UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

UNITED DEFENSE INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

1525 Wilson Boulevard, Suite 700,

Arlington, Virginia, 22209-2411

(703) 312-6100

(Address and telephone number of principal executive offices of

Registrant)

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

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

None

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

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

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

      The aggregate market value of the common stock held by non-affiliates of the registrant was $1,454,321,890 based on the closing price of $35.00 per share on the New York Stock Exchange on June 30, 2004.

      Common Stock, $.01 par value, 50,787,379 shares outstanding as of February 16, 2005

DOCUMENTS INCORPORATED BY REFERENCE

      Certain information in the registrant’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 30, 2005 is incorporated by reference in Part III of this Report.

TABLE OF CONTENTS

Special Note Regarding Forward-Looking Statements

      Our Form 10-K disclosure and analysis concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in developing and expanding our business and the realization of sales from our backlog, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although these statements are based upon assumptions we consider reasonable, they are subject to risks and uncertainties that are described more fully below under the caption “Risk Factors”. Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements.

PART I

Overview

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

      Our Defense Systems segment’s primary military programs include upgrades of the Bradley Fighting Vehicle (“BFV”) and its derivatives, naval ordnance production and development programs, and development of several ground vehicle types within the Army’s Future Combat Systems (“FCS”) program, including the Non-Line-of-Sight Cannon (“NLOS-C”). Since 1981, the BFV has served as the leading domestically produced vehicle able to fulfill the dual role of troop transport and armored fighting vehicle. We have maintained our prime contractor position on the BFV program since production began, and have added a number of technology-based upgrades and derivative vehicles that continue to extend the program’s life cycle. In addition to managing the BFV vehicle programs, we serve as the prime contractor for a number of military programs, several of which have spanned decades, including the M88 tank recovery vehicle since 1960, the M113 armored personnel carrier since 1960, and the U.S. Navy’s Mk45 naval gun system since 1968. In recent years, however, the Army has taken steps to augment its combat vehicle fleet with newer designs such as the Stryker vehicle and a proposed family of manned and unmanned FCS vehicles (discussed below).

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

Business Segments, Products and Programs

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

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

      Although new BFV production largely ended in 1995, we derive significant revenue from upgrading the Army’s existing fleet of BFVs. We initiated delivery of the latest upgrade, the BFV A3 version, in October of 1998. The BFV A3, which currently includes the Infantry Fighting Vehicle, the Cavalry Fighting Vehicle, and Fire Support Vehicle variants, is the most modern version of the vehicle and provides enhanced situation awareness capability and improved lethality, survivability and sustainability. The BFV A3 has a fully integrated digital architecture and is adaptable to the Army’s emerging network architecture as it transforms its current force into the future force. The Army is in the process of upgrading 595 older version BFVs to the A3 configuration, with annual funding allocations over the seven-year period between FY1997-2003. We had been awarded four single year contracts for A3 upgrades (FY1997-2000) for a total of 206 vehicles, and in May 2001, we received a multi-year contract (FY2001-2003) for an additional 389 vehicles. Of these 595 vehicles, 149 were delivered in 2004, and 319 in prior years. Production under the BFV A3 multi-year contract is expected to be completed by June 2005.

      In September of 2003, Congress added $221 million to the FY04 budget to provide for the procurement of additional Bradleys. In May 2004, we received a contract to produce 131 of an improved version of the BFV A2 (known as the A2 OIF) which would incorporate many of the lessons learned during Operation Iraqi Freedom (“OIF”). In February 2005, we received a contract modification to change this order to 120 Bradley A3 “minus” vehicles (an A3 without the Commander’s Independent Viewer system). Production of these vehicles is expected to start in late 2005 and end in the third quarter of 2006.

      In August 2004, we received a contract to “reset” (return to normal operating condition), 131 Bradley A2 vehicles which had been returned from Iraq. As U.S. forces using GSD tracked vehicles (BFV, M88,

M109 and M113) continue to be deployed and rotated through Iraq, additional reset business opportunities may be created.

      BFV Derivatives and Support. The BFV served as a platform for a number of derivative vehicles we have developed. The 2004 Army Campaign Plan outlines the organization of modular heavy Brigade Combat Teams (“BCT”). In addition to the standard Infantry Fighting Vehicle (“IFV”) and Cavalry Fighting Vehicle (“CFV”), there are three BFV derivatives in each BCT: the Bradley Fire Support Vehicle, the Engineer Squad Vehicle and the Bradley Command Vehicle. In addition to the derivatives in the BCT, the Multiple Launch Rocket System (“MLRS”) carrier is fielded to fire support units and was developed to provide a carrier for a long-range rocket artillery system. The MLRS is outfitted with rockets, a launcher and fire control system developed and produced by Lockheed Martin Missiles and Fire Control. The MLRS has been produced for several countries, including Egypt, Israel, Japan, South Korea and various NATO countries. Another derivative is the Command and Control Vehicle (“C2V”). The C2V is a self-contained vehicle used for communications and operational control of forces that keeps pace with armored maneuver forces while providing the crew with a protected environment. We were awarded a three-year production contract for C2V variants in December 1998 which were completed in May 2001. Although the Army removed additional production funding for the C2V in FY01 and cancelled the FY00 award, we retained and maintained all of the C2Vs produced under the original contract. At the outset of the 2003 Iraq campaign, we fielded 15 vehicles to the Army under an urgent need statement.

      In addition to the development and manufacture of BFV derivatives, we provide a wide range of BFV upgrade kits, training devices and field services. BFV Upgrade kits allow the customer to incorporate advances in technology between the recapitalization cycle. The training devices we offer allow the customer to train all of the vehicle and crew functions for all of the derivatives. We recently completed a contract for 13 Bradley Advanced Training Systems (“BATS”) that are designed to train BFV A3 crews and are currently making deliveries of kits to modernize the Bradley Conduct of Fire trainers. Finally, we provide a range of technical services through our Field Service Representatives network which provides on-site training and other technical advice to customers, such as how to complete maintenance and repairs and assess the necessity of replacement parts.

      Mk45 Naval Gun System (“Mk45”). We are the original equipment manufacturer and sole source producer of the 5-inch Mk45 gun system for the U.S. Navy’s current class of destroyers, the Arleigh Burke DDG 51 class (“DDG51”). We are under contract through FY04 requirements. The U.S. Navy currently plans to continue building DDG51 class ships through at least FY05. We are also the prime contractor for the Naval Surface Fire Support (“NSFS”) program. This NSFS program includes upgrading the Mk45 gun system with the capability to fire precision munitions. Due to the NSFS program, we have received contracts to upgrade 12 Mk45 guns for the Navy from Mod0/1 to Mod4 configuration, which extends the Mk45’s range and improves surface fire capability. The Navy is also continuing to evaluate the merits of upgrading up to 44 additional MK45’s to Mod4 for the Ticonderoga Cruiser class ships. Furthermore, the U.S. Government supports allied navies having compatible armaments, and provides us assistance in efforts to place Mk45s on foreign ships. We believe the improvements included in the Mod4 configuration, which provide significantly greater range, will make the Mk45 more competitive internationally. We are presently performing Mk45 contracts for Japan, Denmark and Korea.

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

      The 155-mm AGS with LRLAP will support the U.S. Navy and Marine Corps expeditionary and Joint Operations warfighters in the littorals and deeper inland. The AGS is capable of a maximum sustained firing rate of 10 rounds per minute to deliver high-volume 155-mm LRLAP fire at ranges of up to 100 nautical miles. The high-capacity, fully automated 155-mm AGS and below deck ammunition handling and storage system allows for an uninterrupted and sustained high-volume of fire. Each of the DD(X) destroyers will have

two AGS systems, providing the equivalent firepower of two battalions of U.S. Marine Corps M198 howitzers. Compared with the current DDG-51 ships, the gun system sales per ship should increase by more than three times for the DD(X).

      Funded gun development was initiated in 1999, with completion of development scheduled for 2006. We are currently in System Development and Demonstration for the AGS. Under this phase, we are developing Engineering Development Models to demonstrate the feasibility of the technology and reduce risks. We successfully completed the Critical Design Review and production of the Engineering Development Models in 2004. Integrated land based testing will begin in July of 2005. AGS production for the lead ship is scheduled to begin in FY07.

      The 155-mm LRLAP is a Global Positioning System/ Inertial Measurement Unit-guided and rocket assisted munition capable of delivering a unitary high-explosive warhead at extreme range. In 2004, we completed design of the Engineering Development Model and initiated guided flight testing.

      Medium Caliber Gun Systems. The Mk 110 57mm gun system has been selected for use on the United States Coast Guard (“USCG”) Deepwater National Security Cutter program and the U.S. Navy’s DD(X) and Littoral Combat Ship (“LCS”) programs.

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

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

      The Deepwater program is currently in the design phase with the contract for the first National Security Cutter awarded in September, 2003. We are teamed with Northrop Grumman Ship Systems and have been awarded an order for the first Bofors 57mm gun. The Bofors 57mm Mk 3 is undergoing gun and ammunition qualification in Louisville, Kentucky and Dahlgren, Virginia for installation on the lead ship in December, 2006.

      The MK 110 57mm Naval Gun System has been competitively selected by both LCS Flight 0 prime contractors for their two each (4 in total) Flight 0 LCS Ships. The LCS is envisioned by the U.S. Navy as a new class of surface combatant ship capable of missions closer to shore than are currently achievable by many of the U.S. Navy’s current vessels. We have received a contract from the first LCS Flight 0 ship prime contractor to begin production of the MK 110, and we are proceeding to finalize contracts with the two prime contractors for production of the four Flight 0 guns. This positions the MK 110 57mm Naval Gun very well to be the naval gun of choice for the entire LCS program, currently contemplated at up to 57 ships. The U.S. Navy is planning to increase deliveries of LCS from one in 2006 to five per year in 2009 and following years.

      We believe that the Mk 110 57mm is the only system that can provide effective surface warfare capability and commonality across the DD(X), LCS and Coast Guard Deepwater programs.

      Minor Caliber Gun System. The U.S. Navy is currently establishing requirements to develop and field stabilized Minor Caliber Guns (“MCG”) to provide protection against small boat surface threats. We are actively involved in two MCG programs that have significant domestic and international market potential.

      In 2004, the U.S. Navy awarded us a five year Indefinite Deliver/ Indefinite Quantity contract for the delivery of the Mk 38 Mod 2 Ordnance Alteration. They have placed an initial order for eight gun mounts to be delivered in the first quarter of 2005, for installation on U.S. Navy Cruisers and Amphibious Dock Landing ships. The Mk 38 Mod 2 Machine Gun System (“MGS”) is a lightweight stabilized naval machine gun system for day and night operation. The system utilizes the 25mm Bushmaster M242 gun and can be easily integrated on new or existing platforms. The Mk 38 Mod 2 MGS features an advanced fire control capability. The Mk 38 Mod 2 MGS is primarily operated as an autonomous system, directed by an on-mount Electro-Optical Surveillance System and operated with its own dedicated Remote Operators Console. The Mk 38 Mod 2 MGS replaces an unstabilized mount, creating new capabilities for Anti-Terrorism and Force Protection and is well suited for numerous U.S. Navy platforms.

      We are also actively involved in developing, testing and fielding a .50 caliber stabilized MCG system for short range defense called the EX-45. We are working cooperatively with the U.S. Navy’s In-Service-Engineering-Agency (“ISEA”) in Louisville, Kentucky. Three EX-45 units were under contract from the Louisville ISEA for testing in 2004.

      Submarine Propulsor. We are the sole-source prime contractor of U.S. submarine propulsors, which enables a submarine to meet stealth mission requirements. We are currently under contract to produce seven propulsors for Virginia Class submarines for delivery through 2006. The first five systems have been delivered ahead of schedule. We recently received a contract award for the follow-on multi-year procurement of seven additional propulsors, including all options, for delivery through 2010.

      Launching Systems. The Mk 41 Vertical Launching System (“Mk 41 VLS”) is the U.S. and nine allied navies’ primary multi-mission, multi-missile launcher on surface combatant warships such as destroyers and cruisers. The Mk 41 VLS launches the anti-air threat Standard Missile, strike mission-related Tomahawk cruise missile, vertical launch anti-submarine rocket, and ship self-defense Sea Sparrow missile. We manufacture all the major structural assemblies and electrical cables for the Mk 41 VLS launcher under subcontracts to Lockheed Martin Corporation, the prime contractor of the VLS launcher. We have a Mk 41 VLS teaming agreement with Lockheed Martin, which covers both U.S. and foreign sales through December 31, 2011. The U.S. Navy installs the Mk 41 VLS, like the Mk45, on all DDG51s, each of which contains twelve 8-cell VLS modules. The DDG51 program plan calls for major structural deliveries to be completed by 2008. We signed a three-year launcher production contract with Lockheed Martin in 2002, with deliveries extending through mid-2006. The U.S. Navy is procuring the Mk 41 VLS for the FY05 DDG51 buy of three ships, extending U.S. production through 2007. The U.S. Navy is now processing requests for pricing and availability of Mk 41 VLS for several allied navies, including Spain and Australia, for production spanning 2006-2008.

      We are the designated mechanical design agent for the Mk 41 VLS launcher and the design agent for all Mk 41 VLS canisters. We are the sole-source, prime contractor of Mk 41 VLS canisters to the U.S. Navy and foreign navies. We were awarded a contract in November 2004 to produce both refurbished and new Mk 14 Mod 2 Tomahawk canisters compatible with the U.S. Navy’s new Tactical Tomahawk missile from the Mk 41 VLS. This contract provides for a base award for the refurbishment and upgrade of 352 Mk 14 canisters at our facility in Aberdeen, South Dakota and includes options for the refurbishment of an additional 688 Mk 14 canisters and the production of 439 new Mk 14 canisters through 2009.

      We are also under contract to design a Mk 21 canister modification to launch the Standard Missile 3 for Ballistic Missile Defense missions. Our prototype canisters have been used in the recent successful Standard Missile ballistic missile defense tests. In addition, a variant of this same canister will be used to store, launch and transport the U.S. Navy’s SM-6, which provides the ability to defeat air threats over-the-horizon.

      The U.S. Navy awarded the initial design contract for the next-generation destroyer, the DD(X), to the team of Northrop Grumman Ship Systems — the Design Agent, and Raytheon — the Systems Integrator.

We are a teammate and subcontractor to Raytheon Corporation for the systems engineering of the next generation MK57 VLS for the DD(X), and will design and fabricate the mechanical portions of the MK57 VLS Engineering Development Model (“EDM”). The MK57 EDM will be tested in 2005. Initial ship launcher final design is scheduled to begin in 2005 after the DD(X) Milestone B decision. The MK57 VLS production for the lead ship is scheduled to begin in 2007. The Mk 57 VLS is compatible with the existing inventory of missiles and canisters currently used with the Mk 41 VLS.

      Future Combat Systems (“FCS”). The Future Combat Systems, or FCS program, is the Army’s planned means by which its future combat force is to be developed and produced. FCS is intended to provide an electronically linked network of surveillance, command and control, and combat capabilities, including manned and unmanned systems, by which the Army would prosecute future combat missions. Whereas FCS was initially expected to embrace the missions historically performed by current Army combat systems such as our Bradley, artillery (M109/ FAASV and Crusader), recovery (M88 HERCULES), and battlefield transport (M113 family) systems, an outcome of Iraq operations is that FCS and current vehicles are now expected to coexist for several decades. In March 2002, the Army selected a contractor team led by The Boeing Company to act as the Lead Systems Integrator (“LSI”) in managing the FCS program. Ground combat vehicles, planned as a mixture of manned and unmanned types, are to comprise a major element of FCS. Ultimately, the FCS plan is intended to equip the Army with brigade-scale units of action, consisting of manned and unmanned combat vehicles, aviation elements, and related personnel.

      In July 2004, the Army and LSI announced a major restructure of the FCS program which focused on delivery of critical FCS technologies to the Army’s current force as expeditiously as possible. Within the restructured FCS program the priorities for development were stated as (in order): Network, Unattended Munitions (e.g., NLOS-LS), Unmanned Systems (UAV, UGV, UGS), and Manned Ground Vehicles. Systems which had been deferred in the baseline program were reinstated including; UAV Class II and Class III, ARV-Recon and ARV-Assault, and FRMV.

      (a) FCS Manned Ground Vehicles (“MGV”). In January 2003 the Army announced that the development and integration of MGVs for FCS would be performed by a team composed of ourselves and General Dynamics. This critical role on the program’s MGV component may be of long-term significance to our revenues and potential profits.

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

      Within the MGV effort, the 2004 FCS restructure and reprioritization mandated significant changes. The most significant of these included the addition of six NLOS-C “Increment 0” systems to be delivered in 2008 to meet the intent of Public Law 108-287, which mandates that the Army deliver eight combat operational NLOS-C systems by December 2008. Other significant changes included delaying the initial operational capability for MGV from 2010 to 2014, delaying delivery of prototypes from 2007 to 2010, and the full reinstatement of the medical vehicle and FCS recovery and maintenance vehicle development efforts. This major contract modification is expected to be definitized in early 2005 and is expected to add approximately $400 million to our total contract value and extend the period of performance through 2012.

      With the addition of the NLOS-C “Increment 0” systems and their accelerated delivery schedule, NLOS-C continues to be the lead system for the FCS manned ground vehicle program. These early pre-production prototypes will provide the Army with an early capability to evaluate the benefits of networked

fires, automation of ground combat vehicle and tactics, techniques and procedures for fighting the FCS units of action. They also support a potential early production decision for NLOS-C to meet the additional mandate from P.L. 108-287 to “Program and budget to field NLOS-C in 2010 as part of FCS” or to “Develop NLOS-C independent of FCS if FCS cannot achieve 2010 fielding.” Recently the Army has begun discussions of fielding NLOS-C to the Stryker Brigade Combat Teams in addition to the FCS units of action. In December 2004, we received authorization to enter preliminary design for the unique NLOS-C armament and ammunition handling subsystems, in order to keep this high visibility program on schedule.

      (b) FCS Armed Robotic Vehicle (“ARV”). One of three unmanned ground vehicles in FCS, the ARV was awarded to us as a subcontract from Boeing in November 2003 on the basis of our competitive proposal offering. At that time, for reasons of development cost and technology maturity, the onset of full SDD development was deferred by two years to FY06. The ARV program started with a two-year Systems Engineering Design Phase and included an optional Phase II for SDD. In September 2004, we were authorized to proceed with the ARV Phase II SDD activities and have submitted a proposal as part of the FCS restructuring, which we expect will increase the ARV SDD program to about $320 million. A contract modification is likely in early 2005.

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

      Objective Force Indirect Fire, Non-Line-of-Sight Cannon (“NLOS-C”). The NLOS-C artillery program has been incorporated into the FCS development and demonstration program described above.

      M88 Armored Recovery Vehicle (“M88”). We have been the sole-source, prime contractor of the M88 to the Army since 1960. The M88 currently has an installed base of more than 3,325 vehicles in 19 countries throughout the world. The M88 performs towing, lifting and winching tasks in the recovery of impaired tanks or in basic tracked vehicle maintenance. In preparation for the deployment of heavier M1 tanks by the Army, in 1986 we began the development effort for the M88A2 (“HERCULES”) upgrade, in order to handle 70-ton vehicles. The enhanced capabilities of HERCULES enable a single system with three crewmembers to lift a tank turret upright and tow an M1A1/ A2 tank, tasks which would otherwise require eight soldiers and two recovery vehicles. The Army has awarded annual production contracts for M88 upgrades from 1994 through 2003 totaling 157 vehicles. Of these 157 HERCULES vehicles, 18 were delivered in 2004 and 139 in prior years. Additionally, in 2000 we began to supply M88 upgrades to the U.S. Marine Corps (“USMC”). Annual USMC production contracts for M88 upgrades from 2000 through 2004 total 58 vehicles. Of these 58 HERCULES vehicles, two were delivered in 2004, 55 in prior years, and one is scheduled for delivery in 2005. Under the Administration’s FY05 budget and proposed FY06 budget, further U.S. procurement for HERCULES production would cease after these contracts are completed.

      We are currently under contract with the Army and the USMC to provide retrofit kits incorporating advances in technology and to provide continued technical engineering, logistics, maintenance and repairs support through December 2006. In 2004 we received a contract award to co-produce 21 additional HERCULES vehicles with Egypt in addition to the previous 66 vehicles completed as part of an on-going Egypt Co-production Program. Delivery of the 21 vehicles is expected to be complete by mid-2006. In addition, we received a contract award in 2004 to purchase long-lead materials for the anticipated production of seven HERCULES vehicles and spares for Australia. Contract definitization for the Australia Program is anticipated by mid-2005 and contract deliveries should be completed by mid-2006. The HERCULES vehicle also has been fielded in both Thailand and Kuwait.

      Assault Amphibious Vehicle (“AAV”). The AAV has been the USMC’s assault amphibious vehicle for over three decades with more than 1,500 vehicles delivered. In July 1998, we were awarded a four year contract to perform upgrades to a portion of the fleet in partnership with USMC depots. We received extensions to this contract in 2003 and in 2004. We expect further extensions in 2005 to convert the USMC’s remaining AAVs and provide additional vehicles for worldwide commitments. We also have had recent sales for the AAV and upgrades in Brazil, Spain, Italy and Korea, and Taiwan.

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

      In 2002, we were awarded a contract to develop and produce Opposing Forces Main Battle Tank (“OPFOR-MBT”) vehicles. The OPFOR-MBT is an M113 upgraded to the A3 configuration with visual modifications used for combat maneuver training of the Army. To date, we have received orders to produce 106 OPFOR-MBT vehicles. The Army intends to buy seven additional vehicles in 2005 to increase the total quantity produced over the life of the contract to 113 OPFOR-MBT vehicles.

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

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

      During 2004, Bofors, continued to grow as a world class developer and producer of guns and intelligent ammunition. In early 2004, Bofors was awarded a contract worth nearly $30 million from the Swedish Army to design, develop and manufacture two demonstrators of 155 mm wheeled artillery guns for precision engagement to be delivered during 2005. During the third quarter of 2004, the Danish Army committed to establish cooperation with Sweden and Bofors on this artillery development program. This increases the potential number of production guns to 50 once the testing period is complete.

      In September 2004, Bofors received a contract from the Swedish and French Armies to improve the in-production Sensor Fuzed Artillery Ammunition, called Bonus. Bonus Mk2 will meet these demands by using the next generation of high technology sensors to be able to identify and target new threats. This will make Bonus Mk2 the state-of-the-art-ammunition in the armored piercing class. In addition, Bofors recently received a contract from the Army for the testing and certification of the Bonus ammunition during 2005.

      During 2004, Bofors continued work on the U.S.-Swedish cooperative program for the development of the XM982 Excalibur precision munition in conjunction with its U.S. partner, Raytheon Company. The decision to launch production for an early fielding of Excalibur in 2006 was made in December, 2004 by the Army following a demonstration on November 6, 2004, when the world’s first GPS/ IMU guided artillery projectile landed 3.4 meters from the target, at a range of 20 kilometers from the gun.

      In 2004, Bofors enhanced its position as a strategic resource for the Swedish Government in the Nuclear — Biological — Chemical (“NBC”) area when that government placed an order of approximately $10 million for detecting systems, systems reliability and testing on army vehicles. The order should be completed in early 2006.

      Munitions. In 2004, we continued our focus in the areas of munitions development, program pursuit and program execution to address the U.S. integration of technologies from Bofors and emerging technologies which could have a significant impact on our core Gun Weapon Systems businesses.

      Leading the activities was the qualification effort for the 57mm ammunition to support the Mk 110 57mm GWS. The 57mm GWS has been chosen for the US Coast Guard’s Deepwater program, the LCS and the DD(X). Production of the 57mm guns will be performed at our Louisville, Kentucky facility. In addition, significant effort was expended on the Course Corrector Fuze, to be used in place of existing artillery fuzes to increase the accuracy of existing projectiles. The accuracy improvement is accomplished using simple aerodynamic brakes deployed by a guidance algorithm we developed. In 2004, we signed an exclusive teaming agreement to represent the Bofors/ Giat BONUS Sensor Fuzed Munition to the U.S. We have entered into a contract with the Army for the delivery and testing of the 155mm Bonus projectiles. Activities relating to all of these products will continue in 2005.

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

      Ship Repair and Maintenance. We acquired USMR in July 2002, and its operations comprise our Ship Repair and Maintenance segment. USMR operates several U.S. shipyards serving government and commercial customers. Norfolk Shipbuilding and Drydock Corporation (“Norshipco”) located in Norfolk, Virginia serves the U.S. Navy’s Atlantic Fleet, Military Sealift Command (“MSC”), and numerous commercial customers. Southwest Marine, Inc. (“SWM”) which is based in San Diego, California primarily serves the U.S. Navy’s Pacific Fleet and also performs some commercial and MSC work. During 2004 SWM also operated two smaller shipyards located in San Pedro, California and Ingleside, Texas. In late 2004, USMR adopted a plan to close these two shipyards, whose combined 2004 sales were $13.3 million, due to declining sales opportunities at their locations. In March of 2004, USMR acquired the assets of Honolulu Shipyard and combined it with its existing SWM’s Hawaii operations. A new USMR subsidiary, Hawaii Shipyards, Inc. now serves the U.S. Navy’s Pacific fleet at Pearl Harbor, Hawaii, and is performing several contracts including a multi-year maintenance contract on multiple classes of Naval warships. Finally, San Francisco Drydock, Inc. located in San Francisco, California provides services to MSC and a commercial customer base including several cruise lines.

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

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

      USMR’s largest customer is the U.S. Navy, which accounted for approximately 95% and 93% of sales volume in 2003 and 2004, respectively. In addition to contracts with the U.S. Navy for work on military vessels, USMR has significant contracts covering cargo and logistic vessels under the control of MSC. USMR also performs ship repair services for the USCG, U.S. Maritime Administration, the Army, and numerous commercial customers.

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

      U.S. Navy ship repair contracts may have either fixed-price or cost-reimbursement terms and may cover work ranging from discrete tasks on a single ship to multiple tasks on multiple ships over multiple years. Increasingly, the U.S. Navy has moved towards multi-ship, multi-option (“MSMO”) contracts where the shipyard is engaged to perform continuous maintenance on specific ships for up to five years. Repair work on MSMO contracts may include topside and drydock maintenance, vessel modifications and upgrades, as well as non-scheduled emergency repairs. Contracting in this manner allows the U.S. Navy to benefit from use of a single supplier of ship repair services for each vessel which provides more consistent levels of quality, faster turnaround for emergency work, and reduced costs associated with learning curves and the shipyard’s familiarity with the vessel. MSMO contracts typically have cost-reimbursement terms, but may also be awarded on a negotiated fixed price basis. During 2003 and 2004, USMR was the prime contractor on MSMO programs covering LPD, LSD, and DDG class vessels in San Diego, LSD class vessels in Norfolk, and MCM class vessels in Ingleside, Texas. With the acquisition of a shipyard in Hawaii in 2004, USMR also became prime contractor for a multi-year contract on several classes of vessels home ported in Pearl Harbor, Hawaii. In December 2004 USMR was selected as prime contractor on two new five year multi-ship contracts covering amphibious assault ships (LHA and LHD classes) and guided missile destroyers (DDG class). Work on these new contracts will commence in 2005 although the LHA/ LHD contract award is subject to resolution of a bid protest.

      In addition to U.S. Navy contracts, USMR competes for work on most other classes of government vessels including preposition and sealift ships controlled by MSC, USCG vessels, ready reserve fleet vessels, Army support vessels, and other government owned craft. The most significant non-U.S. Navy contracts during 2003 and 2004 were with MSC and USCG and included major repair and maintenance work on the vessels USNS Kilauea and USCG Boutwell in San Francisco and the USNS Mt. Whitney and USNS Stockham in Norfolk.

      Non-government work includes commercial work on vessels ranging in size from harbor bound tugs and barges to cruise ships, oil tankers, and container ships. The largest commercial contracts performed by USMR during 2003 and 2004 consisted of drydocking work on cruise ships that call on U.S. ports including the Norwegian ‘Sky’ and ‘Star’, Carnival ‘Pride’, Disney ‘Wonder’, and Princess Cruises ‘Sun Princess’. A number of factors have hampered commercial sales revenue during 2003 and 2004 including competition from lower cost foreign shipyards and declining numbers of U.S. flag vessels. The recent decline in the U.S. dollar has made USMR more competitive with foreign shipyards, particularly those in European countries.

Joint Venture

      We have a joint venture in Turkey which is accounted for using the equity method because we do not control it due to our partner’s veto rights over most operating decisions. However we do have the ability to exercise influence over its operating and financial policies.

      FNSS-Turkey. The FNSS Savunma Sistemleri A.S. (“FNSS”) joint venture was formed in 1987 to manufacture and sell armored combat vehicles to the Turkish Army. We own 51% of FNSS. Following completion of an initial contract for 1,698 armored combat vehicles, we received a follow-on contract for 551 additional vehicles in 2000, with deliveries beginning at the end of 2001. In 1998, FNSS signed its first export contract with the United Arab Emirates (Abu Dhabi) to provide 133 vehicles comprised of a mix of forward observation vehicles, engineer squad vehicles and recovery vehicles, with deliveries starting mid 1999 and ending in early 2001. In August 2000, FNSS signed a second major export order to supply 211 vehicles in 11 configurations to the government of Malaysia. This contract also includes co-production through a sublicensee company in Malaysia. Vehicle deliveries for the Turkish government and the Malaysian government will be completed in early 2005.

Research, Development, and Engineering Capabilities

      Our Defense Systems segment conducts research and development of new technologies for application to weapon systems and upgrades. Our ability to compete for new Defense Systems contracts depends to a large extent on the success and innovation of our research and development programs. We apply our significant design and engineering skills, our vast library of data-based models, extensive modeling and simulation skills, and an environment of creative development, in order to rapidly develop and prototype new technologies and systems.

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

      We are a leader in developing Hybrid Electric Drive (“HED”) systems for military vehicles. HED takes advantage of the high energy content of hydrocarbon (diesel) fuels and the performance advantage of electric drive, to provide on-board power for vehicle electronics, while reducing fuel consumption. We have a near-term history of integrating HED systems and in some instances band track (which delivers an improved ride like wheels with performance like track, at lower weight with longer service life) into combat system demonstrators, including our Transformation Technology Demonstrator, more advanced systems in wheeled and tracked manned ground vehicle demonstrators, the NLOS-C CTD and our Thunderbolt demonstrator. Each successive effort brings additional refinement of hardware, controls and performance. In 2004, working under cooperative agreements with government agencies, we modified this demonstrator to build an integrated technology demonstrator that merged the technologies of HED, band track, Electrothermal Chemical (“ETC”) propulsion for a 120mm cannon, and Electromagnetic Armor (“EMA”) into a well packaged combat vehicle demonstrator — the very first integration of all these technologies into a combat vehicle. Both Electrothermal Chemical and conventional 120mm tank rounds were fired from this combat vehicle demonstrator - an industry first. ETC and conventional rounds were fired in the same salvo merely by changing round selection through a fire control command, and using an autoloader we developed, that successfully loaded and ejected rounds and stub cases from the vehicle. EMA provides multi-hit protection from shape charge munitions at less weight than reactive armor, and is easily conformed to combat vehicle configurations.

      In partnership with the Army, we developed an innovative 105mm variable volume chamber cannon that fires 105mm projectiles using 155mm Modular Artillery Charge Systems. The cannon can change the muzzle velocity by varying the chamber volume, as well as the amount of propellant. The cannon’s ground breaking variable volume technology has the ability to provide U.S. ground forces 50% more range than the current 105mm howitzer. Using the 155mm modular charges with the 105mm variable volume chamber cannon

means that the ground forces would have a common propellant for both their 105mm and 155mm artillery systems. In 2004 testing, we fired over 210 rounds through all propelling charge zones, varying chamber volume configurations and temperature extremes, achieving a maximum range of over 30 kilometers.

      During 2004, we followed our first firing success on the NLOS-C CTD by developing and integrating the vehicle’s tactical software in just 10 months. We used our simulated design environment and expertise established during the development of the Crusader Field Artillery System, whereby our SEI Level 4-rated software engineering team worked side-by-side with the demonstrator’s hardware engineers to achieve success in this short period of time. The tactical software integrated the demonstrator’s robotic ammunition handling and auto-loading systems to create a fully automated 155mm cannon system that enables a two-person crew to achieve what currently takes five soldiers to accomplish on the battlefield. Following integration, we used the tactical software to successfully complete an eight-round fire mission at a rate of more than six rounds per minute at Yuma Proving Ground near Yuma, Arizona. This marks the first time a cannon has ever been fired using tactical software.

      We continue to play an important role in the development of advanced materials and techniques for the design and manufacture of future systems. We continued work in this area during 2004 under an Army contract modification for the fabrication of an Integrated Survivability Advanced Technology Demonstrator. This technical effort is a continuation of a previous Composite Armored Vehicle — Advanced Technology Demonstrator application to Integrated Hybrid Structures contract and is part of the Army’s ongoing effort to mature advanced vehicle structural approaches and integrate survivability technologies that can be applied to future and current vehicle systems. We are developing and analyzing structure concepts, and fabricating and testing structural test sections to demonstrate producibility and validate performance. The final stage in this technology development effort includes fabricating a full-scale vehicle hull that will be used to integrate and validate the latest advancements in survivability technologies from advanced armors to survivability suites. This effort continues the company’s focus on developing advanced structures — making use of combinations of advanced materials to provide superior ballistic protection at lower weights than conventional materials — to benefit future systems.

      One of our key survivability projects is the Army’s Active Defense System. Following successful on-the-move testing in the defeat of a variety of threats, we are now conducting active defense systems engineering, analysis and testing to counter tank fired kinetic energy (“KE”) rounds under contract from the Army. This award continues the company’s current Active Defense Systems (“ADS”) development efforts with teammates Northrop Grumman Space Technology and BAE Systems. This effort continues the successful maturation of the Army’s active protection system to enable full spectrum survivability against rocket-propelled grenades (“RPG”s), anti-tank guided missiles (“ATGM”s), high-explosive anti-tank (“HEAT”) rounds, top attack munitions and now tank-fired KE. We are conducting experiments to understand, define, model and simulate all aspects of KE defeat and chart a path for future investments in technology for full spectrum protection. The ADS program (formerly known as Integrated Army Active Protection System or “IAAPS”) is the point-of-departure design and cost baseline for the Army’s Future Combat Systems program and is intended to provide future forces with high survivability at minimal weight. ADS is intended to be platform independent while providing current forces with enhanced protection against today’s threats. The ADS program met or exceeded performance expectations to date and will continue to pursue tank-fired KE protection with the same successful approach.

      We also successfully demonstrated a near-term system designed to counter the long-standing threat from RPGs in September 2004, when our independent R&D funded Close-In Counter Measure (CICM) active protection system successfully intercepted and destroyed incoming RPGs during end-to-end testing at the Army’s Redstone Technical Test Center at Redstone Arsenal, Alabama. In these successful end-to-end tests, our CICM system detected launched RPGs, tracked incoming rockets, launched its countermeasures and defeated RPGs before they reached the protected system. This successful counter-RPG mission was accomplished in less than nine months through targeted research and development efforts and rapid prototyping capabilities by us and our teammates to quickly develop a successful, affordable near-term counter to RPGs. CICM is an outgrowth of the many years supporting the Army in survivability development and integration.

      Additionally, we continued work on a contract for the development of add-on-armor for the Stryker vehicles that another contractor is producing for the Army. The contract included design and qualification testing of a complete vehicle suite of add-on reactive and non-explosive reactive armor designed to defeat RPGs, which has completed live fire testing and production qualification testing. We await a government decision regarding this armor solution. We have also developed mine Blast/ IED protection kits to provide and offer additional protection for our ground combat vehicles to address the latest threats to vehicles such as Bradley and M113.

      We are also developing technology strength in Robotic Systems, as evidenced by our win on the FCS Armed Robotic Vehicle variants, and by our win of the Gladiator unmanned ground vehicle contract, developed in conjunction with Carnegie Mellon University’s Robotics Institute for the USMC’s Gladiator program. Gladiator is a tele-operated Tactical Unmanned Ground Vehicle that benefits operation by increasing battlefield survivability for warfighters. Gladiator can detect, identify and neutralize a variety of threats at extended ranges. The Systems Development and Demonstration phase of this program runs 30 months, into FY07, with LRIP/ Production planned for an FY07 start. The Gladiator team includes: prime contractor Carnegie Mellon University, which is a world leader in robotics, and us, who provide expertise in combat vehicle design, system integration, production and field support.

      In 2004, we continued to add capability to Eagle Vision^tm, which we developed with Sarnoff Laboratories, a battlefield situational awareness system that provides 360 degrees of electronic, panoramic viewing from inside a closed space or from a remote location. In October, we demonstrated the next generation Eagle Vision^tm system, featuring the addition of hemispherical awareness capability, further improving soldier and system survivability in hostile terrain. This enhancement allows the crew to see activity in the hemisphere above their vehicle, in addition to the panoramic battlefield views provided by the first generation system. Eagle Vision could be an integral part of an integrated survivability approach that protects the soldiers and the vehicle system. Eagle Vision^tm uses multiple cameras that are seamlessly blended and displayed on a head tracked helmet viewing system or other display device, Eagle Vision^tm is able to provide enhanced situational awareness for the entire vehicle crew. Another key feature of Eagle Vision^tm is its ability to detect and track moving objects within a 360 degree area around the vehicle regardless of where the user is looking. This version of Eagle Vision was delivered to Night Vision and Electronic Sensors Directorate last year for field testing and user jury evaluations under a purchase order given to us in August 2003.

      We expended $27.7 million, $29.8 million and $32.6 million on research and development in 2002, 2003 and 2004, respectively, a substantial portion of which was included in overhead allocable to both U.S. Government and foreign government contracts.

Competition

      In the markets we serve, we face a variety of major domestic and foreign competitors. In the Defense Systems segment, competitors include BAE Systems Land Systems, The Boeing Company, General Dynamics Corporation, GIAT, Krauss Maffei Wegmann, Lockheed Martin Corporation, Oto Melara, Raytheon Company, Steyr Daimler Puch, and Textron. In the Ship Repair and Maintenance segment, competitors include General Dynamics Corporation, Northrop Grumman Corporation, Metro Machine Corporation, Todd Shipyards Corporation, Cascade General, Earl Industries, L.L.C., Marine Hydraulics International, Inc., and Deytens Shipyards, Inc. In both segments, competition may also arise from, respectively, U. S. Government-owned depots and shipyards.

      We believe that we will continue to be able to compete successfully based upon the quality, technological advancement and cost competitiveness of our products and services. As the electronic and software content of our products increases, we expect to encounter increased competition from electronics and aerospace companies whose activities historically have been largely unrelated to our products and programs. Our ability to compete for new Defense Systems segment contracts depends to a large extent on the success and innovation of our research and development programs, our capability as a systems integrator, whether we can partner with military industrial facilities owned by DoD (known as depots), our ability to offer best value to our government customers, our success in obtaining subcontracts on those programs where we are not the

prime contractor, and our readiness in facilities, equipment and personnel to undertake the programs for which we compete. Major factors involved in competition for the Ship Repair and Maintenance segment include the geographic proximity of the ship repair facility and the vessel, technical skills, price, and facility requirements such as dry-docks, cranes, and berthing capabilities.

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

Major Customers

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

Backlog

      As of December 31, 2004, our funded backlog was approximately $2.1 billion, of which 92% was associated with our Defense Systems segment and 8% with our Ship Repair and Maintenance segment. Funded backlog does not include the awarded but unfunded portion of total contract values. This backlog provides management with a useful tool to project sales and plan its business on an on-going basis. We expect to earn as revenues a substantial majority of the backlog at December 31, 2004 by the end of 2005.

Intellectual Property

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

Employees

      At December 31, 2004, we had approximately 7,700 employees and approximately 450 contract workers (excluding employees of our Turkish joint venture). Approximately 2,200 of our employees at nine locations are represented by 11 unions, including the Glass, Molders, Pottery, Plastics and Allied Workers (Anniston, Alabama); the International Association of Machinists (Louisville, Kentucky and Santa Clara, California); the United Automobile, Aerospace and Agricultural Implement Workers (Minneapolis, Minnesota); the International Guards (Minneapolis); the International Brotherhood of Teamsters (Santa Clara); the United Steelworkers (York, Pennsylvania); the International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers (Norfolk, Virginia and Honolulu, Hawaii); the International Association of Machinists and Aerospace Workers (Honolulu); the Pacific Coast Metal Trades District Council (San Francisco, California); the Swedish Trade Union Cooperation (Sweden); and the Federation of Salaried Employees in Industry and Services (Sweden). While we have from time to time experienced strikes by our unionized employees, we believe that our relations with such employees are generally good. Our union agreements typically have a term of three years and thus regularly expire and require renegotiation in the course of our business. The next scheduled expiration of such agreements will be in March 2005 regarding

approximately 70 workers in Santa Clara, California, in April 2005 regarding approximately 470 workers in York, Pennsylvania and in November 2005, regarding approximately 270 workers in Anniston, Alabama.

Sources and Availability of Raw Materials

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

Environmental Matters

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

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

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

      As with compliance costs, a significant portion of our expenditures for remediation of existing contamination related to our facilities consists of Allowable Costs. As of December 31, 2004, we had accrued approximately $32.4 million to cover any investigation and/or remediation costs that may or may not be Allowable Costs. The amount accrued is based on reasonable estimates, although there is a possibility that amounts in excess of amounts accrued may be incurred. The most significant of the estimated liabilities are related to ongoing remediation efforts described below.

      One of USMR’s largest facilities is located in San Diego, California. Pursuant to a demand from the California Regional Water Quality Control Board, we completed a study of sedimentary contamination in San Diego Bay 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 efforts with respect to the contamination. We anticipate that the total cost associated with the remediation phase will range from $6 to $9 million, although it is conceivable that costs could be as high as $30 million if the most stringent clean-up standard were to be adopted. Up to $9.1 million of such remediation cost, to the extent the costs are not recovered on USMR’s government contracts or from other responsible parties, may be recoverable from USMR’s former shareholders under an escrow arrangement established in 1997 when the San Diego operation was acquired by USMR. Also, a further $15 million escrow fund was established in our 2002 acquisition of USMR, which may be available in respect of USMR’s remediation exposure. We have asserted claims against both escrow funds, on account of the potential remediation exposure at San Diego.

      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 U.S. 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 $8.4 million for such purpose. We dispute any responsibility for such costs, and also believe that any remediation related costs that we may incur concerning the Navy property would constitute Allowable Costs. However, there is still uncertainty regarding the terms on which the matter might ultimately be resolved (whether by settlement, legal proceedings, or otherwise).

      Also located at the Fridley, Minnesota site is an 18 acre tract of land adjacent to our manufacturing and engineering facility which was used to dispose of plant wastes including industrial wastes from the 1940’s to 1969. Environmental investigations conducted at the property revealed soil and groundwater contamination was present. In 1987, a settlement agreement was reached with the U.S. Government whereby the Government made a lump sum payment for all past, present and future investigation and remediation costs, with the provision that any future response costs regarding this property would be unallowable as part of direct or indirect costing of government contracts. Presently, almost $7.6 million has been accrued to cover long-term operation, maintenance and monitoring costs related to response activities for this property.

Available Information — Corporate Governance Materials

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

Risk Factors

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

      We derive revenues predominantly from contracts with agencies of, and prime contractors to, the DoD. Approximately 81% of our sales for the year ended December 31, 2004, were made directly or indirectly to agencies of the U.S. Government, excluding U.S. Foreign Military Sales contracts. Any significant disruption or deterioration in our relationship with the U.S. Government and a corresponding reduction in these contracts would significantly reduce our revenues.

      In recent years, there has been increased emphasis in combat system design and development on the technological integration of various battlefield components, such as combat vehicles, command and control

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