UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

~~SECURITIES~~For ~~EXCHANGE~~the ~~ACT~~quarterly OFperiod ~~1934~~ended March 31, 2005

~~For~~o TRANSITION REPORT ~~the~~PURSUANT ~~quarterly~~TO ~~period~~SECTION 13 ~~ended~~OR ~~September 30,~~15(d) OF THE SECURITIES ~~2003~~EXCHANGE ACT OF 1934

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16821

UNITED DEFENSE INDUSTRIES, INC.

(Exact Name of Registrant as Specified in its charter)

Delaware		52-2059782
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)
1525 Wilson Boulevard, Suite 700 Arlington, Virginia		22209-2411
(Address of Principal Executive Offices)		(Zip Code)

(703) 312-6100

(Registrant’s telephone number, including area code)

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

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

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

At ~~October~~April 3115, ~~2003,~~2005 there were 5250,~~134~~848,~~384~~ 293 shares outstanding of the Registrant’s common stock, par ~~value~~ value $.01 per share.

UNITED DEFENSE INDUSTRIES, INC.

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1.	~~Unaudited~~ Consolidated Financial Statements — United Defense Industries, Inc.
	Consolidated Balance Sheets as of December 31, 2002 and September 30, 2003 (unaudited)		2
	Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005 (unaudited)		2
	Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and 2003		3
	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2004 and 2005		3
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the nine months ended September 30, 2003		4
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2005		4
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2003		5
	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2005		5
	Notes to Unaudited Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of the Results of Operations and Financial Condition		1315
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		1820
Item 4.	Controls and Procedures		1820
PART II — OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		19
Item 2.	Repurchase of Common Stock by the Issuer		21
Signature			20
Item 6.	Exhibits		21
Certifications			21
Signature			22

UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

			December 31, 2002			September 30, 2003
			December 31, 2004			March 31, 2005
						(Unaudited)
ASSETS
Current assets:
		Cash and cash equivalents	$	~~106~~307,~~802~~258		$	~~241~~287,~~114~~375
		Trade receivables, net		~~192~~202,~~166~~980			~~200~~187,~~662~~444
		Inventories		399,189			330,652
		Long-term contract inventories		324,937			336,936
		Deferred tax asset		25,436			—
		Other current assets		34,029			32,647
		Other current assets		15,458			15,765
	Total current assets			869,204			844,402
	Total current assets			739,051			788,193
Property, plant and equipment, net				199,507			200,313
Property, plant and equipment, net				170,378			179,009
Goodwill, net				355,653			358,137
Goodwill, net				341,962			341,962
Intangible assets, net				9,956			9,757
Intangible assets, net				32,624			21,041
Prepaid pension and postretirement benefit cost				120,459			118,451
Prepaid pension and postretirement benefit cost				120,987			124,439
Restricted cash				13,201			12,404
Restricted cash				10,120			11,333
Other assets				33,594			33,188
Other assets				38,848			43,960
Total assets			$	1,601,574		$	1,576,652
Total assets			$	1,453,970		$	1,509,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
		Current portion of long-term debt	$	1352,~~011~~043		$	3952,~~032~~043
		Accounts payable, trade and other		~~121~~132,~~801~~480			98116,~~099~~102
		Advanced payments		~~491~~372,~~217~~889			~~457~~367,~~797~~388
		Accrued and other liabilities		140,914			125,732
		Current tax liability		25,159			12,660
	Total current liabilities			766,943			720,660
		Deferred tax liability, net		20,000			20,499
		Accrued and other liabilities		170,164			158,523
	Total current liabilities			772,735			727,215
Long-term liabilities:
		Long-term debt, net of current portion		~~576~~472,~~989~~904			~~537~~459,~~957~~894
		Accrued pension and postretirement benefit cost		5146,~~964~~317			5845,~~822~~945
		Deferred tax liability		155,~~124~~166			234,~~002~~923
		Other liabilities		7278,~~655~~336			8479,~~139~~674
Total liabilities	~~Total liabilities~~			1,~~483~~375,~~675~~458			1,~~424~~317,~~580~~651
Commitments and contingencies
Stockholders’ (deficit) equity:
Stockholders’ equity:
		Common stock $.01 par value, 150,000,000 shares authorized; 51,695,109 and 52,095,884 issued and outstanding at December 31, 2002 and September 30, 2003, respectively		517			521
	Common stock $.01 par value, 150,000,000 shares authorized; 53,103,539 and 50,611,739 issued and outstanding at December 31, 2004; 53,338,426 and 50,846,626 issued and outstanding, respectively, at March 31, 2005			506			508
	Additional paid-in-capital			~~177~~198,~~740~~083			~~180~~213,~~027~~525
	Deferred compensation			(~~547~~3,322	)		(~~487~~10,208	)
	Retained deficit			(194,952	)		(83,107	)
	Retained earnings			27,834			54,165
	Accumulated other comprehensive loss			(12,463	)		(11,597	)
	Accumulated other comprehensive gain			3,015			1,011
	Total stockholders’ (deficit) equity			(29,705	)		85,357
	Total stockholders’ equity			226,116			259,001
Total liabilities and stockholders’ equity (deficit)			$	1,453,970		$	1,509,937
Total liabilities and stockholders’ equity			$	1,601,574		$	1,576,652

See accompanying notes.

UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except ~~shares and~~ per share data)

			Three months ended						~~Nine months ended~~
			September 30,						September 30,
			March 31,
			2002			2003			2002			2003
			2004			2005
Revenue:
Sales			$	547,077		$	544,060
	Sales		$	529,701		$	507,915		$	1,204,182		$	1,527,891
Costs and expenses:
Costs and expenses:
	Cost of sales			435,087			437,442
	Cost of sales			426,976			400,298			971,672			1,210,061
	Selling, general and administrative expenses			38,759			40,586
	Selling, general and administrative expenses			37,528			38,065			98,013			117,003
	Merger related expenses			—			4,054
	Research and development			76,~~640~~553			104,~~717~~743			~~22,854~~			~~16,752~~
		Total expenses		~~472~~480,~~144~~399			~~449~~486,~~080~~825			~~1,092,539~~			~~1,343,816~~
Income from operations				5766,~~557~~678			5857,~~835~~235			~~111,643~~			~~184,075~~
Other income (expense):
	Earnings (loss) related to investments in foreign affiliates			(561	)		5,003			6,652			16,658
	Earnings related to investments in foreign affiliates			5,816			—
	Interest income			~~1,188~~973			1,~~012~~822			~~3,346~~			~~2,909~~
	Interest expense			(126,~~611~~454	)		(76,~~100~~683	)		~~(25,246~~	)		~~(21,801~~	)
Total other expense				(11,984	)		(1,085	)		(15,248	)		(2,234	)
Total other income (expense)				335			(4,861	)
Income before income taxes				4567,~~573~~013			5752,~~750~~374			~~96,395~~			~~181,841~~
Provision for income taxes				~~493~~25,130			2019,~~360~~677			~~5,000~~			~~69,996~~
Net income			$	4541,~~080~~883		$	3732,~~390~~697		$	~~91,395~~		$	~~111,845~~
Earnings per common share-basic			$	0.8880		$	0.7264		$	~~1.78~~		$	~~2.16~~
	Weighted average common shares outstanding			5152,~~513,743~~400			5250,~~029,410~~752			~~51,239,233~~			~~51,883,593~~
Earnings per common share-diluted			$	0.8578		$	0.7163		$	~~1.73~~		$	~~2.12~~
	Weighted average common shares outstanding			5253,~~759,182~~368			5251,~~994,910~~889			~~52,706,671~~			~~52,802,260~~

See accompanying notes.

UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS

OF CHANGES IN STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

(In thousands)

											Accumulated
			Additional								Other
	Common		Paid-In		Deferred			Retained			Comprehensive
	Stock		Capital		Compensation			~~Deficit~~Earnings			(Loss)/Gain			Total
Balance, December 31, 2002	$	517	$	177,740	$	(547	)	$	(194,952	)	$	(12,463	)	$	(29,705	)
Balance, December 31, 2004	$	506	$	198,083	$	(3,322	)	$	27,834		$	3,015		$	226,116
Amortization of deferred stock compensation		—		—		60			—			—			60
Issuance of restricted stock awards				7,558		(7,558	)								—
Exercise of stock options		4		2,287		—			—			—			2,291
Amortization of deferred stock compensation		—		—		672			—			—			672
Net foreign currency translation		—		—		—			—			1,270			1,270
Exercise of stock options		2		5,097		—			—			—			5,099
Change in fair value of foreign currency and interest rate hedges, net of tax		—		—		—			—			(404	)		(404	)
Tax benefit from stock options		—		2,787		—			—			—			2,787
Net income for the nine months ended September 30, 2003		—		—		—			111,845			—			111,845
Cash dividend ($0.125 per share)									(6,366	)					(6,366	)
Total comprehensive income															112,711
Net foreign currency translation		—		—		—			—			(1,182	)		(1,182	)
Balance, September 30, 2003	$	521	$	180,027	$	(487	)	$	(83,107	)	$	(11,597	)	$	85,357
Change in fair value of foreign currency and interest rate hedges, net of tax		—		—		—			—			(763	)		(763	)
Change in unrealized appreciation on investment		—		—		—			—			(59	)		(59	)
Minimum pension liability, net of tax															—
Net income for the three months ended March 31, 2005									32,697						32,697
Total comprehensive income															30,693
Balance, March 31, 2005	$	508	$	213,525	$	(10,208	)	$	54,165		$	1,011		$	259,001

See accompanying notes.

UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Nine months ended
		Three months ended
		September 30,
		March 31,
		2002			2003
		2004			2005
Operating activities
Net income		$	9141,~~395~~883		$	~~111~~32,~~845~~697
Adjustments to reconcile net income to cash provided by operating activities:
	Depreciation		176,~~664~~754			206,~~170~~758
	Amortization of software		41,~~131~~221			~~3,585~~735
	Amortization of other intangibles		61,~~444~~720			111,~~261~~598
	Amortization of financing costs		~~2,481~~759			~~2,524~~555
	Net loss from early extinguishment of debt		1,859			—
	Deferred tax provision		2,336			416
	Deferred tax provision		—			33,314
Changes in operating assets and liabilities, net of effect of acquisitions
Changes in assets and liabilities:
	Trade receivables		(54,399	)		14,780
	Trade receivables		(53,827	)		(6,733	)
	Inventories		30,288			(10,692	)
	Inventories		19,845			71,006
	Other assets		19,940			2,772
	Other assets		(6,220	)		(7,719	)
	Prepaid pension and postretirement benefit cost		1,561			2,008
	Prepaid pension and postretirement benefit cost		(2,185	)		(3,452	)
	Accounts payable, trade and other		(24,615	)		(15,086	)
	Accounts payable, trade and other		(10,184	)		(24,626	)
	Advanced payments		1,861			(5,046	)
	Advanced payments		44,321			(37,572	)
	Current tax liability		—			(12,532	)
	Accrued and other liabilities		~~(35~~7,~~334~~286	)		(68,~~635~~184	)
	Accrued pension and postretirement benefit cost		(43,~~665~~686	)		~~5,252~~629
Cash provided by operating activities			7532,~~725~~909			~~172~~11,~~220~~408
Investing activities
	Capital expenditures		(135,~~174~~056	)		(326,~~247~~534	)
	Purchase of Cell ITS, net of $0.2 million cash acquired		(4,135	)		—
	Purchase of Engineered Plastic Designs, Inc., net of $0.2 million cash acquired		—			(7,997	)
	Purchase of USMR, net of $7.3 million cash acquired		(307,404	)		—
	Purchase of Kaiser Compositek, Cercom and Hawaii Shipyards		(45,766	)		—
Cash used in investing activities			(~~324~~50,~~713~~822	)		(3214,~~247~~531	)
Financing activities
	Payments on long-term debt		(9013,~~900~~010	)		(13,~~011~~010	)
	Proceeds from senior secured facility		300,000			—
	Proceeds from sale of common stock		3,290			5,099
	Proceeds from sale of common stock		3,281			2,291
	Dividend payment		—			(6,366	)
	Payments for financing and transaction cost		(5,470	)		—
Cash used in financing activities			(9,720	)		(14,277	)
Cash provided by (used in) financing activities			206,911			(10,720	)
Effect of exchange rate changes on cash			(2,688	)		(2,483	)
Effect of exchange rate changes on cash			6,312			5,059
Decrease in cash and cash equivalents			(30,321	)		(19,883	)
(Decrease) increase in cash and cash equivalents			(35,765	)		134,312
Cash and cash equivalents, beginning of year			286,730			307,258
Cash and cash equivalents, beginning of year			90,535			106,802
Cash and cash equivalents, end of period		$	256,409		$	287,375
Cash and cash equivalents, end of period		$	54,770		$	241,114

See accompanying notes.

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2003~~2005


1.	Basis of Presentation

The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. Financial information as of December 31, 2004 ~~2002~~ presented in this quarterly report has been derived from the audited financial statements of United Defense Industries, Inc., but does not include all the associated ~~disclosures~~annual disclosures required by generally accepted accounting principles. InCertain amounts in prior period financial statements have been reclassified to conform to the current period presentation. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal, recurring adjustments) necessary to present fairly our financial position as of ~~September~~March 3031, ~~2003~~ 2005 and the results of operations for the three months ~~and nine months~~ ended ~~September~~March 3031, ~~2002~~2004 and 2005 ~~2003~~ and cash flows for the ~~nine~~three months ended ~~September~~March 3031, 2004 ~~2002~~ and ~~2003~~2005. The results of operations are not necessarily indicative of the results that may be expected for the year ~~ending~~ ending December 31, ~~2003~~2005. These unaudited consolidated ~~financial~~ financial statements should be read in conjunction with the ~~financial~~ financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended ~~December 31, 2002 and our~~ ~~Quarterly Reports on Form~~December ~~10-Q for the quarters ended March~~ 31, ~~and June 30, 2003~~2004.


2.	Summary of Significant Accounting Principles


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

We use different techniques for estimating and recording revenues depending on the type and characteristics of the contract. Sales are recognized on most fixed-price production contracts when the risks and rewards of ownership have been transferred to the customer. For our DoD production contracts, those criteria are typically met when the manufacture of the product is completed and the customer has certified it as meeting the contract specifications and as having passed quality control tests. However, under recent Bradley and M113 production contracts, sales are not recognized until the vehicles are fielded to individual U.S. Army (“Army”) units, because it is at that point that the risks and rewards of ownership are stipulated to be transferred. Fielding a vehicle refers to the final deprocessing activity such as verifying proper running condition, installing on-board equipment, and obtaining 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 production contracts with foreign customers, 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 quarterly and recognize changes in estimates of gross margins during the period in which those changes are determined. Sales under fixed-price ship repair and maintenance contracts are recognized as work is performed. Under this method, contract costs are expensed as incurred and sales are recognized simultaneously based on the ratio of direct labor inputs and other costs incurred to date compared with 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 base fees in the proportion that costs incurred to date bear to total estimated costs. Award fees are recorded as revenue when contracts are modified to incorporate the earned award fees. We charge any anticipated losses on a contract to operations as soon as those losses are determined.


	*Stock-Based Compensation*

At ~~September~~March 3031, ~~2003~~2005, we had a stock-based ~~employee~~ employee compensation plan, which is described more fully in our Form 10-K for the year ended December 31, ~~2002~~2004. 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~~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 expense 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 applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

		Three months ended						Nine months ended
		September 30,						September 30,
		2002			2003			2002			2003
		(In thousands, except per share data)
Net income, as reported		$	45,080		$	37,390		$	91,395		$	111,845
Add back: Compensation expense recorded, net of related tax effects			15			12			45			37
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(220	)		(1,127	)		(660	)		(3,225	)
Pro forma net income		$	44,875		$	36,275		$	90,780		$	108,657
Earnings per share:
	Basic—as reported	$	0.88		$	0.72		$	1.78		$	2.16
	Basic—pro forma	$	0.87		$	0.70		$	1.77		$	2.09
	Diluted—as reported	$	0.85		$	0.71		$	1.73		$	2.12
	Diluted—pro forma	$	0.85		$	0.68		$	1.72		$	2.06

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The~~statements ~~effect~~ of ~~applying~~operations ~~Statement~~if ~~No. 123 on~~ the ~~net~~option ~~income~~price ~~as stated above~~ is ~~not~~less ~~necessarily~~than ~~representative~~fair value of the ~~effects~~common onstock ~~reported~~at ~~net~~the ~~income~~date ~~(loss)~~an ~~for~~option ~~future~~is ~~periods~~granted. Upon ~~due~~closing ~~to,~~of ~~among~~our ~~other~~merger ~~things,~~agreement ~~the~~with ~~vesting~~BAE ~~period~~Systems (See Note 13), all of the ~~stock options~~outstanding ~~and additional~~ stock options ~~that~~and restricted ~~may~~shares bewill ~~granted in the future~~vest.

InThe ~~2003,~~following wetable ~~granted~~illustrates ~~new~~the ~~stock~~effect ~~options~~on tonet ~~purchase~~income and ~~2,208,000~~earnings ~~common~~per ~~shares~~share ~~that~~if ~~vest~~we ~~over~~had ~~three~~elected ~~years~~to atapply ~~exercise~~the fair value ~~prices~~recognition provisions of ~~$23.15~~FASB ~~and~~Statement 24No.~~98,~~ 123 ~~which resulted in no additional~~(as ~~compensation~~amended ~~expense.~~by ~~There~~SFAS 148), ~~were~~“Accounting nofor ~~options~~Stock-Based Compensation,” ~~granted~~to instock-based ~~2002~~employee compensation.


		Three months ended
		March 31,

		2004			2005

		(In thousands, except
		per share data)
Reported net income		$	41,883		$	32,697
Add back: Compensation expense recorded, net of related tax effects			162			419
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,708	)		(1,396	)

Pro forma net income		$	40,337		$	31,720

Earnings per share:
	Basic — as reported	$	0.80		$	0.64

	Basic — pro forma	$	0.77		$	0.63

	Diluted — as reported	$	0.78		$	0.63

	Diluted — pro forma	$	0.76		$	0.61


	*Restricted Stock*

On March 2, 2005, the Board of Directors authorized the issuance of up to 266,700 shares of restricted stock. A portion of the awards (133,350 shares) vest on the passage of time and become fully vested on December 31, 2007. Compensation expense for those awards was measured on the fair value of $56.68 per share at the date of grant and is being amortized over the vesting period. During the quarter ended March 31, 2005, compensation expense related to these restricted stock grants was approximately $0.7 million. The remaining 133,350 shares are performance based shares and vest if certain financial targets are achieved by December 31, 2007. Compensation expense for the performance based awards will be recorded only if it becomes probable that the performance targets will be met and the shares will vest. The expense will be measured periodically based on the fair value of shares at each reporting period until the number of shares to be issued becomes known. As of March 31, 2005 we have not recorded any compensation expense related to the performance based awards. The restricted shares require no payment from the recipient employee or director.


	*Stock Repurchase*

In March 2004, the Board of Directors authorized the repurchase of up to $100 million of our common stock. The total number of shares repurchased under the plan as of December 31, 2004 was 2,491,800 at an aggregate cost of $92.7 million, before expenses. In January 2005, the Board of Directors authorized the repurchase of up to an additional $100 million shares of our common stock. During the first quarter of 2005, no additional UDI shares were repurchased.

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Dividend*

In January, 2005, the Board of Directors authorized a quarterly dividend payment of $0.125 per share, which commenced on March 1, 2005 to shareholders of record as of February 15, 2005. We paid a dividend of $6.4 million on March 1, 2005.


	*New Accounting Pronouncements*

~~For~~On ~~the~~October 13, ~~nine~~2004, ~~months~~the ~~ended~~FASB ~~September 30,~~reached ~~2002 the~~a ~~loss~~consensus on ~~extinguishment~~the effective ofdate ~~debt~~for ~~of $1~~SFAS No. 123R (“SFAS 123R”),~~859,000~~ ~~previously~~“Share-Based Payment.” ~~reported~~SFAS 123R asrequires anus ~~extraordinary~~to ~~item~~measure ~~was~~compensation ~~reclassified~~cost tofor ~~income~~all ~~before~~share-based ~~extraordinary~~payments ~~item~~at ~~(interest~~fair ~~expense)~~value ~~due~~for toannual ~~the~~periods ~~adoption~~beginning ofafter ~~FAS 145~~June 15, ~~Rescission~~2005. ofWe ~~FASB~~are ~~Statements~~currently ~~No. 4,~~evaluating the ~~44,~~requirements and ~~64,~~impact ~~Amendment~~ of ~~FASB~~SFAS 123R ~~Statement~~on ~~No. 13,~~the ~~and~~Company’s ~~Technical~~consolidated ~~Corrections~~financial statements.

On ~~January~~October 1722, ~~2003~~2004, the FASB issued two FASB Staff ~~Interpretation~~Positions ~~No. 46~~ (~~FIN 46~~FSPs), ~~“Consolidation~~regarding ~~of Variable~~the ~~Interest~~accounting ~~Entities.”~~implications ~~FIN~~of ~~46 becomes effective this~~the ~~year~~American ~~and~~Jobs ~~requires~~Creation aAct ~~variable~~of ~~interest~~2004. ~~entity~~We toare becurrently ~~consolidated~~evaluating bythe arequirements ~~company~~and ifimpact ~~that~~of ~~company~~FSP isNo. 109-1, “Application ~~subject~~of toFASB aStatement ~~majority of the~~No. 109 ~~risk~~‘Accounting offor ~~loss~~Income ~~from~~Taxes’ to the ~~variable~~Tax ~~interest~~Deduction ~~entity’s activities~~on orQualified ~~entitled~~Production toActivities ~~receive~~Provided aby ~~majority of~~ the ~~entity’s~~American ~~residual~~Jobs ~~returns~~Creation orAct ~~both~~of 2004”. ~~In general~~However, ait ~~variable interest entity~~ is ~~a corporation,~~not ~~partnership,~~expected ~~trust,~~to ~~or any other legal structure~~have ~~used for business purposes that either (~~a~~) does~~ ~~not~~material ~~have equity~~effect ~~investors~~on ~~with~~our ~~voting~~effective ~~rights,~~tax orrate. ~~(b) has~~FSP ~~equity~~No. 109-2, ~~investors~~“Accounting ~~that~~and doDisclosure ~~not~~Guidance ~~provide sufficient financial resources~~ for ~~the~~ ~~entity to support its activities. We are in~~ the ~~process of~~Foreign ~~evaluating~~Earnings ~~the~~Repatriation ~~impact~~Provision ofwithin the ~~adoption~~American ~~of this Interpretation but~~Jobs doCreation ~~not~~Act ~~believe~~of it2004” will ~~have~~not aaffect ~~significant impact on~~ our consolidated financial statements.


3.	Investments in Affiliated Companies

Our investment in our 51% owned foreign joint venture in Turkey, FNSS Savunma Sistemleri A.S. is accounted for using the equity method because we do not control it due to our partner’s veto rights over ~~many~~most ~~significant~~operating decisions, although we ~~have~~do have the ability to exercise influence over its operating and financial policies. Our share of the earnings ~~related~~ tofrom our investment ~~investments~~in Turkey was ($05.6) 8 million and $50.0 ~~million~~ for the three months ended ~~September~~March 3031, ~~2002~~ 2004 and ~~2003~~2005, ~~and~~respectively. $6A dividend payment from FNSS in 2005 is unlikely.~~7 million~~ ~~and~~Since ~~$16~~FNSS has completed its production contracts, its ability to pay dividends in future years is unclear.~~7 million~~ ~~for~~Consequently this deterioration in the ~~nine~~outlook ~~months~~is ~~ended~~viewed ~~September 30,~~as ~~2002~~other than temporary. We discontinued recognizing our share of the equity in earnings and ~~2003,~~wrote off ~~respectively~~our investment balance as of June 30, 2004.

The following table reports financial results from the joint venture in Turkey ~~for the three months and nine~~: ~~months ended September 30 of 2002 and 2003.~~

	Three months ended					~~Nine months ended~~
	September 30,					September 30,
	March 31,
	2002		2003			2002		2003
	2004		2005
	(In thousands)		~~(In thousands)~~
Sales	$	2951,~~824~~607	$	501,~~848~~800		$	~~97,626~~	$	~~170,580~~
Cost of Sales		15,098		23,936			50,139		81,226
Cost of sales		24,235		1,038
Net Income		2,698		9,812			19,492		30,152
Net income		11,405		(3,849	)


4.	Comprehensive Income

Comprehensive income was $9441.85 million and $~~112~~30.7 million for the ~~nine~~ three-month periods ended ~~September~~March 3031, ~~2002~~2004 and ~~2003~~2005, respectively. Comprehensive ~~income~~ income consists primarily of net income ~~($91.4 million and $111.8 million for the nine month periods ended September 30~~, ~~2002 and 2003),~~ net foreign currency translation adjustments, and fair value adjustments of foreign currency and interest rate hedges, net of taxes.

7 5. Long-term Debt

We have a credit facility with various banks that includes $900 million of term loan facilities and a $200 million revolving credit facility. Outstanding borrowings on the term loan facilities were $511.9 million at March 31, 2005. The facilities bear interest at variable rates with a weighted average rate of 4.77% at

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5March 31, 2005. ~~Long-term~~ These loans are due through 2009 and ~~Debt~~provide for quarterly principal and interest payments. Principal payments of $13.0 million were made during the first three months of 2005.

InOutstanding ~~August~~borrowings ~~2001,~~under wethe ~~entered into a~~ credit facility ~~with~~ ~~various~~are ~~banks~~guaranteed by ~~that~~certain ~~included $600 million~~ of ~~term~~our ~~loan facilities~~subsidiaries and aare ~~$200 million~~secured ~~revolving~~by ~~credit~~a ~~facility.~~lien ~~On July 2,~~on ~~2002 we amended the credit facility to borrow an~~our ~~additional~~present ~~$300 million~~and ~~for~~future ~~the~~tangible ~~purchase~~and ofintangible ~~United States Marine Repair, Inc~~assets. ~~(“USMR”).~~

Outstanding borrowings on the term loan facilities were $577 million at September 30, 2003. The facilities bear interest at variable rates with a weighted average rate of 3.08% at September 30, 2003. These loans are due through 2009 and provide for quarterly principal and interest payments. A prepayment of $13 million was made on August 29, 2003. The next scheduled principal payment is due in the first quarter of 2004.


6.	Pension and Other Post Retirement Benefits

At December 31, ~~2002~~2004, we revised the discount rate assumption used in the determination of net pension and post retirement costs and benefit obligations from 7 6.0% to 6.5.75%. On January 1, ~~2003~~2005 ~~we revised~~ the ~~asset~~ rate of return assumption ~~from~~used 9%for tothe actuarial ~~8.5%.~~estimates ~~The impact~~ of these ~~two changes~~benefit isprograms ~~estimated~~was tounchanged ~~result~~at 8.5%. inComponents anof ~~increase~~Net inPeriodic ~~pension~~Benefit ~~and post-retirement~~Cost ~~benefit costs~~ for the ~~full year 2003 of~~three ~~approximately~~months $5ended March ~~million~~31, ~~compared~~2004 ~~with~~and ~~what~~2005 ~~the estimated~~include: ~~2003 expense would have been if the changes in assumptions had not been made.~~


	Pension Benefits						Other Benefits

	2004			2005			2004			2005

	(In thousands)
Service cost	$	4,775		$	5,192		$	386		$	416
Interest cost		10,696			11,367			838			895
Expected return on plan assets		(14,154	)		(15,121	)		(1,363	)		(1,456	)
Amortization of prior service costs		458			458			34			130
Amortization of of net loss		1,390			1,930			5			40

Net periodic benefit cost	$	3,165		$	3,826		$	(100	)	$	25


7.	Commitments and Contingencies


	*Termination Claims*

~~The~~In ~~Crusader~~1994 ~~program~~the ~~commenced~~Army ininitiated ~~1994~~the Crusader program to develop ~~for~~ ~~the U.S. Army~~ an integrated and extensively automated two-vehicle artillery system consisting of a 155mm, self-propelled howitzer and a resupply vehicle. ~~Since~~During ~~inception~~ the lifetime of the program, we ~~have been~~ 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~~We ~~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 Future Combat Systems (“FCS”) Non-Line-of-Sight Cannon (“NLOS-C”) program. ToThrough ~~date~~March 31, ~~the~~2005 we ~~Crusader~~incurred ~~termination~~$39.6 million ~~has~~of ~~resulted~~termination incosts ~~a reduction to our workforce~~ of ~~approximately~~which ~~180 employees. Through the period~~we ~~ended~~have ~~September~~invoiced ~~30,~~and ~~2003,~~recovered ~~the Army has paid us~~ $36.3 million infrom ~~termination~~the ~~costs and fees~~Army. In order to complete the Crusader termination process, we are negotiating a final termination settlement with the Army which we expect to conclude in due course.

~~Legal~~ ~~Proceedings~~In 1997 we were awarded a contract to provide repairs and maintenance for the U.S. Navy (“Navy”) on mine-countermeasures class vessels that were home-ported in Ingleside, Texas. We established a ship repair operation on leased facilities to accomplish this contract as well as follow-on contracts which continued through 2004. During 2004, the Navy’s contract awards in Ingleside were protested by a competitor. Although we were not directly involved in this protest, the Navy elected to terminate our contract as well as other related ship repair contracts at Ingleside for the convenience of the government. We chose not to participate in re-procurement activities because this process is expected to be lengthy and costly. Our operation in Ingleside ceased in October 2004, and all employees were either relocated or terminated by December 2004. We plan to submit our termination claim to the Navy in the second quarter of 2005.

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

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~aware~~Legal 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. Proceedings

~~From~~As ~~time~~a togovernment ~~time~~contractor, we are ~~involved~~subject into ~~legal~~the audit, review, ~~proceedings~~and ~~arising~~investigative inauthority of various U.S. Government agencies. Depending upon the ~~ordinary~~particular ~~course~~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 ~~business~~on U.S. Government Wecontracts, suspension or ~~believe~~debarment is an inherent risk that wecould readily have ~~adequately~~a ~~reserved~~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 ~~these~~the ~~liabilities~~Eastern District of Virginia, seeking information regarding a 2000 contract between us and ~~that~~the Italian ~~there~~government isfor nothe ~~litigation~~upgrading ~~pending~~of oramphibious ~~threatened~~assault vehicles. We believe that the grand jury investigation seeks to ascertain whether any violation of the Foreign Corrupt Practices Act occurred in connection with the Italian contract. While we ~~expect~~are not aware of any such violation, and we are cooperating with the investigation, it is too early for us to determine whether the ultimate outcome of the investigation would have a material adverse ~~effect~~impact on our results of operations ~~and~~or financial ~~condition~~ position.

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


	*Environmental Matters*

We ~~spend~~incur ~~certain~~costs ~~amounts~~ annually to comply with environmental laws, regulations and permits. Operating and maintenance costs ~~associated~~ associated with ongoing 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 atrelated to our ~~facilities~~operations consist of Allowable Costs. As of ~~September~~March 3031, ~~2003~~2005, we had accrued approximately $3132.43 million to cover ~~any~~ investigation and/or remediation costs that may or may not be Allowable Costs ~~under U~~.S. ~~Government contracts.~~ The amount accrued is based on ~~reasonable~~management’s best estimates of the probable and reasonably estimable costs related to remediation obligations, although there is a possibility that ~~costs~~amounts in excess of ~~such~~costs ~~accruals~~accrued may be incurred. The ~~amount accrued is stated on an undiscounted basis. The~~ most significant of ~~our~~the estimated liabilities ~~pertain~~are related to ongoing remediation efforts described below.

One of our largest ship repair operations is located in San Diego, California. Pursuant to a ~~demand~~requirement from the California Regional Water Quality Control Board, we ~~have~~ completed a study of sedimentary contamination in San Diego Bay ~~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 ~~costs~~cost associated with the remediation phase will range from $6 million to $9 million, ~~of which $8.5 million has been accrued,~~ although it is conceivable that costs could be as high as $~~29.3~~32 million if the most stringent clean-up standard were to be adopted. Up to $8.9.1 million of such remediation ~~cost~~costs, to the extent the costs are not recovered on United States Marine Repair’s (“USMR”)’s government contracts or from other responsible parties, may be recoverable from USMR’s former shareholders, under an ~~escrow~~ escrow arrangement established in 1997 when the San Diego operation was acquired by USMR. AnAlso, ~~additional~~a further $15 million escrow fund was established in our 2002 acquisition of USMR, which we believe is ~~also~~available ~~subject~~in respect to USMR’s remediation exposure. We have asserted claims weagainst ~~may~~both escrow ~~make~~funds, inprimarily ~~respect~~on account of ~~USMR’s~~ ~~sediment~~the potential remediation exposure at San Diego.

10 ~~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 $1.3 million for which we expect to be reimbursed by the Sellers over approximately the next 5 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 a contract with and on behalf of the Navy. We own the remainder of the facility. Since 1991, the Navy has expended approximately $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 we would pay 25% of such costs (approximately $8.4 million). We dispute any responsibility for such costs, and also believe that any environmental costs that we may incur at Fridley would constitute Allowable Costs. However, there is substantial uncertainty regarding the ultimate terms on which the matter might be resolved.

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Since approximately 1941, we (and, prior to our formation, our predecessors) have operated a manufacturing and engineering facility in Fridley, Minnesota. The majority of the Fridley facility was historically owned by the Navy (the “Navy property”), but operated by us under contract with and on behalf of the Navy. In June 2004, we purchased the Navy property and most of the associated equipment. Since the early 1980’s, the Navy has expended more than $30 million in remediation costs, including site investigation, on and adjacent to the Navy property, and the Navy has indicated that it anticipates spending an additional $10 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 approximately $8. ~~United~~4 million ~~States~~for such purpose. We dispute any ~~Marine~~responsibility ~~Repair~~for ~~Acquisition~~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 still uncertainty regarding the terms on which the matter might ultimately be resolved (whether by settlement, legal proceedings, or otherwise).

~~Effective~~Also ~~July 2~~located at the Fridley, ~~2002~~Minnesota site, weis ~~completed~~an ~~the~~18 acre ~~acquisition~~tract of ~~100%~~land south of the ~~outstanding~~manufacturing ~~stock~~and ~~of USMR from The~~engineering ~~Carlyle~~facility ~~Group~~used ~~for~~to ~~$305.4 million~~dispose ~~(net~~ of ~~$7.3 million of~~plant ~~acquired~~wastes ~~cash),~~ including ~~the~~industrial wastes ~~repayment~~from ofthe ~~approximately~~1940’s ~~$105 million~~to ~~of USMR debt~~1969. ~~We incurred an additional~~Environmental ~~$1.5 million~~investigations ofconducted ~~transaction~~at ~~costs related to~~ the ~~acquisition.~~ ~~The~~property ~~acquisition~~revealed ofsoil ~~USMR balances~~ and ~~diversifies~~ ~~our~~groundwater ~~portfolio,~~contamination ~~gives~~was uspresent. aIn ~~strategic growth platform~~1987, ~~and~~a ~~expands~~settlement ~~our~~agreement ~~mission~~was toreached ~~support~~with the U.S. Government ~~Navy~~whereby ~~with superior technology~~the ~~and~~Government ~~services.~~made As a ~~result~~lump ofsum ~~the~~payment ~~transaction,~~for ~~USMR~~all ispast, ~~now~~present aand ~~wholly~~future ~~owned~~investigation ~~subsidiary.~~and ~~The~~remediation ~~transaction~~costs ~~was~~with ~~accounted~~the ~~for~~provision any asfuture ~~a purchase.~~response Wecosts ~~financed~~regarding ~~the~~this ~~acquisition~~property ~~with~~would ~~cash~~be unallowable onas ~~hand~~part ~~and~~of ~~by amending~~direct ~~our~~or ~~credit~~indirect ~~facility~~costing toof ~~borrow~~government contracts. anPresently, ~~additional~~almost $~~300 million~~9.4 million Wehas ~~began~~been accrued to ~~consolidate~~cover ~~the~~long-term ~~results~~operation, ofmaintenance ~~operations~~and ofmonitoring costs ~~USMR~~related asto ofresponse ~~the~~activities ~~effective~~for ~~date~~this ~~of the acquisition~~property.

~~The following are our unaudited consolidated results of operations~~8. ~~The nine months ended September 30, 2002 is on a pro forma basis and assumes that the USMR acquisition occurred at the beginning of the period.~~ Acquisitions

		Three months ended				Nine months ended
		September 30,				September 30,
		2002		2003		2002		2003
		(In thousands)
Sales		$	529,701	$	507,915	$	1,455,425	$	1,527,891
Cost of Sales			426,976		400,298		1,187,322		1,210,061
Net Income			45,080		37,390		94,147		111,845
	Earnings per common share-basic	$	0.88	$	0.72	$	1.84	$	2.16
	Earnings per common share-diluted	$	0.85	$	0.71	$	1.79	$	2.12

On February 5, 2004, we completed the acquisition of the assets of Kaiser Compositek, Inc. (“KCI”) for a purchase price of $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 is expected to enhance our development of advanced weapon systems.

~~These~~On ~~unaudited~~March 1, ~~consolidated~~2004 ~~results~~we ~~are~~purchased ~~not~~certain assets and ~~necessarily~~liabilities ~~indicative~~of the Pearl Harbor, Hawaii ship repair operations of ~~future~~Pacific ~~outcomes~~Shipyards International, LLC and Honolulu Shipyards, Inc. for a purchase price after adjustments of $15.0 million. The Pearl Harbor ship repair business is being operated by a newly formed subsidiary, Hawaii Shipyards, Inc. (“HSI”). Principals of the predecessor entity serve as directors of HSI.

~~Goodwill~~On March 1, 2004 we completed the acquisition of Cercom, Inc. of Vista, California for a purchase price of $~~240~~21.31 million. ~~resulting~~Cercom ~~from~~is a producer of advanced ceramic ~~the~~materials ~~USMR~~and supplier of light-weight ceramic armor. The acquisition ~~was~~is ~~assigned~~expected to ~~the~~enhance ~~Ship~~our ~~Repair~~market ~~and~~presence regarding ~~Maintenance~~survivability ~~segment~~solutions in specialty metals and composites.

On January 13, 2005, we completed the acquisition of Engineered Plastic Designs, Inc., doing business as EPD Container Solutions (“EPD”), of Berthoud, Colorado, for $8.2 million. EPD is a full service provider of specialized containers for military munitions. The acquisition was complimentary to our existing Navy canister business, which will enable us to extend products to all military services as well as other aerospace applications.


9.	Earnings Per Share

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2002		2003		2002		2003
	(In thousands, except per share data)
Net Income	$	45,080	$	37,390	$	91,395	$	111,845
Average common shares outstanding:
Average common shares outstanding for basic computations		51,514		52,029		51,239		51,884
Dilutive stock options-based on the treasury stock method		1,245		966		1,468		918
Average number of common shares outstanding for dilutive computations		52,759		52,995		52,707		52,802

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Three months ended				Nine months ended
		September 30,				September 30,
		2002		2003		2002		2003
		(In thousands, except per share data)
Earnings per share:
	Earnings per common share-basic	$	0.88	$	0.72	$	1.78	$	2.16
	Earnings per common share-diluted	$	0.85	$	0.71	$	1.73	$	2.12

share. The dilutive stock options and restricted shares for the quarters ended March 31, 2004 and 2005 were 968,000 and 1,137,358, respectively.


10.	Information on Business Segments

We operate in two reportable business segments: Defense ~~Systems~~ 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 income before interest and taxes as the measure of financial performance for each segment.

Summary unaudited financial data for each of our business segments for the three ~~month~~months ~~and nine month periods~~ ended ~~September~~ March 3031, ~~2002~~2004 and ~~2003~~ 2005 follow:

	Three months ended						~~Nine months ended~~
	September 30,						September 30,
	March 31,
	2002			2003			2002			2003
	2004			2005
	(in thousands)
	(In thousands)
Sales:
Defense Systems	$	~~423~~409,~~962~~888		$	~~375~~408,~~421~~718		$	~~1,098,443~~		$	~~1,151,425~~
Ship Repair and Maintenance		~~105~~137,~~739~~189			~~132~~135,~~494~~342			~~105,739~~			~~376,466~~
Total sales		~~529~~547,~~701~~077			~~507~~544,~~915~~060			~~1,204,182~~			~~1,527,891~~
Income before interest and taxes:
Earnings related to investments in foreign affiliates:
Defense Systems		545,~~656~~816			~~60,454~~—			~~124,233~~			~~190,224~~
Ship Repair and Maintenance		~~6,860~~—			~~8,347~~—			~~6,860~~			~~24,872~~
Corporate		(4,520	)		(4,963	)		(12,798	)		(14,363	)
Total earnings related to investments in foreign affiliates		5,816			—
Total income before interest and taxes		56,996			63,838			118,295			200,733
Depreciation and amortization:
Interest, net		(11,423	)		(6,088	)		(21,900	)		(18,892	)
Defense Systems		5,641			5,637
Income before income taxes	$	45,573		$	57,750		$	96,395		$	181,841
Ship Repair and Maintenance		4,031			3,437
Corporate		23			17
Total depreciation and amortization		9,695			9,091
Capital spending:
Defense Systems		3,353			4,898
Ship Repair and Maintenance		1,485			1,591
Corporate		218			45
Total capital spending		5,056			6,534
Income before interest and taxes:
Defense Systems		70,139			59,333
Ship Repair and Maintenance		6,727			7,496
Corporate		(4,372	)		(9,594	)
Total income before interest and taxes		72,494			57,235
Interest, net		(5,481	)		(4,861	)
Income before income taxes	$	67,013		$	52,374

	December 31,		September 30,
	2002		2003
Total assets: (a)
Defense Systems	$	884,261	$	838,516
Ship Repair and Maintenance		421,300		412,735
Corporate and eliminations		148,409		258,686
Total assets	$	1,453,970	$	1,509,937

(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, prepaid taxes and deferred financing costs. The substantial increase in Corporate assets was primarily due to a very favorable cash balance generated during 2003.

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	December 31,		March 31,
	2004		2005

	(In thousands)
Total assets: (a)
Defense Systems	$	840,552	$	837,201
Ship Repair and Maintenance		436,249		435,533
Corporate and eliminations		324,773		303,918

Total assets	$	1,601,574	$	1,576,652


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


11.	Income Taxes

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

The ~~provision~~provisions for income taxes for the three ~~and nine~~months ~~month periods~~ ended ~~September~~ March 3031, ~~2003,~~2004 ~~was $20.4 million~~ and ~~$70.0 million,~~2005 ~~respectively,~~were ~~which increased by~~ $1925.91 million and $6519.07 million, respectively,. ~~from~~The ~~the~~income ~~same~~tax ~~periods~~provision in ~~2002, primarily due to~~ ~~higher~~2005 ~~taxable~~reflects ~~income~~an ~~and~~effective totax ~~the~~rate ~~utilization~~ of ~~net~~37.57%. ~~operating loss~~Our ~~carryforwards~~effective ~~in 2002 to substantially offset income~~ tax ~~expense.~~rate ~~The~~fluctuates ~~provision~~due ~~for~~to ~~income~~changes ~~taxes~~ in ~~2003~~permanent ~~more~~differences ~~closely~~such as ~~reflects~~foreign ~~underlying statutory~~ tax ~~rates~~credits, asstate ataxes, ~~result~~and ofsales ~~the reversal~~eligible offor the ~~valuation allowance against net operating loss~~ ~~carryforwards~~extra ~~and~~territorial ~~other~~income ~~deferred~~ tax ~~assets~~exclusion inand ~~2002~~manufacturer’s deduction.


12.	Related Party Transactions

~~Investment~~In ~~funds~~October ~~sponsored~~1997, by The Carlyle Group (“Carlyle”) ~~continue~~formed United toDefense ~~own~~Industries, Inc. as a ~~significant~~wholly-owned ~~portion~~entity ofin order to acquire our ~~common~~predecessor, ~~shares.~~United ~~Individuals~~Defense, ~~affiliated~~L.P. Beginning with our initial public offering in December 2001, Carlyle ~~are~~began ~~expected~~ to ~~continue~~sell tomajor ~~influence~~portions ~~our~~of ~~operations.~~its WeUnited ~~have~~Defense holdings. On ~~entered~~April 30, ~~into~~2004 ~~agreements~~Carlyle ~~with~~completed ~~four~~the ~~affiliates~~sale of ~~our~~its ~~principal~~remaining ~~stockholders~~4.5 million ~~whereby~~United weDefense ~~have~~shares. ~~agreed~~In toconnection ~~designate~~with ~~one~~our initial ~~nominee~~public ~~to our~~offering, ~~board~~we ofentered ~~directors~~into onagreements ~~behalf~~with ofCarlyle pursuant ~~each~~to ofwhich ~~these~~Carlyle entities. had the right to designate up ~~These~~to ~~agreements~~four ~~provide~~nominees for ~~such~~our ~~board~~Board ~~representation~~of Directors, so long as Carlyle owned ~~owns~~ greater than 20% of our voting stock. InBy ~~August 2003,~~virtue of Carlyle’s ~~(including~~sales ~~its~~of ~~affiliated~~United ~~officers~~Defense ~~and entities) sold 11~~shares,~~805,336~~ ~~shares~~such ofagreements have ~~our~~lapsed. ~~stock and on November 5~~Nonetheless, ~~2003,~~ ~~completed~~three ~~the~~individuals ~~sale~~affiliated ofwith Carlyle ~~an additional 1~~(Messrs. Carlucci,~~491,346~~ ~~shares~~Conway, ~~thereby~~ ~~reducing~~and ~~its~~Clare) ~~current~~were re-elected ~~holding~~ to ~~11,663,903~~our ~~shares,~~Board ~~or 22%~~ of ~~our~~Directors ~~outstanding~~at ~~shares.~~our ~~Given~~annual ~~the~~meeting ~~decline in~~on ~~Carlyle’s~~April 13, ~~holdings~~2004, weand ~~expect~~Carlyle ~~its~~may ~~representation~~thereby oncontinue ~~our~~to ~~board~~influence toour ~~decline proportionately in the months ahead~~operations.

InCommencing ~~accordance~~ with ~~the~~Carlyle’s acquisition of United Defense in October 1997, we agreed to pay Carlyle for various management and consulting services under a management agreement between Carlyle and United Defense. ~~Industries~~The management agreement was terminated in March 2004, and ~~Carlyle~~in connection with the termination, we ~~accrued~~made a ~~fee~~ final payment of $13.50 million to Carlyle for ~~various~~services ~~management~~rendered ~~services~~from January 1, 2002 through March 31, 2004. We had not previously provided bypayment to Carlyle for ~~the~~services ~~nine~~during ~~months~~this ~~ended September 30, 2003~~period.

WeDuring ~~have~~the ~~entered~~first ~~into~~quarter anof ~~agreement with CPU Technology~~2005, ~~Inc.~~we ~~(“CPU/~~paid ~~T”) to purchase approximately~~ $10.51 million ~~in component and design services regarding~~to ~~electronic~~compensate ~~subsystems~~seven ~~for~~non-management ~~the~~members ~~Bradley program. Certain Carlyle affiliates are minority stockholders~~ of ~~CPU/~~our TBoard ~~and collectively~~of ~~have~~Directors ~~the~~for ~~right~~service ~~to appoint two of the six members of CPU/ T’s board~~thereon.

WeIn ~~recognized~~June ~~$3.6 million~~2002 ~~and $13.5 million~~we ofentered ~~royalties,~~into ~~license~~an ~~fees~~agreement ~~and~~with ~~technical~~CPU Technology, ~~service~~Inc. ~~fees~~(“CPU/ ~~during~~T”) ~~the~~to ~~nine~~purchase ~~month~~component ~~periods~~and ~~ended~~design ~~September 30,~~services ~~2002~~regarding ~~and~~electronic ~~2003,~~subsystems ~~respectively,~~for ~~from~~the ~~our Turkish~~Bradley ~~joint venture~~program. We currently have ~~also~~$1.7 million ~~entered~~in ~~into~~purchase ~~an agreement~~ orders with ~~our Turkish~~CPU/ ~~joint~~T. ~~venture~~Certain toCarlyle ~~purchase~~affiliates ~~approximately~~are minority ~~$2.4 million~~stockholders inof ~~miscellaneous~~CPU/ ~~parts~~T and ~~kits~~collectively ~~for~~have ~~our~~the ~~M113~~right to ~~vehicles~~appoint ~~and~~two ~~Mk25~~of ~~canisters~~the six members of CPU/ T’s Board of Directors.

1213

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Item~~ We recognized $2.7 million and $1.5 million of royalties, license fees and technical service fees at March 31, 2004 and 2005, respectively, from our Turkish joint venture. We also had an agreement with our Turkish joint venture to purchase miscellaneous parts and kits for our M113 vehicles and MK 25 canisters; this agreement was completed during the first quarter of 2005.

~~Management’s~~ Our ~~Discussion~~subsidiary, HSI, purchases goods and ~~Analysis~~services from various entities which are owned and controlled by its current officers or directors. Purchases are made pursuant to teaming agreements, other preferred supplier agreements, and purely competitive procurements. The aggregate amount of purchases by HSI from all related party businesses during the ~~Results~~three months ended March 31, 2005 was $1.6 million. The aggregate amount of ~~Operations~~sales ~~and~~by ~~Financial~~HSI ~~Condition~~to —all ~~September~~related 30party businesses during the three months ended March 31, ~~2003~~2005 was $0.6 million. It is our policy that any transactions with related parties be on terms that are no less favorable than those available from unrelated third parties. The transactions with related parties entered into by our subsidiary HSI are on terms that we believe are consistent with this policy.

~~Special~~13. ~~Note~~Recent ~~Regarding~~Developments ~~Forward~~and ~~Looking Statements~~ Subsequent Events

~~Our~~On ~~Form~~March ~~10-Q~~6, ~~disclosure~~2005, ~~and~~we ~~analysis concerning~~entered ~~our~~into ~~operations,~~an ~~cash~~agreement ~~flows~~ and ~~financial~~plan ~~position,~~of ~~including,~~merger ~~in particular,~~ (the ~~likelihood~~“Merger ofAgreement”) ~~our~~with ~~success~~BAE inSystems North ~~developing~~America ~~and~~Inc. ~~expanding~~(“BAE”) ~~our business~~ and ~~the~~BAE’s ~~realization~~wholly ofowned ~~sales~~subsidiary, ~~from~~Ute ~~our~~Acquisition ~~backlog,~~Company ~~include~~Inc. ~~forward-looking~~The ~~statements~~Merger Agreement ~~within~~provides ~~the~~for ~~meaning~~BAE’s ofacquisition ~~Section 27A~~ of ~~the~~United ~~Securities Act and~~Defense ~~Section 21E~~Industries, ofInc. (the ~~Exchange Act~~“Company”). ~~Statements~~The ~~that~~consummation ~~are~~of ~~predictive~~this intransaction ~~nature,~~is ~~that~~subject ~~depend~~to ~~upon~~certain orconditions, ~~refer~~including ~~to future events~~the oradoption ~~conditions,~~of orthe ~~that~~Merger ~~include~~Agreement ~~words~~by ~~such~~the ~~as “expects,”~~required ~~“anticipates,” “intends,”~~vote ~~“plans,”~~of ~~“believes,”~~our ~~“estimates”~~stockholders and ~~similar~~certain ~~expressions~~related ~~are forward-looking~~regulatory ~~statements~~approvals. ~~Although~~If ~~these~~the Merger ~~statements~~Agreement ~~are~~is ~~based upon~~approved ~~assumptions~~by weour ~~consider~~stockholders ~~reasonable,~~and ~~they~~if ~~are~~the other ~~subject~~conditions ~~to risks~~in ~~and~~the ~~uncertainties~~Merger ~~that~~Agreement are ~~described~~met, ~~more~~BAE’s wholly ~~fully~~owned ~~below~~subsidiary ~~and in~~will ~~our~~merge ~~annual~~into ~~report~~the onCompany, ~~Form 10-K~~which ~~for~~will be the ~~year~~surviving ~~ended December 31~~corporation, ~~2002,~~and ~~our~~each ~~quarterly~~share ~~reports~~of onour ~~Form 10-Q~~common stock ~~for~~will be converted into the ~~three~~right ~~months~~to ~~ended~~receive ~~March 31~~$75.00 ~~and~~in ~~June 30,~~cash. ~~2003,~~For ~~and~~more ~~our~~information ~~Form S-3~~pertaining ~~Registration~~to ~~Statement~~the ~~and~~pending ~~Prospectus Supplement~~transaction ~~dated~~with ~~October 31~~BAE, please ~~2003.~~refer ~~Accordingly,~~to weour ~~can~~current ~~give no~~report ~~assurance~~on ~~that~~Form 8-K/A, wefiled ~~will~~on March 17, ~~achieve~~2005, ~~the~~which ~~results~~is ~~anticipated~~available orat ~~implied~~http://www.sec.gov byand ~~our forward-looking statements~~www.uniteddefense.com.

~~Overview~~On April 20, 2005, we completed the acquisition of 100% of the common stock of Corrosion Engineering Services, Inc. for an aggregate purchase price of $20.0 million plus expenses.

14 ~~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 the sole-source prime contractor and systems integrator. We conduct global operations through our manufacturing facilities in the United States and Sweden, our ship repair facilities in Virginia, California, Hawaii, Florida and Texas, a manufacturing joint venture in Turkey, and co-production programs with various other governments and foreign contractors.

~~The~~Item ~~Carlyle Group formed United Defense Industries, Inc~~2. inManagement’s ~~October~~Discussion ~~1997~~and toAnalysis ~~facilitate~~of the ~~acquisition of~~Results ~~United Defense, L.P., our predecessor entity. The Carlyle Group continues to own a significant portion~~ of ~~our~~Operations ~~common stock.~~and InFinancial ~~July~~Condition ~~2002~~— weMarch ~~acquired~~31, ~~United States Marine Repair (“USMR”) from The Carlyle Group.~~ 2005

~~Our~~Special ~~results~~Note Regarding ofForward ~~operations,~~Looking ~~particularly revenue,~~Statements 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, such as our July 2002 acquisition of USMR, 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~~Form 10-Q ~~typically~~disclosure ~~fall~~and ~~into~~analysis ~~two~~concerning ~~categories,~~our ~~cost-plus~~operations, ~~and~~cash ~~fixed-price.~~flows ~~Our~~and ~~contracts~~financial ~~for~~position, ~~research~~including, in ~~engineering~~particular, ~~prototype,~~the ~~and~~likelihood ~~some~~of ~~other~~our ~~matters~~success ~~are~~in ~~typically~~developing and ~~cost-plus~~expanding ~~arrangements~~our ~~under~~business ~~which~~and wethe ~~are~~realization ~~reimbursed~~of ~~for approved~~sales ~~costs~~from ~~and~~our backlog, ~~also~~include ~~receive~~forward-looking astatements ~~fee.~~within ~~Our~~the ~~production contracts~~meaning ~~are~~of ~~typically~~Section 27A ~~fixed-price~~of ~~arrangements~~the ~~under~~Securities ~~which~~Act weand ~~assume the~~Section 21E ~~risk~~ of ~~cost~~the ~~overruns~~Exchange ~~and~~Act. ~~receive~~Statements ~~the~~that ~~benefit~~are ofpredictive ~~cost~~in ~~savings.~~nature, ~~Our~~that ~~repair~~depend ~~and~~upon ~~maintenance~~or ~~contracts~~refer ~~are~~to afuture ~~mix~~events ofor ~~fixed-price~~conditions, or ~~and~~that ~~cost-plus~~include ~~arrangements~~words ~~with~~such aas ~~recent~~“expects,” “anticipates,” ~~trend~~“intends,” ~~toward cost-plus.~~“plans,” ~~All~~“believes,” of“estimates” ~~our~~and ~~DoD~~similar expressions ~~contracts,~~are ~~whether~~forward-looking westatements. Although these statements are ~~the~~based ~~prime~~upon ~~contractor~~assumptions ~~or a~~we ~~subcontractor~~consider reasonable, they are subject to ~~audit~~risks and ~~cost~~uncertainties ~~controls.~~that Asare adescribed ~~result,~~more ~~the~~fully ~~DoD~~below ~~typically~~and ~~has~~in ~~the~~our ~~right~~annual toreport ~~object~~on toForm 10-K ~~our costs~~for asthe ~~not~~year ~~allowable~~ended orDecember 31, as2004. ~~unreasonable~~Accordingly, ~~which~~we can ~~increase the~~give ~~costs~~no weassurance ~~bear~~that ~~rather~~we ~~than~~will ~~allow~~achieve ~~recovery~~the asresults ~~costs~~anticipated ~~reimbursed~~ or ~~allowed~~implied inby our ~~negotiation of fixed~~forward-~~price~~looking ~~contracts~~statements.

~~We use different techniques for estimating and~~Overview 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 accepted 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

13 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 (“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 Navy, a manufacturing joint venture in Turkey, and co-production programs with various other governments and foreign contractors.

~~the~~The ~~risks~~Carlyle ~~and~~Group ~~rewards~~(“Carlyle”) offormed ~~ownership~~United ~~transfer.~~Defense ~~Gross~~Industries, ~~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~~Inc. ~~We evaluate estimates of gross margin on production contracts and recognize changes~~ in ~~estimates~~ ofOctober 1997 ~~gross~~to ~~margins~~facilitate ~~during~~ the ~~period in which those~~ ~~changes~~acquisition ~~are~~of ~~determined. Our ship repair sales in the~~ United ~~States~~ ~~under~~Defense, ~~fixed-price contracts are recognized using the percentage of completion method~~L. ~~Under this method~~P., ~~contract costs~~our ~~are~~predecessor ~~expensed~~entity. ~~as incurred and sales are recognized~~In ~~simultaneously~~July 2002 ~~based~~we onacquired ~~the~~United ~~ratio~~States ofMarine ~~direct labor inputs and~~Repair ~~other~~(“USMR”) ~~costs~~from ~~incurred to date to estimated total direct labor inputs and total costs~~Carlyle. ~~Sales~~On ~~under cost reimbursement contracts for research~~April 30, ~~engineering~~2004, ~~prototypes, ship repair and~~Carlyle ~~maintenance~~completed ~~and~~the ~~certain~~sale ~~other~~of ~~contracts are recorded as costs are incurred and include estimated fees in~~ the ~~proportion~~final ~~that costs~~portion ~~incurred~~of toits ~~date~~holdings ~~bear~~of ~~to total estimated costs. We charge~~our ~~any~~common ~~anticipated losses on a contract to operations as soon as those losses are determined~~stock.

We are a supplier of armored combat vehicles and weapons delivery systems to the DoD and a number of allied military forces worldwide. Our products include critical elements of the U.S. military’s tactical force structure. We had a firm funded backlog of approximately $2.23 billion as of ~~September~~March 3031, ~~2003~~2005, a substantial majority of which ~~was~~ was derived from sole-source, prime contracts. Approximately 7978% of of our sales for the ~~nine~~three months ended ~~September 30~~March 31, ~~2003~~2005 were to to the U.S. ~~government~~ Government, primarily to agencies of the DoD (excluding sales conducted under ~~the~~DoD ~~U.S. Government’s~~ Foreign Military Sales ~~program~~ programs), or through subcontracts with other ~~government~~ government contractors.

~~Except~~Our asresults ~~indicated~~of inoperations, ~~the~~particularly ~~“U.S.~~revenue, ~~Army~~gross profits ~~Transformation”~~and ~~discussion~~cash ~~below~~flows, ~~there~~vary ~~were~~significantly nofrom ~~material changes~~period to period, depending largely upon the timing of our ~~major~~delivery ~~programs~~of ~~from~~finished products, ~~those~~the ~~described~~terms inof our contracts and our level of export ~~Form 10~~sales. As a result, period-Kto-period ~~Report~~comparisons ~~for~~may ~~the~~show substantial ~~year~~changes ~~ended~~disproportionate ~~December 31,~~to ~~2002,~~our underlying business ~~other~~activity. ~~than~~Period-to-period ~~normal~~comparisons ~~additional~~are ~~funding~~also asaffected ~~new~~by acquisitions ~~contracts~~where the results of operations for the acquired business are included in our results only for periods subsequent ~~negotiated~~to ~~and~~the ~~awarded~~date of acquisition.

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

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

		Three months ended				Nine months ended
		September 30,				September 30,
		2002		2003		2002		2003
		(In millions)
Defense Systems:
	Bradley Family of Vehicles	$	125.3	$	46.7	$	266.3	$	257.5
	Naval Ordnance		55.9		64.1		140.7		181.3
	Vertical Launch Systems		29.8		32.0		88.7		81.3
	Combat, Engineering & Recovery Vehicles		41.8		19.5		107.4		85.8
	Artillery Systems		86.3		117.5		252.7		237.5
	Assault, Amphibious Vehicles		21.3		32.5		42.8		97.0
	Other		63.6		63.1		199.9		211.0
Total Defense Systems			424.0		375.4		1,098.5		1,151.4
Ship Repair and Maintenance			105.7		132.5		105.7		376.5
Total		$	529.7	$	507.9	$	1,204.2	$	1,527.9

During the quarter ended March 31, 2005, there were no material changes to our major programs from those described in our Form 10-K Report for the year ended December 31, 2004, other than normal additional funding as new contracts are negotiated and awarded. See, however, the discussion under “Emerging Trends and Uncertainties” below.

~~For~~Business aSegments, ~~more~~Products ~~detailed description of our business~~ and ~~principal operating programs, see our Form 10-K Report~~Programs ~~for the year ended December 31, 2002.~~

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

Results of Operations


		Three months ended
		March 31,

		2004		2005

		(In millions)
Defense Systems:
	Bradley Family of Vehicles	$	112.4	$	71.2
	Naval Ordnance		73.5		74.2
	Vertical Launch Systems		28.8		28.6
	Future Combat Systems		67.4		44.8
	Artillery Systems		27.2		29.5
	Combat, Engineering & Recovery Vehicles		24.9		20.3
	Assault, Amphibious Vehicles		7.0		42.8
	Other		68.7		97.4

Total Defense Systems			409.9		408.8
Ship Repair and Maintenance			137.2		135.3

Total		$	547.1	$	544.1

~~Revenue~~ For a more detailed description of our business and principal operating programs, see our Form 10-K Report for the year ended December 31, 2004.

~~Revenue~~Emerging ~~for~~Trends the three months ended September 30, 2003 of $507.9 million was $21.8 million lower than the $529.7 million for the comparable period in 2002, driven by lower Defense Systems segment sales which in turn were partially offset by higher Ship Repair and ~~Maintenance segment sales. Defense Systems segment~~Uncertainties revenue of $375.4 million for the three months ended September 30, 2003 was $48.6 million lower than for the same period in 2002, primarily due to $78.6 million of lower Bradley upgrade fieldings which were partially offset by a ramp-up in NLOS-C and DD(X) Advanced Gun System (“AGS”) development work, and higher Assault Amphibious Vehicle (“AAV”) kit deliveries. Ship Repair and Maintenance segment sales of $132.5 million for the three month period ended September 30, 2003 were $26.8 million higher than the same period in 2002. Increased sales in our Ship Repair and Maintenance segment largely reflect the Navy’s increased maintenance needs resulting from the broader and more extended deployment of the fleet in connection with the Iraq war.

~~Revenue~~Regarding ofthe $1U.5S. ~~billion~~Army’s ~~for~~Modularity initiative as it pertains to our ground combat vehicle business, we believe that the ~~nine~~Administration’s ~~months~~proposed FY05 supplemental ~~ended~~appropriation ~~September 30~~is likely to be enacted during our second quarter in a form which would, ~~2003~~as ~~was~~indicated ~~$323.7~~in our Form ~~million~~10-K ~~higher~~Report ~~than~~for ~~the~~2004, provide approximately $1.2 billion for ~~the~~work ~~same~~on our ~~period~~vehicles, inprimarily ~~2002,~~Bradleys. anThe Army continues to envision ~~increase~~a ofModularity ~~26.9%.~~effort ~~Sales~~which ~~from~~would ~~our~~expand ~~Ship~~its ~~Repair~~current Bradley operating fleet by between 900 and ~~Maintenance~~2000 vehicles. Such expansion ~~segment,~~would occur by reactivating Bradley vehicles which ~~was~~the ~~acquired~~Army currently holds in ~~July~~inactive ~~2002~~storage. ~~and~~We ~~therefore~~are ~~only~~engaged in ~~partially~~discussions ~~included~~with inthe ~~2002~~Army ~~results,~~regarding ~~accounted~~the ~~for~~proportion of such ~~$270.8 million,~~reactivated Bradleys which would be upgraded to A3 status or instead ~~83.7~~to %lesser ofconfigurations such as the ~~increase.~~A2 ~~Our~~Operation ~~Defense~~Desert ~~Systems~~Storm ~~segment~~(A2-ODS), ~~sales~~but ofwe ~~$1.15 billion~~cannot ~~were~~yet ascertain what decision the ~~$52~~Army will ultimately make.~~9 million~~ ~~higher~~The inArmy’s ~~the~~choice ~~2003~~regarding Bradley ~~period~~versions ~~mainly~~can ~~attributed~~have significant impact on our financial toperformance, ~~higher~~since ~~AAV~~we ~~deliveries~~anticipate ~~and~~that aour ~~ramp~~per-upvehicle inrevenue from ~~DD(X)~~an ~~AGS~~A3 ~~development~~upgrade would be $2 million or more, where as ~~work~~our per-vehicle revenue from an A2-ODS upgrade would be approximately $1 million.

~~Gross~~Recent Developments ~~profit~~

~~Gross~~On ~~profit of $107.6~~March ~~million~~6, in2005 ~~the~~we ~~three month~~entered ~~period~~into ~~ended~~an ~~September~~Agreement ~~30,~~and ~~2003~~Plan ~~was $4.9 million~~of ~~higher~~Merger ~~than~~ (the ~~$102.7 million~~“Merger ~~for~~Agreement”) ~~the~~with ~~corresponding~~BAE ~~period~~Systems North inAmerica, ~~2002~~inc. ~~Gross~~(“BAE”) ~~profit~~and asBAE’s ~~a percentage of sales for the three~~wholly-owned ~~months ended September 30~~subsidiary, ~~2003~~Ute ~~was~~Acquisition 21Company, Inc.1% ~~compared with 19~~(“Ute”).4% Under ~~for~~ the ~~same~~Merger ~~period~~Agreement, inUte ~~2002.~~would ~~This~~be ~~improvement~~merged ~~reflects favorable~~into ~~contract adjustments and higher royalty payments from~~United ~~our~~Defense ~~foreign~~Industries, ~~affiliate in Turkey~~Inc.

16 ~~Gross profit for the nine months ended~~ ~~September 30, 2003 was $317.8 million, $85.3 million~~ higher than the $232.5 million in the same period in 2002. Gross profit percentage of sales for the nine months ended September 30, 2003 was 20.8% compared with 19.3% for the same period in 2002. The increase in the 2003 profit rate was due to an award fee in 2003 for the Crusader program, higher royalty payments from our foreign affiliate in Turkey, and favorable profit adjustments on several production contracts.

~~Selling~~(“UDI”), with UDI being the surviving entity and ~~general~~thereupon a wholly-owned subsidiary of BAE, and ~~administrative~~each ~~expenses~~share of UDI common stock would be converted into the right to receive $75.00 in cash. Consummation of the merger is subject to customary conditions, including (i) the adoption of the Merger Agreement by the requisite vote of our stockholders; (ii) approval of the Merger Agreement by the stockholders of BAE’s U.K. parent entity, BAE Systems plc; (iii) review and clearance by the Committee on Foreign Investment in the United States (“CFIUS”); and (iv) expiration or termination of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”).

~~Selling,~~We ~~general~~have ~~and~~made ~~administrative~~substantial ~~expenses~~progress toward satisfying the major conditions to the merger. A proposal to adopt the Merger Agreement is to be voted on at our annual stockholders meeting scheduled for May 10, 2005, and detailed information regarding the ~~three~~merger ~~months~~is ~~ended~~provided ~~September~~in the proxy statement which we filed with the SEC on April 306, ~~2003~~2005 ~~were~~and mailed to our ~~$38~~stockholders.1 Regarding the CFIUS review, on March ~~million~~16, ~~compared~~2005 we and BAE filed a joint notification with ~~$37~~CFIUS regarding the merger, and on April 15, 2005 CFIUS responded that it had concluded its review and would permit the merger to proceed.5 Regarding the HSR antitrust review, on March ~~million~~14, 2005 we and BAE filed the requisite antitrust notifications under HSR, and on April 13, 2005 the Department of Justice (“DoJ”) issued to us and to BAE a request for additional information (commonly known as a “second request”) regarding the ~~same~~proposed merger. The second request will have the effect of extending the HSR review period, and we do not know when DoJ will complete its review. We and BAE are cooperating with DoJ in ~~2002~~order to expedite its review. Provided that the closing conditions are timely satisfied, we expect the merger to be completed by midyear.

Selling, general and administrative expenses for the nine months ended September 30, 2003 and 2002 were $117.0 million and $98.0 million, respectively. The inclusion of USMR for all nine months in 2003 accounted for $17~~.0 million of the $19.0 million increase. The~~ ~~balance was associated with higher bid and proposal expenses~~ ~~primarily in support of the development of Future Combat Systems~~ ~~(“FCS”) proposals.~~

~~Research and~~Results ~~development~~of Operations

~~Research~~The ~~and~~following ~~development~~table ~~costs~~summarizes ~~were $10.7 million~~key ~~and~~income ~~$16.8 million~~statement ~~for the three and nine~~financial ~~month periods ended September 30, 2003, respectively,~~results: compared with $7.6 million and $22.9 million for the corresponding prior periods. Research and development costs were higher in the three months period ended September 30, 2003 due to spending on development projects for future technologies. Research and development costs were higher in the nine months of 2002 as a result of spending on projects in preparation for the Army’s FCS program and higher spending on projects related to the AGS and Advanced Vertical Launch System for the Navy’s DD(X) destroyer.


		Three months ended
		March 31,

		2004			2005

		(In thousands)
Revenue:
	Defense Systems	$	409,888		$	408,718
	Ship Repair and Maintenance		137,189			135,342

Total Revenue			547,077			544,060
Cost of sales:
	Defense Systems		312,422			317,423
	Ship Repair and Maintenance		122,665			120,019

Total cost of sales			435,087			437,442
Gross Profit:
	Defense Systems		97,466			91,295
	Ship Repair and Maintenance		14,524			15,323

Total gross profit			111,990			106,618
Gross profit % of sales:
	Defense Systems		23.8	%		22.3	%
	Ship Repair and Maintenance		10.6	%		11.3	%

Total gross profit % of sales			20.5	%		19.6	%
Selling, general and administrative expenses:
	Defense Systems	$	30,962		$	32,758
	Ship Repair and Maintenance		7,797			7,828

Total selling, general and administrative expenses			38,759			40,586
Merger related expenses			—			4,054
Research and development			6,553			4,743

Income from operations			66,678			57,235
Earnings related to investments in foreign affiliates			5,816			—
	Interest income		973			1,822
	Interest expense		(6,454	)		(6,683	)

Net interest expense			(5,481	)		(4,861	)

	Income before income taxes		67,013			52,374

Provision for income taxes			25,130			19,677

	Net income	$	41,883		$	32,697

~~Earnings (loss) from foreign affiliates~~ Revenue

~~Earnings~~Revenue ~~from~~of ~~foreign affiliates were~~ $5544.01 million for the three months ended ~~September~~ March 3031, ~~2003~~ as2005 ~~compared~~was ~~with~~slightly (lower than $0547.6) 1 million for in the ~~same~~comparable period ~~last year~~in 2004. ~~For~~Defense ~~the~~Systems ~~nine months ended September 30, 2003,~~segment ~~earnings~~revenue ~~from~~of ~~foreign affiliates was~~ $16408.78 million ~~compared~~ compares with $6409.79 million in ~~earnings~~the ~~for~~first quarter of 2004. Lower Bradley sales due to timing of deliveries, and lower FCS sales due to the ~~same~~completion ~~prior~~of ~~year~~the Non-Line-of-Site ~~period.~~Canon (“NLOS-C”) Concept Technology ~~The~~Demonstrator ~~higher~~(“CTD”) ~~earnings~~contract in ~~2003~~2004, were aoffset ~~result~~by higher ofAAV ~~higher~~and ~~vehicle~~M113 deliveries. Ship Repair and Maintenance ~~sales~~segment atrevenue ~~our~~of ~~Turkish~~$135.3 million ~~joint~~was ~~venture~~slightly lower than the first quarter of 2004.

18 ~~Interest~~ ~~expense~~

~~Net~~Gross interest expense was $6.1 million in the three months ended September 30, 2003 compared with $11.4 million for the same period in 2002. For the nine months ended September 30, 2003, net interest expense of $18.9 million was $3.0 million lower than the corresponding 2002 period. The higher interest expense in 2002 was due to the write-off of unamortized financing costs due to early extinguishment of debt and higher interest rates. profit

~~Provision~~ Gross profit of $106.6 million for ~~Income~~the ~~Taxes~~three-month period ended March 31, 2005 was $5.4 million lower than the $112.0 million for the corresponding period in 2004. Gross profit as a percentage of sales for the three months ended March 31, 2005 was 19.6% compared with 20.5% for the same period in 2004. The Defense Systems segment’s gross profit rate for the three months ended March 31, 2005 and 2004 was 22.3% and 23.8%, respectively. The higher gross profit rate in 2004 is primarily attributable to the receipt of an $8.8 million dollar award fee for the CTD phase of the NLOS-C contract which was completed in 2004. The Ship Repair and Maintenance segment’s gross profit rate was 11.3% for the three months ended March 31, 2005 compared with 10.6% in the prior year period.

~~The provision for income taxes for the three-month period ended September 30~~Selling, ~~2003~~general was $20.4 million compared with $0.5 million for the corresponding 2002 period. For the nine months ended September 30, 2003, the provision for income taxes was $70.0 million compared with $5.0 million in the same period in 2002. The respective increases of $19.9 million and ~~$65.0 million~~administrative for the three month and nine month periods in 2003 were due primarily to utilization of net operating loss carryforwards in 2002 to substantially offset income tax expense. The provision for income taxes in 2003 is based on an estimated annual effective income tax rate and more closely reflects underlying statutory tax rates as a result of the reversal of the valuation allowance against net operating loss carryforwards and other deferred tax assets in 2002. expenses

~~Net~~ ~~income~~Selling, general and administrative expenses for the three months ended March 31, 2005 and 2004 were $40.6 million and $38.8 million, respectively. The increase in 2005 was primarily due to inflation, higher stock compensation expense, and the inclusion of general and administrative expenses from Engineered Plastic Designs, Inc., the company we acquired in January 2005.

AsMerger arelated result of the foregoing factors, we had a net income of $37.4 million in the three months ended September 30, 2003, compared with $45.1 million in the same prior period. For the nine months ended September 30, 2003, we had net income of $111.8 million compared with $91.4 million for the same period in 2002. expenses

~~Liquidity~~In the three-month period ended March 31, ~~Capital~~2005, ~~Resources~~we incurred $4.1 million in investment banking and ~~Financial~~consulting expenses ~~Condition~~related to our pending merger as described above.

~~Cash~~Research provided by operating activities was $172.2 million for the nine month period ended September 30, 2003 compared with $75.7 million in the same period in 2002, a $96.5 million increase. The primary reasons for this increase were higher net income, tax payments less than the tax provision and ~~receipt of higher earnings distributions, net of taxes, from our joint venture in Turkey.~~ development

~~Cash~~Research ~~used~~and indevelopment ~~investing~~spending ~~activities~~ was $324.27 million for the three ~~nine~~months ~~month period~~ ended ~~September~~ March 3031, ~~2003~~2005 compared with $~~324~~6.76 million infor the ~~prior~~ ~~year~~corresponding prior period. ~~Capital expenditures of $32.2 million in~~Spending ~~2003~~in ~~were~~2005 ~~$19.1 million~~was ~~higher~~lower ~~than the same prior period,~~ due ~~primarily~~ to the ~~purchase~~redeployment of apersonnel ~~drydock~~from research ~~and~~projects ~~the expense~~ to ~~install~~ ~~it at our USMR Norfolk, Virginia facility. Expenditures for manufacturing, ship repair, and computer equipment and software primarily represent~~ the ~~balance~~FCS ~~of capital expenditures~~program. ~~Cash used for investing activities in 2002~~ ~~included the acquisition of USMR for $307.4 million (net of $7.3 million cash acquired), and Cell ITS AB for $4.1 million.~~

~~Cash~~Earnings ~~used~~from inforeign financing activities was $10.7 million for the nine month period ended September 30, 2003, compared with $206.9 million of cash provided in the same period in 2002. On July 2, 2002, we amended our credit facility to borrow an additional $300 million for the purchase of USMR. This increase was partially offset by the repayment of $90.9 million of debt during the nine month period. Principal repayments on debt in the nine months ended September 30, 2003 were $13.0 million. affiliates

~~Based~~We onrecorded ~~current~~no ~~levels~~earnings offrom ~~operations~~foreign ~~and~~affiliates for the three ~~anticipated~~months ~~growth~~ended March 31, 2005 compared with $5.8 million for the same period last year. During the second quarter of 2004, we ~~believe~~determined that ~~our~~the ~~cash~~likelihood ~~from~~of ~~operations,~~further dividends ~~together~~from ~~with~~our ~~other~~Turkish ~~available~~joint ~~sources~~venture ofwas ~~liquidity~~unlikely since they no longer have a production contract. Consequently, ~~including~~we discontinued ~~borrowings~~recognizing ~~available~~our ~~under~~share of the ~~revolving~~equity ~~credit~~in earnings and wrote off our investment balance as of June 30, 2004.

16 Interest expense

~~facility,~~Net ~~will~~interest beexpense ~~sufficient~~was to$4.9 million ~~fund~~in ~~anticipated capital~~the ~~expenditures~~three ~~and~~months ended ~~make~~March 31, ~~required~~2005 ~~payments~~compared ofwith ~~principal~~$5.5 million ~~and~~in the ~~interest~~same onperiod ~~debt,~~in ~~including~~2004. ~~payments~~The ~~due~~lower ~~under~~interest ~~our~~expense ~~senior~~in ~~credit~~2005 was ~~facility,~~primarily ~~for~~due ~~the~~to ~~foreseeable~~a ~~future~~lower net debt level.

~~U.S.~~Provision ~~Army~~for ~~Transformation~~ Income Taxes

The ~~principal~~income ~~developments~~tax ~~involving~~provision ~~the~~for ~~U.S. Army which might significantly affect our ground combat vehicle business were discussed under~~ the ~~heading, “U.S. Army Transformation” in both our Form 10~~three-Kmonth ~~Report~~period ~~for the year~~ ended ~~December~~ March 31, ~~2002~~2005 ~~and~~was ~~our Form~~$19.7 ~~10-Q~~million ~~Report~~compared with $25.1 million for the ~~three~~same ~~months~~prior ~~ended June 30, 2003~~period. ~~Supplementing such~~The ~~discussion,~~provision ~~we note that the DoD appropriation~~ for ~~the~~ ~~fiscal~~income ~~year~~taxes ~~ending~~is ~~September 30,~~based ~~2004~~on ~~(“FY04”) was~~an ~~recently~~estimated ~~signed~~annual ~~into~~effective ~~law.~~income tax ~~The~~rate ~~elements~~ of ~~the~~approximately ~~FY04 appropriation~~37.5% ~~which are likely to have the greatest significance~~ for ~~the~~both ~~ground~~2005 ~~combat~~and ~~vehicle portion of our Defense Systems~~2004. ~~segment are as follows:~~

	(1)	The $1.7 billion sought by the Administration for FCS and related activities was provided. In doing so, the appropriation act designated the Non-Line of Sight-Cannon (NLOS-C) as a separate program element, segregated $353 million of the FCS appropriation for NLOS-C, and restated the previous statutory requirement that NLOS-C be fielded by 2008.
	(2)	$221 million was appropriated for additional Bradley upgrades.
	(3)	Approximately $1 billion was provided for Stryker vehicles, meaning that this major share of the Army’s combat vehicle procurement is to be spent on a program in which we participate only minimally.

Liquidity, Capital Resources and Financial Condition

~~Regarding~~Cash ~~the~~provided ~~Bradley~~by ~~and~~operating ~~NLOS-C~~activities ~~appropriations for~~was ~~FY04,~~$11.4 million wefor the ~~continue~~three-month toperiod ~~note~~ended ~~that~~March 31, as2005 ~~such~~compared ~~appropriations also~~with ~~cover~~$32.9 million ~~program~~in ~~administration~~the bysame ~~the~~prior ~~Army~~period, wea $21.5 million ~~ordinarily~~decrease. ~~receive only~~The aprimary ~~portion~~reasons ~~(typically,~~for ~~65–75%~~the decrease in ~~our~~2005 ~~long~~were ~~experience with~~lower ~~the~~net ~~Bradley)~~income, ~~rather than all, of such funding~~$4.1 million ~~Also,~~in ~~because~~banking ~~FCS~~ and ~~NLOS-C~~consulting ~~remain~~costs inassociated ~~such~~with anour ~~early~~pending ~~stage and the~~merger, ~~subject~~inventory ofbuild ~~ongoing~~up ~~review~~for ~~within~~M113 ~~the~~upgrades ~~Government,~~and weMk-45 ~~are~~and ~~not at~~VLS ~~all~~production, ~~certain~~and ashigher toincome ~~what~~tax ~~portion~~payments ofwhich ~~this~~were ~~appropriation will~~partially ~~ultimately~~offset ~~translate~~by ~~into~~the ~~revenue~~reduction ~~for~~in ~~the~~accounts ~~Company~~receivable.

~~Finally,~~Cash ~~there~~used ~~are~~in ~~substantial~~investing ~~indications~~activities ~~that the~~was ~~Army~~$14.5 million ~~expects the production and fielding schedule~~ for the ~~FCS program overall to be delayed by two or more years. The effects of delays in NLOS~~three-Cmonth ~~and/or~~period ~~FCS~~ended ~~more generally could include (i)~~March ~~reducing our revenues and profits during the delay period~~31, ~~particularly~~2005 ifcompared ~~vehicle production is postponed,~~with ~~and (ii)~~$50.8 ~~extending~~million ~~the period during which our facilities involved~~ in the ~~production~~prior ofyear ~~ground~~period. ~~combat~~The ~~vehicles~~lower ~~could experience~~level ~~a gap between the potential cessation~~ of ~~Bradley work~~ ~~and~~investment ~~the~~in ~~commencement~~2005 ofis ~~production of NLOS-C and/or other FCS~~primarily ~~vehicles.~~

1719

~~Item~~ attributable 3.to ~~Quantitative~~three acquisitions we made during the 2004 three-month period: Kaiser Compositek, Cercom, and ~~Qualitative~~Hawaii Shipyards ~~Disclosures~~for ~~About~~an ~~Market~~aggregate ~~Risk~~of $45.8 million. In the 2005 three-month ~~September~~period, 30we acquired Engineered Plastic Designs, ~~2003~~Inc. for $8.0 million, net of $0.2 million cash acquired.

~~All~~Cash ofused ~~our~~in ~~financial~~financing ~~instruments~~activities ~~that~~was ~~are~~$14.3 million for the ~~sensitive~~three-month period ended March 31, 2005, compared with $9.7 million in the same period in 2004, an increase of $4.6 million. The increase was due to ~~market~~the ~~risk~~payment ~~are~~of ~~entered~~a dividend ~~into~~of ~~for~~$6.4 million ~~purposes~~partially ~~other~~offset by higher ~~than~~proceeds ~~trading~~from the sale of common stock.

~~Forward~~Based ~~Currency~~on ~~Exchange~~current ~~Risk~~levels of operations and anticipated growth, we believe that our cash from operations, together with other available sources of liquidity, including borrowings available under the revolving credit facility, will be sufficient to fund anticipated capital expenditures and make required payments of principal and interest on debt, including payments due under our senior credit facility, for the foreseeable future.

WeItem ~~conduct some of our operations outside the U~~3.S. inQuantitative ~~functional~~and ~~currencies~~Qualitative ~~other~~Disclosures ~~than~~About ~~the~~Market ~~U.S.~~Risk ~~dollar.~~— ~~To mitigate~~March ~~the risk associated with fluctuating currencies on short-term and long-term foreign currency-denominated transactions~~31, ~~we enter into foreign currency forward exchange contracts. We do not enter into foreign currency forward exchange contracts for trading purposes.~~ 2005

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

~~Borrowings~~Forward ~~under~~Currency ~~our~~Exchange senior secured credit facility are sensitive to changes in interest rates. The weighted average interest rate on our borrowings outstanding under the senior secured credit facility and swap agreements as of September 30, 2003 was 3.20%. Risk

InWe ~~January~~conduct ~~2002,~~some weof ~~entered~~our ~~into~~operations anoutside ~~interest~~the ~~rate protection~~United ~~agreement~~States ~~to mitigate risks associated with variable~~in ~~interest~~functional ~~rate~~currencies ~~borrowings~~other ~~under~~than ~~our~~the ~~senior secured credit facility~~U. ~~The specified contract amount of this interest rate swap agreement is $173~~S. ~~million~~dollar. ~~The agreement entitles us~~To tomitigate ~~pay a base interest rate of 3.45%, in return for~~ the ~~right~~risk ~~to receive~~associated awith ~~floating~~fluctuating ~~interest~~currencies ~~rate which is based~~ on ~~three-month~~ ~~LIBOR~~short-term asand ~~of each quarterly measurement date. In the event the three~~long-~~month~~term ~~LIBOR~~foreign ~~at the measurement date exceeds 6%~~currency-denominated transactions, ~~the~~we ~~base interest~~enter ~~rate~~into isforeign ~~adjusted~~currency toforward ~~the then effective LIBOR up to a~~exchange ~~maximum of 8%~~contracts. ~~USMR~~We ~~had~~do ~~also~~not ~~entered~~enter into anforeign ~~interest~~currency ~~rate~~forward ~~protection~~exchange ~~agreement~~contracts to mitigate risks associated with variable interest rate borrowings. The specified contract amount of the agreement is $20 million with a maturity date of January 29, 2004. The agreement entitles us to pay base interest rate of 3.77% in return for ~~the~~trading ~~right to receive a floating interest rate that is based on three month LIBOR as of each quarterly measurement date~~purposes. ~~The net cash amounts paid or~~ ~~received on these agreements are accrued and recognized as an adjustment to interest expense.~~

~~Item~~Interest 4.Rate ~~Controls and Procedures~~Risk

WeBorrowings ~~maintain~~under ~~disclosure~~our ~~controls~~senior ~~and~~secured ~~procedures that~~credit facility are sensitive ~~designed~~ to ~~ensure~~changes ~~that information required to be disclosed~~ in ~~our~~interest ~~reports~~rates. ~~under~~As ~~the Securities Exchange Act~~ of ~~1934,~~ ~~as amended~~March 31, ~~is recorded, processed, summarized and~~ ~~reported~~2005 ~~within~~ the ~~time~~weighted ~~periods~~average ~~specified~~interest inrate ~~the~~on ~~Securities and~~the ~~Exchange~~$57.0 million ~~Commission’s~~Term A ~~rules~~borrowings and ~~forms,~~on ~~and that such~~the ~~information~~$454.9 million isTerm B ~~accumulated~~borrowings ~~and~~was ~~communicated~~4.77%. toLoans ~~our management,~~made ~~including~~pursuant ~~our~~to ~~Chief~~the ~~Executive~~Term A ~~Officer~~loan ~~and~~facility ~~our~~require ~~Chief Financial~~equal ~~Officer,~~quarterly asamortization ~~appropriate,~~payments toof ~~allow~~$6.3 million, ~~timely~~with ~~decisions regarding~~a ~~required~~final ~~disclosure.~~payment Indue ~~designing~~on ~~and evaluating our disclosure controls and procedures~~August 13, ~~management~~2007. ~~recognizes~~Loans ~~that~~made ~~any controls~~pursuant ~~and~~to ~~procedures,~~the noTerm B ~~matter~~facility ~~how~~require ~~well~~quarterly ~~designed and operated, can~~amortization ~~provide~~payments ~~only reasonable assurance~~ of ~~achieving~~$6.7 million ~~the~~until ~~desired control~~June 30, ~~objectives~~2007, and ~~management necessarily was required to~~ ~~apply~~$49.4 million ~~judgment~~each inquarter ~~evaluating~~thereafter, with the ~~cost-benefit relationship of~~final ~~possible~~payment ~~controls~~being ~~and~~due ~~procedures.~~on ~~Also~~August 13, we2009. ~~have~~Given ~~investments in~~the ~~an unconsolidated entity~~$511.9 million Asdebt welevel doas ~~not~~of ~~control~~March 31, or2005, ~~manage~~a ~~this~~1.0% ~~entity,~~change ~~our~~in ~~disclosure~~the ~~controls~~weighted ~~and~~average ~~procedures~~interest ~~with~~rate ~~respect~~would ~~to this~~have ~~entity are necessarily substantially more limited than~~an ~~those~~interest weimpact ~~maintain~~of ~~with~~approximately ~~respect~~$5.1 million ~~to our consolidated subsidiaries~~annually.

AsItem ~~required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of United Defense Industries, Inc~~4. ~~management, including~~Controls ~~our principal executive officer~~ and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and our principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level. Procedures

~~There~~We ~~has~~maintain ~~been~~disclosure nocontrols ~~change~~and procedures designed to ensure that information required to be disclosed in our Company’s ~~internal~~Exchange ~~controls~~Act reports is recorded, processed, ~~over~~summarized ~~financial~~and ~~reporting~~reported ~~during~~within ~~our~~the ~~most~~time ~~recent~~periods ~~fiscal~~specified ~~quarter~~in the ~~that~~SEC’s ~~has~~rules ~~materially~~and ~~affected~~forms, orand that such information is accumulated ~~reasonably~~and ~~likely~~communicated to ~~materially~~ ~~affect~~our management, including our Chief ~~internal~~Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and ~~over~~procedures, ~~financial~~management recognized that any controls and ~~reporting~~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, from time to time we make investments in unconsolidated entities, the largest of which has been the 51% ownership position we have held in our Turkish affiliate since 1989. As we do not control or manage such entities, the disclosure controls and procedures with respect thereto may be substantially more limited than those we maintain with respect to our consolidated subsidiaries.

18 As of March 31, 2005, 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 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.

~~PART~~There IIhave 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.

20 ~~OTHER INFORMATION~~

~~September~~PART ~~30, 2003~~II

~~Item~~ OTHER ~~6. Exhibits and Reports on Form 8-K~~INFORMATION

~~(a)~~March ~~Exhibits~~31, 2005

31Item 2.1 ~~Certification~~Repurchase of ~~Chief~~ ~~Executive~~Common ~~Officer~~ Stock by the Issuer

~~31.2~~In ~~Certification~~March 2004, our Board of Directors authorized the repurchase ~~Chief~~of ~~Financial~~up ~~Officer~~to $100 million of our common stock. The repurchase plan was announced on March 5, 2004 and expired on March 5, 2005. The total number of shares repurchased under the plan was 2,491,800 at an aggregate cost of $92.7 million.

~~32.1~~The ~~Certification~~following oftable provides the information related to our ~~Chief~~repurchase ~~Executive~~of ~~Officer~~common stock starting in May 2004.

32.2 Certification of Chief Financial Officer


					Total number of
					shares (or units)		Approximate dollar
					purchased as part		value of shares (or
	Total number		Average		of publicly		units) that may yet
	of shares (or units)		price paid		announced plans		be purchased under
Period	purchased		per share (or unit)		or programs		the plans or programs

							(In thousands)
April 1 to April 30, 2004		0	$	—		0	$	100,000
May 1 to May 30, 2004		269,500	$	34.30		269,500		90,756
June 1 to June 30, 2004		599,300	$	33.26		599,300		70,823
July 1 to July 30, 2004		65,200	$	33.98		65,200		68,608
August 1 to August 30, 2004		160,100	$	36.90		160,100		62,700
September 1 to September 30, 2004		535,400	$	39.21		535,400		41,707
October 1 to October 31, 2004		648,700	$	39.61		648,700		16,010
November 1 to November 30, 2004		213,600	$	40.98		213,600		7,258
December 1 to December 31, 2004		0	$	—		0		7,258
January 1 to March 5, 2005		0	$	—		0		0

~~(b)~~In January 2005 our Board authorized the repurchase of an additional $100 ~~Reports~~million of our common stock during a one-year period, which will end on ~~Form~~January ~~8-K~~20, 2006. To date, no shares have been repurchased under this second authorization.

OnItem July 24, 2003, we filed a report on Form 8-K to include our second quarter 2003 earnings press release. On August 5, 2003, we filed a report on Form 8-K/ A amending the revenue by program table in our second quarter 2003 earnings press release as reported on Form 8-K dated July 24, 2003. On August 6~~, 2003, we filed a report on Form 8-K indicating we had entered into an Underwriting Agreement with Lehman Brothers, Inc~~. on behalf of several Underwriters in conjunction with the public offering of up to 10,800,000 shares of our common stock (plus an over-allotment option to purchase 1,080,000 additional shares of common stock) by certain named Selling Stockholders.Exhibits

19 Exhibits

~~SIGNATURE~~ 2.1 Agreement and Plan of Merger, dated as of March 6, 2005, among United Defense Industries, Inc., BAE North America, and Ute Acquisition Company, Inc. (Incorporated by reference to exhibit 2.1 on our Form 8-K/A filed March 17, 2005). 31.1 Certification of Chief Executive Officer. 31.2 Certification of Chief Financial Officer. 32.1 Certification of Chief Executive Officer. 32.2 Certification of Chief Financial Officer.

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

~~By: /s/ FRANCIS RABORN~~ SIGNATURE

~~Francis~~ Pursuant ~~Raborn~~to ~~Principal~~the ~~Financial~~requirements ~~and~~of ~~Accounting~~the ~~Officer~~Securities ~~and~~Exchange ~~Authorized~~Act ~~Signatory~~of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~Dated:~~United ~~November 7~~Defense Industries, ~~2003~~ Inc. (registrant)

20 By: /s/ Francis Raborn



	Francis Raborn
	Principal Financial and Accounting Officer
	and Authorized Signatory

Dated: April, 28, 2005

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