Arthur Andersen & Co.                                                                 
|        | 31.1 (6) |                         |  | Certification of Chief Executive Officer                                                                                                          
|        | 31.2 (6) |                         |  | Certification of Chief Financial Officer                                                                                                          
|        | 32.1 (6) |                         |  | Certification of Chief Executive Officer                                                                                                          
|        | 32.2 (6) |                         |  | Certification of Chief Financial Officer                                                                                                          



---



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (333-71986) filed with
    the Securities and Exchange Commission on October 22, 2001.
|   
|(2) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 (333-60207) filed with
    the Securities and Exchange Commission on July 30, 1998.   
|   
|(3) | Incorporated by reference to the Companys
    Report on Form 10-Q for the quarter ended June 30,
    1999.                                                             
|   
|(4) | Incorporated by reference to the Companys
    Report on Form 8-K filed June 4, 2002                                                                                    
|   
|(5) | Incorporated by reference to the Companys
    Report on Form 10-Q for the year ended September 30,
    2002.                                                           
|   
|(6) | Filed herewith                                                                                                                                                          

40



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



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

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | Francis Raborn                                     
| | Chief Financial Officer and Principal
    Financial
| | and Accounting Officer of the
    Registrant       

Pursuant to the requirements of the Securities
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the
dates indicated.

|                                                   |  |                                                          |  |               |  | 
|-------------------------------------------------- |  | -------------------------------------------------------- |  | ------------- |  | 
|                                                   |  |                                                          |  |              
|Name                                               |  | Title                                                    |  | Date         
|                                                   |  |                                                          |  |              
|                                                  
|/s/ THOMAS W. RABAUTThomas W. Rabaut               |  | President, Chief Executive Officer
    and Director      |  | March 2, 2004
|                                                  
|/s/ FRANCIS RABORNFrancis Raborn                   |  | Vice President, Chief Financial Officer
    and Director |  | March 2, 2004
|                                                  
|/s/ WILLIAM E. CONWAY, JRWilliam E. Conway, Jr     |  | Chairman of the Board                                    |  | March 2, 2004
|                                                  
|/s/ FRANK C. CARLUCCIFrank C. Carlucci             |  | Director                                                 |  | March 2, 2004
|                                                  
|/s/ PETER J. CLAREPeter J. Clare                   |  | Director                                                 |  | March 2, 2004
|                                                  
|/s/ ALLAN M. HOLTAllan M. Holt                     |  | Director                                                 |  | March 2, 2004
|                                                  
|/s/ C. THOMAS FAULDERS, IIIC. Thomas Faulders, III |  | Director                                                 |  | March 2, 2004
|                                                  
|/s/ JOHN M. SHALIKASHVILIJohn M. Shalikashvili     |  | Director                                                 |  | March 2, 2004
|                                                  
|/s/ J.H. BINFORD PEAY, IIIJ. H. Binford Peay, III  |  | Director                                                 |  | March 2, 2004
|                                                  
|/s/ ROBERT J. NATTERRobert J. Natter               |  | Director                                                 |  | March 2, 2004

41