SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarter ended March 31,June 30, 2004

OR

Commission file number 1-14287

USEC Inc.

2 Democracy Center
6903 Rockledge Drive,
Bethesda, MD 20817
(301) 564-3200

     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 XNo ___

     Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934.)
Yes X  No___No

     As of March 31,June 30, 2004, there were 83,843,00084,286,000 shares of Common Stock issued and outstanding.

TABLE OF CONTENTS

     This Quarterly Report on Form 10-Q contains forward-looking information (within the meaning of the Private Securities Litigation Reform Act of 1995) that involves risks and uncertainty, including certain assumptions regarding the future performance of USEC. Actual results and trends may differ materially depending upon a variety of factors, including, without limitation, market demand for USEC’s products, pricing trends in the uranium and enrichment markets, deliveries under the Russian Contract, the availability and cost of electric power, implementing agreements with the Department of Energy (“DOE”) regarding uranium inventory remediation and the use of centrifuge technology and facilities, satisfactory performance of the American Centrifuge technology at various stages of demonstration, USEC’s ability to successfully execute its internal performance plans, the refueling cycles of USEC’s customers, final determinations of environmental and other costs, the outcome of litigation and trade actions, performance under government contracts and audits of allowable costs on government contract work, and the impact of any government regulation. Revenue and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year.

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USEC Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(millions)

USEC Inc.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) (Unaudited)
(millions, except per share data)

USEC Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(millions)

USEC Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

     The unaudited consolidated condensed financial statements as of and for the three and six months ended March 31,June 30, 2004 and 2003, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited consolidated condensed financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial results for the interim period. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to such rules and regulations.

     Operating results for the three and six months ended March 31,June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations, included in the annual report on Form 10-K for the year ended December 31, 2003.

     Certain amounts in the consolidated condensed financial statements have been reclassified to conform with the current presentation.

2. Centrifuge Costs

     USEC is in the process of demonstrating the American Centrifuge uranium enrichment technology and expects to construct and operate the American Centrifuge uranium enrichment plantPlant by 2010. Costs relating to the demonstration and deployment of the American Centrifuge technology are charged to expense or capitalized based on the nature of the activities.

     Centrifuge costs relating to the process of demonstrating the American Centrifuge technology are charged to expense as incurred. Demonstration costs include licensing, engineering, assembling and testing centrifuge machines and equipment at centrifuge test facilities located in Oak Ridge, Tennessee and at the American Centrifuge Demonstration Facility in Piketon, Ohio.

     Capitalized costs relating to the American Centrifuge uranium enrichment plantPlant include, or will include, enrichment plantNuclear Regulatory Commission (“NRC”) licensing, engineering, centrifuge machines and equipment, leasehold improvements and other costs directly associated with deploying the American Centrifuge at the commercial plant.Plant. Capitalized centrifuge costs are recorded in property, plant and equipment as part of construction work in progress. The continued capitalization of such costs is subject to ongoing review and successful project completion, including NRC licensing, financing of capital costs, and installation and operation of centrifuge machines and equipment. If conditions change and deployment was no longer probable, costs that were previously capitalized would be charged to expense.

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3. Restatement of StatementStatements of Income

     USEC performs contract work for DOE and DOE contractors at the Portsmouth and Paducah plants. Beginning in the fourth quarter of 2003, billings under government contracts are reported as part of revenue, and costs are reported as part of costs and expenses. In prior periods, the net amount of income or expense for government contracts had been reported as part of other income (expense), net. The statementstatements of income for the three and six months ended March 31,June 30, 2003, hashave been restated to conform to the current presentation. Revenue and cost of sales increased, and other income (expense), net was adjusted by the net amount. There was no effect on net income or net income per share as a result of the change. The effects of the restatement are as follows (in millions, except per share data):

specification means that the uranium would not meet the industry standard as defined in the American Society for Testing and Materials (“ASTM”) specification “Standard Specification for Uranium Hexafluoride for Enrichment.” The levels of technetium exceeded allowable levels in the ASTM specification.

     Under the DOE-USEC Agreement signed in June 2002 (“DOE-USEC Agreement”), DOE is obligated to replace or remediate the affected uranium inventory, and USEC has been working with DOE to facilitateimplement this process. Under the DOE-USEC Agreement, the remediated inventory would meet the ASTM specification or be acceptable to USEC for use as feed material in its enrichment plant. USEC has been operating facilities at the Portsmouth plant for DOE since June 2002, and, at March 31,June 30, 2004, had completed the processing and removal of contaminants from 4,0394,552 metric tons (or 42%48%) of the out-of-specification uranium. FromIn June 17, 2002, through December 19, 2003,2004, DOE approved a cost ratification request and, in July 2004, DOE paid $10.8 million to USEC operatedrelating to the facilities pursuant to three successive agreements with DOE under which USEC was reimbursed for its costs. Thereafter, from December 20, 2003, until April 7, 2004, while negotiating a new agreement with DOE, USEC continued operations with DOE’s knowledge but without a written contract. USEC has asked DOE to ratify and pay costsprocessing of out-of-specification uranium during the period from December 20, 2003 untilto April 7, 2004, and that request is currently under consideration. USEC believes it will be reimbursed for its costs during this period. On2004. In April 7, 2004, USEC and DOE concluded a letter work authorization for USEC to process out-of-specification uranium for DOE during the period from April 7, 2004 tothrough September 30, 2004.2004, and USEC and DOE are negotiating contract terms for further extensions. At March 31,June 30, 2004, the remaining amount of uranium inventory that may contain elevated levels of technetium and be out of specification is 5,5114,998 metric tons with a cost of $146.4$132.1 million reported as part of long-term assets.

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6. Stock-Based Compensation

     Compensation expense for employee stock compensation plans is measured using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” As long as stock options are granted at an exercise price that is equal to the market value of common stock at the date of grant, there is no compensation expense for the grant, vesting or exercise of stock options.

     Grants of restricted stock result in deferred compensation based on the market value of common stock at the date of grant. Deferred compensation is amortized to expense on a straight-line basis over the vesting period. Compensation expense for awards of restricted stock units is accrued over a three-year performance period.

     Under the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation —– Transition and Disclosure,” pro forma net income assumes that compensation expense relating to stock options and to shares of common stock purchased by employees at 85% of the market price under the Employee Stock Purchase Plan is recognized based on the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,Compensation.” with theThe fair value of stock options is measured at the date of grant based on the Black-Scholes option pricing model and is amortized to expense over the vesting period. The following table illustrates the effect on net income (loss) if the fair value method of accounting had been applied (in millions, except per share data):

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8.7. Pension and Postretirement Health and Life Benefits

     The components of net benefit costs for pension and postretirement health and life benefit plans were as follows (in millions):

10.9. Settlement of Power Contract and Commitments

     In 2001 and prior years, USEC purchased electric power for the Portsmouth uranium enrichment plant from DOE under a contract with DOE. DOE acquired the power under a power purchase agreement with the Ohio Valley Electric Corporation (“OVEC”). In June 2000, USEC announced that it would cease uranium enrichment operations at the Portsmouth plant in June 2001. As a result of this decision, in September 2000, USEC requested that DOE notify OVEC that DOE would terminate the power purchase agreement effective April 30, 2003, and that DOE would cease taking power after August 2001. USEC ceased uranium enrichment operations at the Portsmouth plant in 2001.

2001, and the power purchase agreement was terminated effective April 30, 2003. As a result of termination of the power purchase agreement, DOE was responsible for a portion of the costs incurred by OVEC for postretirement health and life insurance benefits and for the eventual decommissioning, demolition and shutdown of the coal-burning power generating facilities owned and operated by OVEC. Under its contract with DOE, USEC was, in turn, responsible for a portion of DOE’s costs. In February 2004, OVEC and DOE, and DOE and USEC, entered into agreements and settled all the issues relating to the termination, and USEC paid the previously accrued amount of $33.2 million representing its share of the obligation.

11.10. Legal Matters

     Environmental Matters

     In 1998, USEC contracted with Starmet CMI (“Starmet”) to convert a small portion of USEC’s depleted uranium into a form that could be used in certain beneficial applications or disposed of at existing commercial disposal facilities. In 2002, Starmet ceased operations at its Barnwell, South Carolina facility.

     In November 2002, USEC received notice from the U.S. Environmental Protection Agency (“EPA”) that EPA was undertaking removal action under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), as amended (commonly known as Superfund), to clean up two evaporation ponds and remove and dispose of certain drums and other material located at Starmet’s Barnwell site containing uranium and other byproducts of Starmet’s activities at the site. The notice also stated that EPA believed USEC as well as other parties, including agencies of the U.S. Government, are potentially responsible parties (“PRPs”) under CERCLA. In February 2004, USEC and certain federal agencies who have been identified as PRPs under CERCLA entered into an agreement with EPA, under which USEC is responsible for removing certain material from the site that is attributable to quantities of depleted uranium USEC had sent to the site. USEC has engaged contractors to remove and dispose of such material.

     At March 31,June 30, 2004, USEC has an accrued liability of $8.9$8.1 million representing its current estimate of its share of costs to comply with the EPA settlement agreement to comply with a settlement agreement with the South Carolina Department of Health and Environmental Control (“SCDHEC”), and other costs associated with the

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Starmet facility. Additional costs could be incurred due to a number of factors including, but not limited to, increases in costs associated with the removal and disposal of material from the Starmet site, increases in costs associated with remediation of the evaporation ponds, or a decision by EPA or SCDHECthe South Carolina Department of Health and Environmental Control to perform additional remediation at the site after completion of the removal and disposal activities. An allocation of costs to USEC in excess of

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USEC Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in the annual report on Form 10-K for the year ended December 31, 2003.

Overview

     USEC Inc. (“USEC”), a global energy company, is the world’s leading supplier of low enriched uranium (“LEU”) for commercial nuclear power plants. LEU is a criticalfundamental component in the production of nuclear fuel for reactors to produce electricity. USEC:

	•		supplies LEU to both domestic and international utilities for use in about 160155 nuclear reactors worldwide,
	•		is the exclusive executive agent for a nuclear nonproliferation program with Russia, known as Megatons to Megawatts,
	•		is in the process of deploying what is anticipated to be the world’s most efficient uranium enrichment technology known as the American Centrifuge, and
	•		performs contract work for DOE and DOE contractors at the Paducah and Portsmouth plants.

Low Enriched Uranium

     LEU is sold and measured by the components separative work units (“SWU”) and uranium. SWU is a standard unit of measurement which represents the effort required to separate specific quantities of uranium containing .711% of U²³⁵ into two components: enriched uranium having a higher percentage of U²³⁵ and depleted uranium having a lower percentage of U²³⁵. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment contained in LEU under this formula is commonly referred to as the SWU component.

     Supplier of LEU

USEC produces or acquires LEU from two principal sources. LEU is produced at the gaseous diffusion plant in Paducah, Kentucky, and LEU is acquired by purchasing the SWU is purchasedcomponent of LEU from Russia. Revenue is derived primarily from sales of the SWU component of LEU, from sales of both the SWU and uranium components of LEU, and from sales of uranium.

The gaseous diffusion process uses significant amounts of electric power to enrich uranium, and costs for electric power typically represent 60% of production costs at the Paducah plant. USEC purchases about 78% of the electric power for the Paducah plant from Tennessee Valley Authority. USEC maintains the Portsmouth gaseous diffusion plant in Piketon, Ohio in a cold standby condition under a contract with DOE. The gaseous diffusion plants are leased from DOE and are regulated by the U.S. Nuclear Regulatory Commission (“NRC”). In 2003, USEC applied for and NRC granted a renewal of the certifications for the five-year period ending December 2008.

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Megatons to Megawatts

     USEC is the exclusive executive agent for the U.S. Government under a government-to-government agreement (the “Russian Contract”) to purchase the SWU component of LEU derived from highly enriched uranium contained in decommissioned nuclear warheads in Russia. USEC expects purchases under the Russian Contract will be about half of its supply mix in 2004.

13American Centrifuge

     Revenue includes estimates and judgments relating to the recognition of deferred revenue and price adjustments under contracts with customers that involve pricing based on inflation rates and customers’ nuclear fuel requirements. SWU and uranium inventories include estimates and judgments for production quantities and costs and judgments regarding the replacement or remediation of out-of-specification uranium by DOE. Production costs include estimates of future costs for the storage, transportation and disposition of depleted uranium, the treatment and disposal of hazardous, low-level radioactive and mixed wastes, and plant lease turnover costs. Pension and postretirement health and life benefit costs and obligations are based on provisions of the plans and actuarial assumptions that involve estimates and judgments, including expected returns on plan assets, discount rates, and healthcare cost trend rates. Income taxes include estimates and judgments for the tax bases of assets and liabilities and the future recoverability of deferred tax assets. Actual results may differ from these estimatesCosts relating to the demonstration and such estimates may change ifdeployment of the underlying conditionsAmerican Centrifuge technology are charged to expense or assumptions change.capitalized based on the nature of the activities.

Results of Operations —– Three and Six Months Ended March 31,June 30, 2004 and 2003

     Revenue

     Revenue amounted to $180.0SWU revenue declined $74.5 million (or 28%) in the three months ended March 31, 2004, a decline of $147.1and $208.8 million (45%(or 39%) from $327.1 million in the corresponding period of 2003. SWU revenue declined $134.3 million (51%), sales of uranium declined $10.5 million (43%), and revenue from U.S. Government contracts declined $2.3 million (6%). USEC expects that revenue from sales of

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since contractual commitments from customers are typically long-term, the effects of aggressive or unfair pricingtrade practices by foreign competitors prior to the increase in market prices have contributed to the reductionreductions in revenue in the three months ended March 31, 2004.2004 periods.

     Revenue could be adversely affected by actions of the NRC or nuclear regulators in foreign countries issuing orders to delay, suspend or shut down nuclear reactor operations within their jurisdictions. Beginning in late 2002, 17 reactors were temporarily shut down in Japan by the Ministry of Economy, Trade and Industry. USEC provides LEU for seven of the reactors that have returned to service andas well as three of the five reactors that remain shutdown. TheBeginning in 2004, the shutdowns and the delay in restarting the remaining reactors postponeshas postponed the utility’s requirements for reloading fuel. USEC expects revenue for the remainder of 2004 and, to a lesser extent, for 2005 will be reduced as a result of the shutdowns. A continued shutdown of reactors in Japan would have an additional adverse effect on USEC’s revenue and results of operations.

     Revenue from sales of uranium declined $10.5increased $29.3 million (or 43%57%). in the three months and $18.8 million (or 25%) in the six months ended June 30, 2004, compared with the corresponding periods in 2003. Under certain contracts, revenue is derived from both the SWU and uranium components of LEU. The volume of uranium sold increased 20% in the three months but declined 50% reflecting2% in the timingsix months, and movement of customer orders. USEC expects that revenue from sales ofthe average uranium will be $170 million (or 12%) of total revenueprice billed to customers increased 30% in 2004, about the same asthree and 28% in 2003, including sales of $71 million using uranium purchased from third-party suppliers to fulfill the

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     The DOC recently conducted administrative reviews of its 2002 orders in order to establish the definitive countervailing and antidumping duties for DOE.imports of LEU in 2001 and 2002 and the deposit rates for future imports. The reviews resulted in margins of duty that were substantially lower than the margins estimated in the 2002 orders, indicating that Eurodif reduced its level of dumping and Eurodif and Urenco obtained fewer benefits from subsidization following the granting of trade relief in the DOC’s original investigations. Based on the results of these reviews, the DOC calculated new estimated antidumping and countervailing duty rates of 5.43% and .71%, for a combined rate of 6.14%, that will apply to imports of LEU produced by Eurodif in lieu of the combined 32.1% rate that has applied since February 2002. Further, based on its conclusion that the subsidies conferred on Urenco ended in 2002, the DOC determined that no estimated rate will apply to imports of LEU produced by Urenco (the previous estimated rate was 2.23%). However, the existing countervailing duty order on imports of LEU from Urenco remains in force and Urenco could again face duties if found to have received subsidies in the future.

     Cost of Sales

     Total cost of sales was $164.4 million in the three months ended March 31, 2004, a decline of $127.6 million (44%) from $292.0 million in the corresponding period of 2003. Cost of sales for SWU and uranium declined $124.3 million (49%), and cost of sales for U.S. Government contracts declined $3.3 million (or 8%).

     Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold during the period and is determined by a combination of inventory levels and costs, production costs, and SWU purchase costs under the Russian Contract. Under the monthly moving average inventory cost method coupled with USEC’s inventory position, an increase or decrease in production or purchase costs will have an effect on inventory costs and cost of sales over future periods.

     Cost of sales for SWU and uranium declined $124.3$55.8 million (or 49%20%). in the three months and $180.1 million (or 34%) in the six months ended June 30, 2004, compared with the corresponding periods in 2003. The decline reflectsreductions primarily resulted from the reductions of 48%declines in the volume of SWU sold and 50% in the volume of uranium sold. Cost of sales per SWU improved 4%3% in the six-month period primarily as a result of the effect on inventory costs of purchases of SWU under the Russian Contract based on market-based pricing terms beginning in 2003.

     Cost of sales for U.S. Government contracts declined $3.3$2.0 million (or 8%5%) reflectingin the three months and $5.3 million (or 7%) in the six months ended June 30, 2004, compared with the corresponding periods in 2003. The reductions reflect changes in the contract work performed for DOE.performed.

     The labor contract with the Paper, Allied-Industrial, Chemical and Energy Workers International Union (“PACE”) Local 5-689 covers 558568 employees at the Portsmouth plant performing work under contracts with DOE and DOE contractors. In March 2004, USEC ratified a six-year labor contract with PACE at the Portsmouth plant.

     (a) Purchase Costs under Russian Contract

     Purchases of the SWU component of LEU under the Russian Contract amounted to $112.5declined $44.4 million including shipping charges,(or 26 %) in the three months and $.9 million in the six months ended March 31,June 30, 2004, (representing 46% of the supply mix), compared with $69.0 million (or 30% of the supply mix)corresponding periods in 2003. The reduction in the correspondingthree-month period reflects the timing of 2003.purchases. Purchase costs per SWU increased 2% compared with3% in the corresponding period in 2003.six-month period. In June 2002, the U.S. and Russian governments approved implementation of new, market-based pricing terms for the remaining term of the Russian Contract through 2013. Beginning in 2003, prices are

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short-term market price swings. The amendment also provides that, after the end of 2007, USEC and the Russian Executive Agent may agree on appropriate adjustments, if necessary, to ensure that the Russian Executive Agent receives at least $7,565 million for the SWU component over the 20-year term of the Russian Contract through 2013. From inception of the Russian Contract in 1994 through March 31,June 30, 2004, USEC has purchased the SWU component of LEU at an aggregate cost of $3,298$3,420 million.

     Under the amended contract, USEC agreed to purchase 5.5 million SWU each calendar year for the remaining term of the Russian Contract through 2013. Over the life of the 20-year Russian Contract, USEC expects to purchase 92 million SWU contained in LEU derived from 500 metric tons of highly enriched uranium. A significant delay in deliveries of LEU from Russia would have an adverse effect on USEC’s results of operations.

     (b) Production Costs

     Production costs consist principally of electric power, labor and benefits, depleted uranium disposition costs, materials, depreciation and amortization, and maintenance and repairs. Production levels and production costs at the Paducah plant were lower but unit production costs increased 7%3% in the threesix months ended March 31,June 30, 2004, compared with the corresponding period of 2003. Production efficiency improved, continuing the efficiency gains from 2003. Costs for electric power were lower reflecting the lower production but labor and employee benefit costs were higher, compared with the corresponding periodperiods in 2003 when labor costs were reduced during a strike by PACE union employees at the Paducah plant. Power costs represented 57%59% of production costs in the six month period, compared with 61% in the corresponding period of 2003.

     (c) Replacing Out-of-Specification Natural Uranium Inventory

     Reference is made to information regarding out-of-specification uranium inventories transferred to USEC by DOE prior to privatization in 1998 and in the process of being remediated, reported in note 54 to the consolidated condensed financial statements.

     (d) Environmental Matters

     Reference is made to information regarding environmental matters involving Starmet CMI, the U.S. Environmental Protection Agency, the South Carolina Department of Health and Environmental Control, agencies of the U.S. Government, USEC and others, reported in note 1110 to the consolidated condensed financial statements.

     Gross Profit

     Gross profit amountedmargin increased to $15.6 million17.4% from 11.5% in the three months ended March 31, 2004, a decline of $19.5 million (or 56%)and to 14.2% from $35.1 million11.1% in the six months ended June 30, 2004, compared with the corresponding period of 2003.periods in 2003 reflecting higher prices and margins on uranium. Gross profit for SWU and uranium was $14.1increased $10.6 million a decline of 59% that reflects the 7% reduction(or 26%) in the three months but declined $9.9 million (or 13%) in the six-months ended June 30, 2004, compared with the corresponding periods in 2003. In the three-month period, the average SWUuranium price billed to customers improved 30%, and the improvement was partly offset by lower SWU volume. The decline in gross profit in the six-month period resulted from the reductions in the volume of SWU and average price for SWU; the reductions were partly offset by the higher uranium sold.prices.

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     Gross profit for U.S. Government contracts was $1.5increased $3.2 million an increase of $1.0in the three months and $4.2 million overin the six months ended June 30, 2004, compared with the corresponding periodperiods in 2003, as2003. USEC began earning a fee on cold standby contract work in September 2003. Gross margin was 8.7% in the three months ended March 31, 2004, compared with 10.7% in the corresponding period2003, and margins before selling, general and administrative expense improved as a result of 2003. USEC expects gross margin will be about 11% in 2004.DOE’s approval of revised provisional billing rates.

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     USEC is taking steps in 2004 to reduce expenses below the 2003 level. As a percentage of revenue, expenses were 8.9% reflecting the low level of sales6.4% in the threesix months ended March 31,June 30, 2004, compared with 4.2% in the corresponding period of 2003; the increase reflects the lower revenue in the six months ended June 30, 2004. USEC expects the expenses will be 4.8%4.4% of revenue in 2004, about the same ascompared with 4.8% in 2003.

     Operating Income (Loss)

     There was an operating loss of $9.8Operating income increased $13.1 million (or 83%) in the three months but declined $7.8 million (or 29%) in the six months ended March 31,June 30, 2004, compared with operating income of $11.1 million in the corresponding periodperiods of 2003. The operating lossincrease in the three-month period reflects higher margins on uranium, and the reduction in the six-month period reflects the decline in SWU revenue.

     Provision (Credit) for Income Taxes

     The provision (credit) for income taxes reflects an effective income tax rate of 39% applied to a pre-tax loss38% in the threesix months ended March 31,June 30, 2004, compared with 42% applied to pre-tax income in the corresponding period of 2003. The effective tax rate is lower in 2004 as a result ofreflects higher export tax incentives and lower nondeductible expenses.incentives.

     Net Income (Loss)

     There was a net loss of $11.2Net income increased $7.4 million (or $.13($.09 per share) in the three months ended March 31, 2004, compared with net income of $2.1but declined $5.9 million (or $.03($.07 per share) in the six months ended June 30, 2004, compared with the corresponding periodperiods of 2003. The net lossincrease in the three-month period reflects higher margins on uranium, and the reduction in the six-month period reflects the decline in SWU revenue.

182004 Outlook

     USEC expects net income for 2004 in a range of $14 to $16 million (or $.17 to $.19 per share) based on higher volume and prices for natural uranium and improved SWU pricing. A small loss is anticipated in the third quarter of 2004.

     USEC projects revenue for 2004 will be almost $1.4 billion with approximately half of the revenue in the fourth quarter of 2004 due to the timing of the customer orders. Total revenue is basically unchanged from earlier guidance, but revenue from sales of uranium is expected to be $40 million higher at $210 million due to higher volume and prices. The additional uranium available for sale is the result of underfeeding operations at the Paducah plant. Revenue from sales of SWU is expected to decline on lower volume due to the movement of customer orders but will benefit from modestly higher average prices billed to customers that are higher than originally projected and about the same as in 2003. SWU volume in 2004 is negatively affected by the postponed refuelings due to the shutdown of a Japanese customer’s reactors for special inspections and by lower contractual commitments from customers. Higher uranium sales are expected to improve gross margin to 13% in 2004, compared with 11% in 2003.

     USEC expects to spend approximately $70 million on demonstration and deployment of the American Centrifuge technology in 2004. Of this amount, approximately $50 million relates to demonstration activities and is being charged to expense which has the effect of reducing net income by about $30 million. Costs of approximately $20 million related to the American Centrifuge Plant are being capitalized in 2004.

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Outlook

     USEC reiterates its annual guidance that it expects revenue for 2004 to be approximately $1.4 billion with about half coming in the fourth quarter due to timing of customer orders.     USEC expects to invest $70 million in the American Centrifuge. Of this amount, $50 million related to demonstration activities will be expensed, which has the effect of reducing USEC’s net income by about $30 million. Approximately $20 million related to the commercial centrifuge plant is expected to be capitalized in 2004. Given this substantial spending on the American Centrifuge, USEC continues to expect net income in 2004 to be in a range of $6 to $8 million (or $.07 to $.10 per share).

     USEC also reiterates its annual guidance that operating cash flow in 2004from operating activities will be in a range of negative $110$95 to $130$105 million in 2004 and that capital expenditures will be in a range of $30 toapproximate $35 million, including costsexpenditures related to the American Centrifuge.Centrifuge Plant. USEC anticipates ending 2004 with a cash balance in a range of $40$55 to $60 million and that net cash flow from operating activities will return to positive levels in 2005.$70 million.

Liquidity and Capital Resources

     Liquidity and Cash Flows

     Cash and cash equivalents amounted to $146.1 million at March 31, 2004, compared with $249.1 million at December 31, 2003. USEC expects cash and cash equivalents will be in a range of $40 to $60 million at December 31, 2004.

Net cash outflow from operating activities amounted to $91.8$190.6 million in the threesix months ended March 31,June 30, 2004, compared with net cash outflowinflow of $20.1$23.1 million in the corresponding period of 2003. Cash outflow in the threesix months ended March 31,June 30, 2004, reflects a net inventory increase or temporary build up of $194.9 million, the payment of a previously accrued obligation of $33.2 million resulting from the settlement of the termination obligations under the OVEC power purchase agreement, the net lossand income tax payments of $11.2$8.1 million, and higher income taxes. In addition, there was a net inventory increase or temporary build up of $153.0 million andpartly offset by a decline of $126.4$51.5 million in accounts receivable. The increase in inventory and the decline in accounts receivable resulted from the low level of sales in the three month period ended March 31, 2004.

     Net cash outflow of $20.1flow from operating activities amounted to $23.1 million in the threesix months ended March 31, 2003, reflectsJune 30, 2003. Cash flow was reduced by deliveries of $40.8 million against advances from customers resultingthat result in non-cash revenue, higher cash paymentsthe timing of purchases under the Russian Contract, and the timing of collections of trade receivables.

     Capital expenditures amounted to $5.6$11.2 million in the threesix months ended March 31,June 30, 2004, compared with $8.4$14.9 million in the corresponding period of 2003. Capital expenditures in the 2004 period include $2.7$4.5 million for capitalized centrifuge costs associated with the American Centrifuge uranium enrichment plant. USEC expects that capitalized centrifuge costs will amount to $20 million in 2004.Plant.

     The issuance of common stock, primarily from the exercise of stock options, added $5.9$8.1 million to cash flow from financing activities in the threesix months ended March 31,June 30, 2004. There were 83.884.3 million shares of common stock outstanding at March 31,June 30, 2004, compared with 82.6 million at December 31, 2003.

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     Cash and cash equivalents amounted to $32.4 million at June 30, 2004, compared with $249.1 million at December 31, 2003. The reduction of $216.7 million reflects the net cash outflow from operating activities, principally inventories. Inventories included in current assets, net of uranium owed to customers and suppliers, increased $232.9 million (or 28%) reflecting the temporary build-up of SWU inventories in anticipation of planned low production levels in the summer months when power costs are very high and the high levels of customer orders for deliveries scheduled in the fourth quarter of 2004. USEC expects about one half of the SWU and uranium revenue for 2004 will be earned in the fourth quarter of 2004.

     There were no short-term borrowings at June 30, 2004 or December 31, 2003. USEC expects to temporarily borrow under the credit agreement later in 2004 and expects to repay such borrowings by the end of 2004.

     In February 2004, USEC paid a previously accrued obligation of $33.2 million resulting from the settlement of termination obligations under the OVEC power purchase agreement.

Long-term Liabilities

     The long-term liability for the disposition of depleted uranium declined $24.6 million (or 46%) and the long-term asset for the prepayment and deposit for depleted uranium declined $23.6 million (or 50%) at June 30, 2004, compared with December 31, 2003. The reductions reflect the transfer of depleted uranium to DOE under the terms of a 1998 Memorandum of Agreement.

     Capital Structure and Financial Resources

     In January 1999, USEC issued $350.0 million of 6.625% senior notes due January 2006 and $150.0 million of 6.750% senior notes due January 2009. The senior notes are unsecured obligations and rank on a parity with all other unsecured and unsubordinated indebtedness of USEC Inc.

     There were no short-term borrowings at March 31, 2004, or December 31, 2003.

In September 2002, United States Enrichment Corporation, a wholly owned subsidiary of USEC, entered into a three-year syndicated revolving credit facility. The facility provides up to $150 million in revolving credit commitments (including up to $50 million in letters of credit) until September 2005 and is secured by certain assets of the subsidiary and, subject to certain conditions, certain assets of USEC. Borrowings under the new facility are subject to limitations based on percentages of eligible accounts receivable and inventory. Obligations under the facility are fully and unconditionally guaranteed by USEC.

     Outstanding borrowings under the facility bear interest at a variable rate equal to, based on the borrower’s election, either (i) the sum of (x) the greater of the JPMorgan Chase Bank prime rate or the federal funds rate plus ½1/2 of 1% plus (y) a margin ranging from .75% to 1.25% based upon collateral availability or (ii) the sum of LIBOR plus a margin ranging from 2.5% to 3% based on collateral availability. The revolving credit facility includes various operating and financial covenants that are customary for transactions of this type, including, without limitation, restrictions on the incurrence and prepayment of other indebtedness, granting of liens, sales of assets, making of investments, maintenance of a minimum amount of inventory, and payment of dividends or other distributions. The new facility does not restrict USEC’s payment of common stock dividends at the current level, subject to the maintenance of a specified minimum level of collateral. Failure to satisfy the covenants would constitute an event of default. At March 31,June 30, 2004, USEC was in compliance with covenants under the revolving credit facility.

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     The total debt-to-capitalization ratio was 37%36% at March 31,June 30, 2004, and 36% at December 31, 2003. In July 2004, Moody’s affirmed its negative outlook on USEC, lowered the rating on USEC’s senior notes ($500 million) to Ba3 from Ba2, lowered the senior implied rating to Ba2 from Ba1, and placed the ratings under review for possible further downgrade. In October 2003, Standard & Poor’s affirmed the outlook on USEC as stable and affirmed the BB- rating of USEC’sthe senior notes, ($500 million), the BB corporate credit rating, and the BBB- rating for the revolving credit facility. In April 2004, Moody’s affirmed its negative outlook, Ba2 rating for senior notes, and Ba1 senior implied rating.

     USEC expects that its cash, internally generated funds from operations, and available financing under the revolving credit facility will be sufficient in 2004over the next twelve months to meet its obligations as they become due and to fund operating requirements and capital expenditures, purchases of SWU under the Russian Contract, interest expense, American Centrifuge demonstration costs, and quarterly dividends.

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Controls and Procedures

     Disclosure Controls and Procedures

     Management, with the participation of the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the disclosure controls and procedures as of March 31,June 30, 2004. Based on such evaluation, management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by USEC in the reports that it files or submits under the Securities Exchange Act of 1934.

     Internal Control over Financial Reporting

     There have not been any changes in USEC’s internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, USEC’s internal control over financial reporting.

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USEC Inc.
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Environmental Matters

     In 1998, USEC contracted with Starmet CMI (“Starmet”) to convert a small portion of USEC’s depleted uranium into a form that could be used in certain beneficial applications or disposed of at existing commercial disposal facilities. In 2002, Starmet ceased operations at its Barnwell, South Carolina facility.

     In November 2002, USEC received notice from the U.S. Environmental Protection Agency (“EPA”) that EPA was undertaking removal action under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), as amended (commonly known as Superfund), to clean up two evaporation ponds and remove and dispose of certain drums and other material located at Starmet’s Barnwell site containing uranium and other byproducts of Starmet’s activities at the site. The notice also stated that EPA believed USEC as well as other parties, including agencies of the U.S. Government, are potentially responsible parties (“PRPs”) under CERCLA. In February 2004, USEC and certain federal agencies who have been identified as PRPs under CERCLA entered into an agreement with EPA, under which USEC is responsible for removing certain material from the site that is attributable to quantities of depleted uranium USEC had sent to the site. USEC has engaged contractors to remove and dispose of such material.

     At March 31,June 30, 2004, USEC has an accrued liability of $8.9$8.1 million representing its current estimate of its share of costs to comply with the EPA settlement agreement to comply with a settlement agreement with South Carolina Department of Health and Environmental Control (“SCDHEC”), and other costs associated with the Starmet facility. Additional costs could be incurred due to a number of factors including, but not limited to, increases in costs associated with the removal and disposal of material from the Starmet site, increases in costs associated with remediation of the evaporation ponds, or a decision by EPA or SCDHECthe South Carolina Department of Health and Environmental Control to perform additional remediation at the site after completion of the removal and disposal activities. An allocation of costs to USEC in excess of the amounts that USEC has accrued at March 31,June 30, 2004, could have an adverse effect on USEC’s results of operations.

     Other

     USEC is subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, USEC does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations or financial condition.

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Item 2. Changes in Securities, Use4. Submission of Proceeds and Issuer PurchasesMatters to a Vote of Equity SecuritiesSecurity Holders

     RepurchasesUSEC held its annual meeting of shareholders on April 29, 2004. As of the record date, March 5, 2004, there were 83.5 million shares of common stock by USEC inoutstanding and entitled to vote. 95% of those shares were represented at the three months ended March 31, 2004,annual meeting.

     A board of eight directors (listed below) was elected at the annual meeting. Each director holds office until the next annual meeting of shareholders and until his or her successor is elected and has qualified. There were asno abstentions or broker non-votes. The number of votes cast for and withheld follows (in thousands, except per share data)millions):

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Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits.

     (b) Reports onForm 8-K.

     On February 4,April 22, 2004, USEC filed a current report on Form 8-K to furnish its press release, dated February 3,April 21, 2004, announcing financial results for the three months and year ended DecemberMarch 31, 2003 and certain matters discussed during USEC’s2004.

     On June 4, 2004, USEC filed a current report on Form 8-K announcing that the USEC Benefits Administration Committee engaged Grant Thornton LLP as the independent registered public accounting firm for the USEC Savings Plan, dismissing PricewaterhouseCoopers LLP.

     On July 14, 2004, USEC filed a current report on Form 8-K to furnish its press release, dated July 13, 2004, updating earnings conference call.

guidance for 2004.

     On July 30, 2004, USEC filed a current report on Form 8-K to furnish its press release, dated July 29, 2004, announcing that it had entered into a definitive agreement to acquire NAC International.

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SIGNATURE

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

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EXHIBIT INDEX

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