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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934




|                                     |                              
|------------------------------------ | -----------------------------
|For Quarter Ended:     June 30, 2002 | Commission File No. 001-16821



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UNITED DEFENSE INDUSTRIES, INC.

(Exact name of registrant as specified in its
charter)


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



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1525 Wilson Boulevard,
Suite 700,

Arlington, Virginia, 22209-2411


(703) 312-6100


(Address and telephone number of principal
executive offices of


Registrant and each Co-Registrant)




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

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

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

None


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

As of July 31, 2002, the aggregate market
value of the common stock held by non-affiliates of the
registrant was $570,499,700 based on the closing price of $21.77
per share on the New York Stock Exchange on such date.

Common Stock, $.01 par value 51,465,234 Shares
Outstanding as of July 31, 2002.



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UNITED DEFENSE INDUSTRIES, INC.

INDEX

|                                   |  |                                                                                                                          |    |      |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                   |  |                                                                                                                          |    | Page
|                                   |  |                                                                                                                          |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Unaudited Consolidated Financial
    Statements  United Defense Industries, Inc.                                        |    |      | 2  | 
|                                   |  | Unaudited Consolidated Balance Sheets as of
    December 31, 2001 and June 30, 2002                                      |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months and six months ended June 30, 2001 and
    2002 |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statement of Changes in
    Stockholders Deficit for the six months ended
    June 30, 2002      |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the six months ended June 30, 2001 and 2002                      |    |      | 5  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements                                                                 |    |      | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis of the
    Results of Operations and Financial Condition                            |    |      | 8  | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                           |    |      | 21 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                        |    |      | 22 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                  |    |      | 22 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                         |    |      | 22 | 
|Signature                          |  |                                                                                                                          | 23 |     

1



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED BALANCE
SHEETS

(In thousands)


|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |           |         | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------- | ------------- | ------- | - | --------- | --------- | ------- | 
|                                                |                                                                                                                                                                           | December 31, 2001         |           | June 30, 2002
|                                                |                                                                                                                                                                           |                           |           |              
|ASSETS                                         
|Current assets:                                 |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                | Cash and cash equivalents                                                                                                                                                 |                           | $         | 90,535        |         |   | $         | 124,550   |        
|                                                | Trade receivables                                                                                                                                                         |                           |           | 78,387        |         |   |           | 96,496    |        
|                                                | Long-term contract inventories                                                                                                                                            |                           |           | 368,167       |         |   |           | 454,579   |        
|                                                | Other current assets                                                                                                                                                      |                           |           | 14,406        |         |   |           | 14,422    |        
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                |                                                                                                                                                                           | Total current assets      |           |               | 551,495 |   |           |           | 690,047 | 
|Property, plant and equipment, net              |                                                                                                                                                                           |                           | 90,352    |               |         |   | 85,308    |          
|Goodwill, net                                   |                                                                                                                                                                           |                           | 97,582    |               |         |   | 101,434   |          
|Intangible assets, net                          |                                                                                                                                                                           |                           | 8,327     |               |         |   | 5,922     |          
|Prepaid pension and postretirement benefit cost |                                                                                                                                                                           |                           | 127,828   |               |         |   | 129,116   |          
|Restricted cash                                 |                                                                                                                                                                           |                           | 14,950    |               |         |   | 18,141    |          
|Other assets                                    |                                                                                                                                                                           |                           | 21,758    |               |         |   | 36,140    |          
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          
|Total assets                                    |                                                                                                                                                                           | $                         | 912,292   |               |         | $ | 1,066,108 |          
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          
|LIABILITIES AND STOCKHOLDERS
    DEFICIT      
|Current liabilities:                            |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                | Current portion of long-term debt                                                                                                                                         |                           | $         | 8,307         |         |   | $         | 8,307     |        
|                                                | Accounts payable, trade and other                                                                                                                                         |                           |           | 88,273        |         |   |           | 101,208   |        
|                                                | Advanced payments                                                                                                                                                         |                           |           | 394,771       |         |   |           | 499,185   |        
|                                                | Accrued and other liabilities                                                                                                                                             |                           |           | 114,807       |         |   |           | 106,132   |        
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                |                                                                                                                                                                           | Total current liabilities |           |               | 606,158 |   |           |           | 714,832 | 
|Long-term liabilities:                          |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                | Long-term debt, net of current portion                                                                                                                                    |                           |           | 422,593       |         |   |           | 414,287   |        
|                                                | Accrued pension and postretirement benefit cost                                                                                                                           |                           |           | 22,487        |         |   |           | 18,554    |        
|                                                | Other liabilities                                                                                                                                                         |                           |           | 27,420        |         |   |           | 28,513    |        
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          
|Total liabilities                               |                                                                                                                                                                           |                           | 1,078,658 |               |         |   | 1,176,186 |          
|Commitments and contingencies (Note 4)          |                                                                                                                                                                           |                           |           |               |         |   |           |          
|Stockholders deficit:                          |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                | Common stock $.01 par value, 150,000,000 shares
    authorized; 50,915,689 and 51,407,564 issued and outstanding at
    December 31, 2001 and June 30, 2002, respectively |                           |           | 509           |         |   |           | 514       |        
|                                                | Additional paid-in-capital                                                                                                                                                |                           |           | 167,457       |         |   |           | 169,617   |        
|                                                | Deferred compensation                                                                                                                                                     |                           |           | (648          | )       |   |           | (598      | )      
|                                                | Retained deficit                                                                                                                                                          |                           |           | (329,528      | )       |   |           | (283,213  | )      
|                                                | Accumulated other comprehensive (loss) gain                                                                                                                               |                           |           | (4,156        | )       |   |           | 3,602     |        
|                                                | Total stockholders deficit                                                                                                                                               |                           |           | (166,366      | )       |   |           | (110,078  | )      
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          
|                                                | Total liabilities and stockholders deficit                                                                                                                               |                           | $         | 912,292       |         |   | $         | 1,066,108 |        
|                                                |                                                                                                                                                                           |                           |           |               |         |   |           |          

See accompanying notes.

2



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except shares and per share
data)


|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |            |         | 
|------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------- | ------ | ------------------------- | ------- | ---- | ------ | ---------- | ------- |  | ------ | ---------- | ------- |  | ------ | ---------- | ------- | 
|                                                                    |                                                           |                             |        |                          
|                                                                    |                                                           | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                                    |                                                           |                             |        |                          
|                                                                    |                                                           | 2001                        |        | 2002                      |         | 2001 |        | 2002      
|                                                                    |                                                           |                             |        |                           |         |      |        |           
|Revenue:                                                            |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Sales                                                     |                             |        | 346,728                   |         |      |        | 318,038    |         |  |        | 638,808    |         |  |        | 674,481    |        
|Costs and expenses:                                                 |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Cost of sales                                             |                             |        | 282,195                   |         |      |        | 248,102    |         |  |        | 513,388    |         |  |        | 544,696    |        
|                                                                    | Selling, general and administrative expenses              |                             |        | 36,323                    |         |      |        | 32,368     |         |  |        | 78,551     |         |  |        | 60,485     |        
|                                                                    | Research and development                                  |                             |        | 5,241                     |         |      |        | 9,550      |         |  |        | 9,608      |         |  |        | 15,214     |        
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    |                                                           | Total expenses              |        |                           | 323,759 |      |        |            | 290,020 |  |        |            | 601,547 |  |        |            | 620,395 | 
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Income from operations                                              |                                                           |                             | 22,969 |                           |         |      | 28,018 |            |         |  | 37,261 |            |         |  | 54,086 |           
|Other income (expense):                                             |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Earnings related to investments in foreign
    affiliates |                             |        | (672                      | )       |      |        | 6,309      |         |  |        | (18        | )       |  |        | 7,213      |        
|                                                                    | Interest income                                           |                             |        | 1,076                     |         |      |        | 979        |         |  |        | 2,747      |         |  |        | 2,158      |        
|                                                                    | Interest expense                                          |                             |        | (6,286                    | )       |      |        | (6,252     | )       |  |        | (12,480    | )       |  |        | (12,393    | )      
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Income before income taxes                                          |                                                           |                             | 17,087 |                           |         |      | 29,054 |            |         |  | 27,510 |            |         |  | 51,064 |           
|Provision for income taxes                                          |                                                           |                             | 1,377  |                           |         |      | 1,757  |            |         |  | 6,670  |            |         |  | 4,507  |           
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Income before extraordinary item                                    |                                                           |                             | 15,710 |                           |         |      | 27,297 |            |         |  | 20,840 |            |         |  | 46,557 |           
|Extraordinary item  net loss from
    early extinguishment of debt |                                                           |                             |       |                           |         |      |       |            |         |  |       |            |         |  | (242   | )         
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Net income                                                          |                                                           |                             | 15,710 |                           |         |      | 27,297 |            |         |  | 20,840 |            |         |  | 46,315 |           
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Earnings per common share  basic:                                  |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Income before extraordinary item                          |                             | $      | 0.39                      |         |      | $      | 0.53       |         |  | $      | 0.51       |         |  | $      | 0.91       |        
|                                                                    | Extraordinary item                                        |                             |        |                          |         |      |        |           |         |  |        |           |         |  |        | (0.01      | )      
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Net income                                                |                             | $      | 0.39                      |         |      | $      | 0.53       |         |  | $      | 0.51       |         |  | $      | 0.90       |        
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Weighted average common shares outstanding                |                             |        | 40,730,071                |         |      |        | 51,196,184 |         |  |        | 40,656,286 |         |  |        | 51,097,051 |        
|Earnings per common share  diluted:                                |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Income before extraordinary item                          |                             | $      | 0.37                      |         |      | $      | 0.52       |         |  | $      | 0.49       |         |  | $      | 0.88       |        
|                                                                    | Extraordinary item                                        |                             |        |                          |         |      |        |           |         |  |        |           |         |  |        | (0.01      | )      
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Net income                                                |                             | $      | 0.37                      |         |      | $      | 0.52       |         |  | $      | 0.49       |         |  | $      | 0.87       |        
|                                                                    |                                                           |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                                                                    | Weighted average common shares outstanding                |                             |        | 42,992,850                |         |      |        | 52,710,059 |         |  |        | 42,774,634 |         |  |        | 52,676,701 |        

See accompanying notes.

3



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS DEFICIT

(In thousands)


|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------ | --- | ---------- |  | ------------ | ------- | -------- |  | ------------- | ---- | ----- |  | - | -------- | - |  | - | ------ | - |  | - | -------- | -
|                                                                      |  |        |     |            |  |              |         |          |  | Accumulated   |      |      
|                                                                      |  |        |     | Additional |  |              |         |          |  | other         |      |      
|                                                                      |  | Common |     | Paid-In    |  | Deferred     |         | Retained |  | Comprehensive |      |      
|                                                                      |  | Stock  |     | Capital    |  | Compensation |         | Deficit  |  | (Loss)/Income |      | Total
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |      
|Balance, December 31, 2001                                            |  | $      | 509 |            |  | $            | 167,457 |          |  | $             | (648 | )     |  | $ | (329,528 | ) |  | $ | (4,156 | ) |  | $ | (166,366 | )
|Amortization of deferred stock compensation                           |  |        |    |            |  |              |        |          |  |               | 50   |       |  |   |         |   |  |   |       |   |  |   | 50       |  
|Exercise of options                                                   |  |        | 5   |            |  |              | 2,160   |          |  |               |     |       |  |   |         |   |  |   |       |   |  |   | 2,165    |  
|Net foreign currency translation adjustment                           |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 6,753  |   |  |   | 6,753    |  
|Change in fair value of foreign currency and
    interest rate hedges |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 1,005  |   |  |   | 1,005    |  
|Net income for the six months ended June 30,
    2002                 |  |        |    |            |  |              |        |          |  |               |     |       |  |   | 46,315   |   |  |   |       |   |  |   | 46,315   |  
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  
|Balance, June 30, 2002                                                |  | $      | 514 |            |  | $            | 169,617 |          |  | $             | (598 | )     |  | $ | (283,213 | ) |  | $ | 3,602  |   |  | $ | (110,078 | )
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  

See accompanying notes

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOW

(In thousands)


|                                                                                  |                                                             |                           |         |         |   |   |         |         |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                  |                                                             |                          
|                                                                                  |                                                             | Six Months Ended June 30,
|                                                                                  |                                                             |                          
|                                                                                  |                                                             | 2001                      |         | 2002   
|                                                                                  |                                                             |                           |         |        
|Operating activities                                                              |                                                             |                           |         |         |   |   |         |        
|Net income                                                                        |                                                             | $                         | 20,840  |         |   | $ | 46,315  |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                             |                           |         |         |   |   |         |        
|                                                                                  | Depreciation                                                |                           |         | 6,977   |   |   |         | 10,266  |  
|                                                                                  | Amortization of software                                    |                           |         | 3,332   |   |   |         | 2,802   |  
|                                                                                  | Amortization of intangible assets                           |                           |         | 27,049  |   |   |         | 2,352   |  
|                                                                                  | Amortization of financing costs                             |                           |         | 3,121   |   |   |         | 1,349   |  
|                                                                                  | Non-cash compensation                                       |                           |         |        |   |   |         | 50      |  
|                                                                                  | Extraordinary loss from early extinguishment of
    debt    |                           |         |        |   |   |         | 242     |  
|Changes in assets and liabilities:                                                |                                                             |                           |         |         |   |   |         |        
|                                                                                  | Trade receivables                                           |                           |         | 25,712  |   |   |         | (16,576 | )
|                                                                                  | Inventories                                                 |                           |         | (22,167 | ) |   |         | (75,065 | )
|                                                                                  | Other assets                                                |                           |         | (2,261  | ) |   |         | (19,115 | )
|                                                                                  | Prepaid pension and postretirement benefit cost             |                           |         | (1,996  | ) |   |         | (1,288  | )
|                                                                                  | Accounts payable, trade and other                           |                           |         | (8,865  | ) |   |         | 12,139  |  
|                                                                                  | Advanced payments                                           |                           |         | 10,539  |   |   |         | 94,853  |  
|                                                                                  | Accrued and other liabilities                               |                           |         | (16,790 | ) |   |         | (9,369  | )
|                                                                                  | Accrued pension and postretirement benefit cost             |                           |         | (2,183  | ) |   |         | (3,933  | )
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Cash provided by operating activities                                             |                                                             |                           | 43,308  |         |   |   | 45,022  |        
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Investing activities                                                              |                                                             |                           |         |         |   |   |         |        
|                                                                                  | Capital expenditures                                        |                           |         | (8,188  | ) |   |         | (7,484  | )
|                                                                                  | Disposal of property, plant and equipment                   |                           |         | 249     |   |   |         |        |  
|                                                                                  | Purchase of Cell ITS, net of $0.2 million
    cash acquired |                           |         |        |   |   |         | (4,135  | )
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Cash used in investing activities                                                 |                                                             |                           | (7,939  | )       |   |   | (11,619 | )      
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Financing activities                                                              |                                                             |                           |         |         |   |   |         |        
|                                                                                  | Payments on long-term debt                                  |                           |         | (86,757 | ) |   |         | (8,306  | )
|                                                                                  | Proceeds from sale of common stock                          |                           |         | 650     |   |   |         | 2,164   |  
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Cash used in financing activities                                                 |                                                             |                           | (86,107 | )       |   |   | (6,142  | )      
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Effect of exchange rate changes on cash and
    marketable securities             |                                                             |                           | 120     |         |   |   | 6,753   |        
|(Decrease)increase in cash and marketable
    securities                          |                                                             |                           | (50,618 | )       |   |   | 34,014  |        
|Cash and marketable securities, beginning of year                                 |                                                             |                           | 113,357 |         |   |   | 90,535  |        
|                                                                                  |                                                             |                           |         |         |   |   |         |        
|Cash and marketable securities, end of period                                     |                                                             | $                         | 62,739  |         |   | $ | 124,549 |        
|                                                                                  |                                                             |                           |         |         |   |   |         |        

See accompanying notes

5



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##### 



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

June 30, 2002


1.     Basis of
Presentation

The financial information presented as of any
date other than December 31 has been prepared from the
books and records without audit. Financial information as of
December 31, 2001 has been derived from the audited
financial statements of United Defense Industries, Inc. (the
Company), but does not include all the disclosures
required by generally accepted accounting principles. In the
opinion of management, the accompanying unaudited interim
financial statements contain all adjustments, consisting of
normal recurring adjustments necessary to present fairly the
Companys financial position as of June 30, 2002 and
the results of its operations for the three months and six
months ended June 30, 2002, and cash flows for the six
months ended June 30, 2002. The results of operations are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2002. These unaudited
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Companys Annual Report on Form 10-K for the year
ended December 31, 2001.

2.     Changes in
Accounting Principles

In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and Other
Intangible Assets, (the Statements) effective
for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and indefinite-lived intangible assets
are no longer amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives.

On January 1, 2002, the Company began to
apply the new rules on accounting for goodwill and other
intangible assets and ceased the amortization of goodwill. The
following information reconciles reported net income and
earnings per share to adjusted net income and earnings per
share, excluding the goodwill amortization previously recognized.

|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |            |  
|-------------------------- | ------------------------------------------ | ------------------------------------------------ | - | ------------------------- |  | ---- | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | -
|                           |                                            |                                                  |   |                          
|                           |                                            | Three Months Ended June 30,                      |   | Six Months Ended June 30,
|                           |                                            |                                                  |   |                          
|                           |                                            | 2001                                             |   | 2002                      |  | 2001 |   | 2002      
|                           |                                            |                                                  |   |                           |  |      |   |           
|                           |                                            |                                                 
|                           |                                            | (In thousands, except shares and per share data)
|Net income                 |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Income before extraordinary item           |                                                  | $ | 15,710                    |  |      | $ | 27,297     |  |  | $ | 20,840     |  |  | $ | 46,557     |  
|                           | Add back goodwill amortization             |                                                  |   | 2,388                     |  |      |   |           |  |  |   | 4,408      |  |  |   |           |  
|                           | Extraordinary item                         |                                                  |   |                          |  |      |   |           |  |  |   |           |  |  |   | (242       | )
|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Adjusted net income                        |                                                  | $ | 18,098                    |  |      | $ | 27,297     |  |  | $ | 25,248     |  |  | $ | 46,315     |  
|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|Basic earnings per share   |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Income before extraordinary item           |                                                  | $ | 0.39                      |  |      | $ | 0.53       |  |  | $ | 0.51       |  |  | $ | 0.91       |  
|                           | Add back goodwill amortization             |                                                  |   | 0.06                      |  |      |   |           |  |  |   | 0.11       |  |  |   |           |  
|                           | Extraordinary item                         |                                                  |   |                          |  |      |   |           |  |  |   |           |  |  |   | (0.01      | )
|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Adjusted net income                        |                                                  | $ | 0.45                      |  |      | $ | 0.53       |  |  | $ | 0.62       |  |  | $ | 0.90       |  
|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Weighted average common shares Outstanding |                                                  |   | 40,730,071                |  |      |   | 51,196,184 |  |  |   | 40,656,286 |  |  |   | 51,097,051 |  
|Diluted earnings per share |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Income before extraordinary item           |                                                  | $ | 0.37                      |  |      | $ | 0.52       |  |  | $ | 0.49       |  |  | $ | 0.88       |  
|                           | Add back goodwill amortization             |                                                  |   | 0.05                      |  |      |   |           |  |  |   | 0.10       |  |  |   |           |  
|                           | Extraordinary item                         |                                                  |   |                          |  |      |   |           |  |  |   |           |  |  |   | (0.01      | )
|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Adjusted net income                        |                                                  | $ | 0.42                      |  |      | $ | 0.52       |  |  | $ | 0.59       |  |  | $ | 0.87       |  
|                           |                                            |                                                  |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                           | Weighted average common shares outstanding |                                                  |   | 42,992,850                |  |      |   | 52,710,059 |  |  |   | 42,774,634 |  |  |   | 52,676,701 |  

6



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has completed the first of the
required impairment tests of goodwill during the second quarter
of 2002 and determined that, as of January 1, 2002, there is no
impairment of goodwill.

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

Generally, the provisions of FAS 145 are
effective for financial statements issued for fiscal years
beginning after May 15, 2002. Effective January 1,
2003, the gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods that does
not meet the criteria in APB 30 for classification as an
extraordinary item will be reclassified. The Company is
currently evaluating the impact of adoption of this statement,
but does not believe it will have a significant impact on its
financial statements other than possible reclassification of
gains and losses on extinguishment of debt from extraordinary
gains and losses to income before extraordinary items.

3.     Investments in
Affiliated Companies

The Companys investment in 51% owned
foreign joint ventures in Turkey and Saudi Arabia are accounted
for using the equity method because, although the Company does
not control them, it has the ability to exercise some influence
over their operating and financial policies. Equity in earnings
from these investments was $(0.7) million and $6.3 million
for the three months ended June 30, 2001 and 2002 and $(0.0)
million and $7.2 million for the six-month period ended
June 30 2001, and 2002 respectively. The following table,
which summarizes financial information for these joint ventures
includes results from the joint venture in Saudi Arabia only
through February of 2002:

|              |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        | 
|------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | 
|              |  |                    |        |                 
|              |  | Three Months Ended |        | Six Months Ended
|              |  | June 30,           |        | June 30,        
|              |  |                    |        |                 
|              |  | 2001               |        | 2002             |  | 2001 |        | 2002
|              |  |                    |        |                  |  |      |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 12,229 |                  |  | $    | 40,922 |      |  | $ | 49,284 |   |  | $ | 67,802 | 
|Cost of Sales |  |                    | 8,849  |                  |  |      | 20,129 |      |  |   | 30,577 |   |  |   | 35,041 | 
|Net Income    |  |                    | (1,267 | )                |  |      | 12,370 |      |  |   | (24    | ) |  |   | 16,794 | 

In view of the declining scale and prospects of
the Companys Saudi Arabian joint venture, United Defense
Systems Ltd. as described in the Companys Form 10-K
for the year ended December 31, 2001, the Company has
entered into agreement with its Saudi Arabian joint venture
partner, Al-Hejailan Projects Company Ltd.
(Al-Hejailan), under which the Company will sell its
interest in the joint venture to Al-Hejailan for approximately
$408,000. Completion of the sale is expected to occur within the
next nine months. The Company does not expect to incur
significant loss from the sale. Accordingly, as of March 1,
2002 the Company no longer receives a share of earnings from
this joint venture.

4.     Commitments
and Contingencies

Environmental
Matters

The Company spends certain amounts annually to
maintain compliance with environmental laws. Operating and
maintenance costs associated with environmental compliance and
prevention of pollution at the Companys facilities are a
normal, recurring part of operations, are not significant
relative to total operating

7



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

costs or cash flows, and are generally allowable
as contract costs under the Companys contracts with the
U.S. Government (Allowable Costs).

As with compliance costs, a significant portion
of the Companys expenditures for remediation at its
facilities consists of Allowable Costs. As of June 30, 2002
the Company has accrued approximately $14 million to cover
any investigation and/or remediation costs that may not be
Allowable Costs under U.S. Government contracts. The amount
accrued is based on estimated liabilities for each site in which
the Company is able to make reasonable estimates. The Company
does not believe there are significant uncertainties affecting
the estimated liabilities or amounts that will be paid in the
near term. The most significant of the estimated liabilities is
based on the Companys experience related to ongoing
remediation efforts. In addition, pursuant to the terms of the
acquisition of UDLP, the Sellers are required to reimburse the
Company for 75% of certain remediation costs that are
Non-Allowable Costs through the year 2007 for environmental
losses previously identified by the Company to the Sellers.
Accordingly, the Company has recorded a receivable for
$1.6 million for which it expects to be reimbursed over the
next 5 1/2 years by the Sellers under the terms of the
acquisition agreement.

5.     Cell ITS
Acquisition

On March 26, 2002, the Company, through its
subsidiary, Bofors Defence, finalized the acquisition of 100% of
the outstanding stock of Cell ITS AB, a company incorporated
under the laws of Sweden and wholly owned by Cell Network AB.
Cell ITS specializes in interactive training and simulation. As
consideration for the purchase, the Company paid the former
owner, Cell Network AB, 45 million Swedish krona (SEK)
(approximately $4.3 million), of which 20 million SEK was
held in escrow as a lien for the fulfillment of certain
receivables. The transaction was accounted for as a purchase.
Accordingly, the financial statements reflect the results of
operations of Cell ITS from the date of acquisition. The
purchase price allocation has not yet been finalized.

6.     Subsequent
Events

Acquisition
of United States Marine Repair, Inc.

On July 2, 2002, the Company completed the
acquisition of United States Marine Repair, Inc.,
(USMR) for $305.4 million including the
repayment of approximately $105 million of USMR debt. As a
result of the transaction, USMR became a wholly owned subsidiary
of the Company. The Company financed the acquisition with cash
on hand and by amending its credit facility to borrow an
additional $300 million. The Company will begin to
consolidate the results of operations of USMR as of the
effective date of the transaction.

USMR, based in Norfolk, Va., is the leading
provider of non-nuclear ship repair, modernization, overhaul and
conversion services to the U.S. Navy. It provides a range of
services from standard topside ship repair to full dry-dock
services at six strategically located ship repair facilities in
the ports of Norfolk, Virginia; San Diego, San Francisco and San
Pedro, California; Pearl Harbor, Hawaii; and Ingleside, Texas.

Crusader
Termination/New Contract Awarded

The Crusader program was terminated on
August 7, 2002 and the Company was awarded a new contract
to develop a new indirect fire cannon artillery system and
multi-role resupply vehicle for the Armys transformation
to its long-term future combat force, known as the Objective
Force.



|        |                                                                                                                  
|------- | -----------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of the Results of Operations and Financial Condition 
    June 30, 2002

Special Note Regarding Forward Looking
Statements

Our Form 10-Q 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

8



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##### 



realization of sales from our backlog, includes
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act. Statements that are predictive in nature, that
depend upon or refer to future events or conditions, or that
include words such as expects,
anticipates, intends, plans,
believes, estimates and similar
expressions are forward-looking statements. Although these
statements are based upon assumptions we consider reasonable,
they are subject to risks and uncertainties that are described
more fully below. Accordingly, we can give no assurance that we
will achieve the results anticipated or implied by our
forward-looking statements.




| |                                           
| | ------------------------------------------
| | Our Government Contracts Entail
    Risks.

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



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Rely on Key Contracts with U.S.
    Government Entities for a Significant Portion of Our Sales. A
    Substantial Reduction in These Contracts Would Materially
    Adversely Affect Our Operating Results.

We derive revenues predominantly from contracts
with agencies of, and prime contractors to, the DoD.
Approximately 77% of our sales for the six months ended
June 30, 2002, 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 would significantly reduce
our revenues.

Our largest weapon system development program is
the Crusader artillery system. In recent years, the U.S. Army
has supported Crusader as its next generation field artillery
system. Crusader is a self-propelled, armored artillery system
utilizing an advanced technology, 155 mm cannon. We have
been the prime contractor on Crusader since the systems
inception in 1994. During the six months ended
June 30, 2002, the Crusader program provided 23%, or
$152.5 million, of our revenues.

On August 7, 2002, in accordance with
direction from the Secretary of Defense, the Army issued us
notice that our Crusader contract was being terminated for the
convenience of the government. On the same date, the Army also
issued to us a preliminary prime contract, funded at an initial
amount of $27 million, to begin adapting key Crusader
technologies to a new cannon artillery system known as
Non-Line-of-Sight (NLOS). We believe that NLOS is
envisioned as a next generation, self-propelled, cannon-based
field artillery system intended to be a part of the Armys
Future Combat System (discussed below). As such, NLOS will be
substantially smaller and lighter in weight than the Crusader
system and may present significant technological, engineering,
and financial challenges if it is to be successfully developed.

If the Army continues to pursue NLOS development,
the program will require substantial funding during the
Governments FY03 and subsequent budgetary years. In
congressional deliberations to date regarding FY03 funding for
DoD, both the House of Representatives and the Senate have
approved the appropriation of $368.5 million for NLOS. We
are uncertain whether (i) the ultimate outcome of the FY03
legislative process will result in funding for and development
of NLOS on the scale suggested by the above appropriation;
(ii) if so, the degree to which funds so appropriated would
be made available to us as the program prime contractor (i.e.,
because a portion of funds appropriated for any particular
program is ordinarily consumed by the DoD agency which
administers the program); and (iii) whether NLOS would
continue to be supported by the Army and DoD, and funded by
Congress, in fiscal years subsequent to FY03.

The ultimate impact of the Crusader
programs termination upon our revenues and profits is
likely to depend primarily upon the following factors:
(i) the degree to which we are able to recover Crusader
program termination costs in negotiations with the Army;
(ii) the level of continued DoD, Army, and Congressional

9



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##### 



support of the NLOS program in FY03 and beyond,
as described above; (iii) whether we will remain as prime
contractor on NLOS; (iv) the level of our success in executing
any NLOS program work contracted to it; and (v) the pace at
which NLOS develops, compared to how the Crusader program might
have developed, in any particular year (i.e., because, at the
time of Crusaders termination, the program was already
well along in development, compared to NLOS, which is just
getting underway).




| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Government Contracts Contain Termination
    Provisions Unfavorable to Us and Are Subject to Audit and
    Modification by the Government at Its Sole
    Discretion.

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



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | suspend or permanently prevent us from receiving
    new contracts or extending existing contracts based on
    violations or suspected violations of procurement laws or
    regulations;
|
| |  | terminate our existing contracts;                                                                                                                                                         
|
| |  | reduce the value of our existing contracts;                                                                                                                                               
|
| |  | audit and object to our contract-related costs
    and fees, including allocated indirect costs;                                                                                          
|
| |  | control and potentially prohibit the export of
    our products; and                                                                                                                      
|
| |  | change certain terms and conditions in our
    contracts.                                                                                                                                 

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

As a U.S. Government contractor, we are subject
to financial audits and other reviews by the U.S. Government of
our costs and performance, accounting and general business
practices relating to these contracts.

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

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

10



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##### 





| |                                                             
| | ------------------------------------------------------------
| | Government Contracts are Subject to
    Competitive Bidding.

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



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

In addition, in order to win the award of
developmental programs, we must be able to align our research
and development and product offerings with the governments
changing concepts of national defense and defense systems. For
example, in recent years, there has been a trend in military
procurement toward achieving a balance between wheeled and
tracked combat vehicles including the U.S. Armys announced
procurement of over 2,000 wheeled vehicles in November 2000 for
its Interim Armored Vehicle program. We unsuccessfully offered
tracked vehicle candidates for the Interim Armored Vehicle
program. To the extent that future armored vehicle procurements
emphasize wheeled designs, we may remain at a competitive
disadvantage if we are unable to offer a competitive wheeled
vehicle design. Moreover, there is no assurance that we will
continue to win competitively awarded contracts or that awarded
contracts will generate sales sufficient to result in profits.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Our Fixed-Price and Cost-Plus Contracts May
    Commit Us to Unfavorable Terms.

We provide our products and services primarily
through fixed-price and cost-plus contracts. Fixed-price
contracts provided 71% and cost-plus contracts provided 29% of
our sales for the six months ended June 30, 2002.

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

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

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



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Intense Competition in the Defense Industry
    Could Limit Our Ability to Win and Retain Government
    Contracts.

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



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | the effectiveness of our research and development
    programs;                                                     
|
| |  | our ability to offer better program performance
    than our competitors at a lower cost to the U.S. Government; and

11



---



##### 





| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | the readiness of our facilities, equipment and
    personnel to undertake the programs for which we compete.

Additionally, our U.S. Government programs must
compete with programs managed by other defense contractors for
limited funding. Our competitors continually engage in efforts
to expand their business relationship with the U.S. Government
and are likely to continue these efforts in the future. The U.S.
Government may choose to use other defense contractors for its
limited number of defense programs. In addition, defense
programs compete with non-defense spending of the U.S.
Government for funding. Budget decisions made by the U.S.
Government are outside of our control and can have long-term
consequences for our size and structure.

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



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in Defense Procurement Models May
    Make It More Difficult For Us to Successfully Bid on Projects as
    a Prime Contractor and Limit Sole-Source Opportunities Available
    to Us.

In recent years, the trend in combat system
design and development appears to be evolving towards the
technological integration of various battlefield components,
including combat vehicles, command and control network
communications, advanced technology artillery systems and
robotics. For example, the U.S. Army recently awarded the prime
contractor role in its Future Combat System (FCS)
program (discussed below) to The Boeing Company
(Boeing). 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.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ultimate role in Future Combat System
    program is uncertain, and the scale of the program may impair
    funding for other important U.S. Army programs in which we
    participate.

The FCS program is the Armys announced
means by which its long-term combat force, known as the
Objective Force, is to be developed and produced. On
March 7, 2002 the Army selected a contractor team led by
Boeing to manage the initial phase of the FCS program. Boeing
thereafter solicited potential participation in the program from
a broad range of industry and other sources, and indicated in
the process that the program was expected to include a
significant ground combat vehicle component. On July 3,
2002 Boeing awarded us an initial FCS subcontract for
approximately $1 million to study various manned and
unmanned combat vehicle platforms, subsystems, and payloads.

The FCS program is still at a very early stage,
and hence the ultimate nature and characteristics of any combat
vehicles it may use, as well as the pace of developing and
producing such systems, is uncertain. The Army has indicated
that it intends to field at least some elements of FCS in the
2008-2010 timeframe. Although we believe that we have key
organizational and technological strengths pertinent to the FCS
program, and are pleased to have been selected for some of the
initial study work in the program, the infancy and relative lack
of definition in the program leave management uncertain as to
(i) the overall future progress of the program, its
continued level of support by the Administration, and its
continued level of funding by Congress; and (ii) the nature and
scale of any longer-term role which we may obtain in the program.

12



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##### 



However, given the announced purpose and scope of
the FCS program, we expect to continue to accord the highest
priority to securing a substantial, ongoing role in the program.


Assuming that FCS continues to develop in the
overall direction envisioned by the Army, the funding
requirements for the program are expected to expand
considerably. Unless overall procurement spending by the Army is
permitted to increase significantly, the Army may choose to
pursue the FCS program at the expense of funding for other
weapons programs. Such programs would likely be in the so-called
Legacy Force, which is the Armys current heavy mechanized
combat force based primarily upon the M-1 tank (produced by
General Dynamics Corporation) and the Bradley Fighting Vehicle
(produced by us). Our largest current contract for Legacy Force
work consists of a $697 million multi-year contract to
upgrade 389 Bradley vehicles to the A3 model and to perform
other Bradley work. This contract should be completed by
December 2005. In the event that the Army becomes convinced that
its overall procurement funding will be insufficient to fully
pursue both FCS and Legacy Force programs, funding for further
Bradley program work (i.e., beyond our multi-year contract which
ends in 2005) and/or other U.S. Army programs in which we
participate may be substantially reduced, or cut off entirely.
Unless we were to have developed replacement FCS or other
program work on a comparable scale by that time, any significant
reduction or cutoff in Bradley or other program work would
likely reduce commensurately our revenue and profits.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | A Reduction in the U.S. Defense Budget
    Could Result in a Decrease in Our Revenue.

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



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Operating Performance is Heavily
    Dependent Upon the Timing of Manufacturing and Delivery of
    Products Under Our U.S. Government Contracts.

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

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



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We are Not Successful in Integrating the
    New and Complex Technologies to be Used in Our Products, Our
    Business Could be Materially and Adversely
    Affected.

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

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



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

13



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##### 





| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our International Operations and Foreign
    Joint Ventures Subject Us to Risks that Could Materially
    Adversely Affect Our Results of Operations and Financial
    Condition.

We participate in an unconsolidated joint venture
in Turkey and in selected co-production programs in several
other countries. We recognized earnings from our joint ventures
of $7.2 million for the six months ended June 30,
2002. Our export sales, which include U.S. direct foreign sales,
U.S. Foreign Military Sales and our revenues from our Bofors
Defence subsidiary, totaled $155.6 million for the six
months ended June 30, 2002 representing approximately 23%
of our total revenues for that period. Our strategy includes
expansion of our international operations and export sales. In
connection with these international operations and sales we are
subject to risks, including the following:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | devaluations and fluctuations in currency
    exchange rates;                                                                                                                                                                
|
| |  | the ability to obtain distributions of cash which
    require the approval of joint venture partners;                                                                                                                        
|
| |  | changes in, or changes in interpretations of,
    foreign regulations that may adversely affect our ability to
    sell certain products or repatriate profits to the United States;                                         
|
| |  | imposition of limitations on conversions of
    foreign currencies into U.S. dollars;                                                                                                                                        
|
| |  | imposition or increase of withholding and other
    taxes on remittances and other payments by foreign subsidiaries;                                                                                                         
|
| |  | hyperinflation or political instability in the
    countries in which we operate or sell;                                                                                                                                    
|
| |  | imposition or increase of investment and other
    restrictions by foreign governments;                                                                                                                                      
|
| |  | the potential imposition of trade or foreign
    exchange restrictions or increased tariffs;                                                                                                                                 
|
| |  | U.S. arms export control regulations and policies
    that restrict our ability to supply foreign affiliates and
    customers; and                                                                                          
|
| |  | local political pressure to shift from majority
    to minority ownership positions in joint ventures, which could
    further reduce our ability to influence the conduct, strategy
    and profitability of these ventures.

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



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We May Not Have the Ability to Make
    Acquisitions, Develop Strategic Alliances, Expand or Implement
    New Joint Ventures, or Successfully Implement and Maintain
    Co-Production Programs.

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

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

14



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##### 



lengthy process that often occurs after the
consummation of an acquisition. Accordingly, our failure to
obtain any required novation could have a material adverse
effect on the value to us of an acquired business.




| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We May Not be Able to Receive or Retain the
    Necessary Licenses or Authorizations Required For Us to Sell Our
    Products Overseas.

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



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Our Significant Level of Debt May Adversely
    Affect Our Financial and Operating Activity.

On July 2, 2002, we amended and restated our
existing secured credit facility for an additional loan of
$300 million to acquire U.S. Marine Repair, Inc. In the
future, we may borrow more money, subject to the limitations
imposed on us by our senior secured credit facility.

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



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



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | We Depend on Key Management and Personnel
    and May Not Be Able to Retain Those Employees or Recruit
    Additional Qualified Personnel.

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



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Environmental Laws and Regulations May
    Subject Us to Significant Liabilities.

Our operations are subject to U.S. federal, state
and local environmental laws and regulations, as well as
environmental laws and regulations in the various countries in
which we operate, relating to the discharge, storage, treatment,
handling, disposal and remediation of certain materials,
substances and wastes. New laws

15



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##### 



and regulations, stricter enforcement of existing
laws and regulations, the discovery of previously unknown
contamination or the imposition of new clean-up requirements may
require us to incur substantial costs in the future. Although a
significant portion of our ongoing environmental costs are
recoverable from other parties or allowable as costs under the
terms of many of our contracts, there is no assurance that we
will not incur material unrecoverable or unallowable costs in
the future. In addition, there is no assurance that
environmental costs we expect to be reimbursed by other parties
or allowed as charges in U.S. Government contracts will be
reimbursed or allowed. A decline in such reimbursement or
allowability could have a material adverse effect on our
financial condition and results of operations.




| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We May Need to Raise Additional Capital on
    Terms Unfavorable to Our Stockholders.

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

The following discussion and analysis should be
read in conjunction with the financial statements and related
notes and the other financial information, included elsewhere in
this report, and with our Annual Report on Form 10-K for
the year ended December 31, 2001.

Overview

United Defense is a leader in the design,
development and production of combat vehicles, artillery, naval
guns, missile launchers and precision munitions used by the U.S.
Department of Defense (DoD) and more than 40 foreign
militaries. For many of our key DoD programs, we are the
sole-source prime contractor and systems integrator. We conduct
global operations through our manufacturing facilities in the
United States and Sweden, through a manufacturing joint venture
in Turkey, and through co-production programs with various other
governments and foreign contractors.

The Carlyle Group formed United Defense
Industries, Inc. in October of 1997 to facilitate the
acquisition of United Defense, L.P., our predecessor entity. The
Carlyle Group continues to own a significant portion of our
common stock. Individuals affiliated with The Carlyle Group are
expected to continue to influence our operations.

Our results of operations, particularly revenue,
gross profits and cash flows, vary significantly from period to
period, depending largely upon the timing of our delivery of
finished products, the terms of our contracts and our level of
export sales. As a result, period-to-period comparisons may show
substantial changes disproportionate to our underlying business
activity.

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototypes, repair and maintenance, and some other
matters are typically cost-plus arrangements, under which we are
reimbursed for approved costs and also receive a fee. The
production contracts are typically fixed-price arrangements
under which we assume the risk of cost overruns and receive the
benefit of cost savings. All of our DoD contracts, whether we
are the prime contractor or a subcontractor, are subject to
audit and cost controls. As a result, the DoD typically has the
right to object to our costs as not allowable or as
unreasonable, which can increase the costs we bear rather than
allow recovery as costs reimbursed or allowed in our negotiation
of fixed-price contracts.

We recognize sales on fixed-price production
contracts when the risks and rewards of ownership have been
transferred to the customer. For our DoD production contracts,
those criteria are typically met when the

16



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##### 



manufacture of the product is completed and the
customer has certified it as meeting the contract specifications
and as having passed quality control tests. However, under
recent Bradley production contracts, sales are not recognized
until the U.S. Army fields individual units because it is at
that point that the risks and rewards of ownership are
transferred. This contractual provision extends the period of
time during which these vehicles are carried as inventory and
may result in an uneven distribution of revenue from these
contracts between periods. For our foreign production contracts,
sales are generally recorded upon shipment of products to the
customer, which corresponds to when the risks and rewards of
ownership transfer. We tend to deliver products to our foreign
customers in lots, which also results in an inventory build-up
pending delivery. We record sales under cost reimbursement
contracts as costs are incurred and invoiced.


We use the contract method of accounting for our
fixed-price contracts and therefore record gross margin on each
unit produced at the time a sale is recognized, based on an
estimate of the margin that will be realized over the life of
the related contract. We currently evaluate estimates of gross
margin three times each year and use the cumulative catch-up
method to recognize changes in estimates of sales and gross
margins during the period in which those changes are determined.
We charge any anticipated losses on a contract to operations as
soon as those losses are determined. The principal components of
our operating costs for production contracts are materials,
subcontractor costs, labor and overhead. The principal operating
costs for engineering and development contracts are compensation
costs for the engineers and designers and related overhead
necessary to support those personnel. All of these operating
costs are charged to inventory as incurred. We also use the
last-in, first-out, or LIFO, method of accounting, which
generally results in higher cost of sales in periods when
current costs of the inventory are higher than comparable costs
in prior periods and a periodic charge to earnings to reflect
changes in the costs of components of inventory. We expense
selling, general, administrative, and research and development
costs in the period incurred. The major components of these
costs include compensation, overhead and amortization of
intangibles.

We are a supplier of armored combat vehicles and
weapons delivery systems to the DoD and a number of allied
military forces worldwide. Our products include critical
elements of the U.S. militarys tactical force structure.
We had a firm funded backlog of approximately $2.0 billion
as of June 30, 2002, a substantial majority of which was
derived from sole-source, prime contracts. Approximately 77% of
the our sales for the six months ended June 30, 2002 were
to the U.S. government, primarily to agencies of the DoD
(excluding Foreign Military Sales), or through subcontracts with
other government contractors.

There were no material changes to our major
programs from those described in our Form 10-K Report,
other than normal additional funding as new contracts are
negotiated and awarded, except as follows:

Crusader:As
described above, the Crusader program was terminated on
August 7, 2002 and we were awarded a new contract to
develop a new indirect fire cannon artillery system and
multi-role re-supply vehicle for the Armys transformation
to its long-term future combat force, known as the Objective
Force.

United Defense Systems 
Arabia:In view of the declining scale
and prospects of the UDS business, as described in our
Form 10-K Report for the year ended December 31, 2001,
we have entered into an agreement with our Saudi partner,
Al-Hejailan Projects Company Ltd., under which we will sell our
interest in UDS to Al-Hejailan for approximately $408,000.

FNSS-Turkey:The
initial contract with the Turkish Army to produce 1,698 armored
vehicles has been completed. We received a follow-on contract
for an additional 551 vehicles in 2000 and are awaiting another
follow-on contract to produce 114 additional vehicles.

Bradley:As
indicated in the discussion above regarding the Future Combat
System (FCS), expanded funding requirements for the
FCS program may cause the U.S. Army to reduce or curtail its
spending on other programs, including the Bradley. Of the 1,037
Bradleys which the Army originally planned to upgrade to
the A3 configuration, 445 have yet to be contracted for, and may
be relatively more vulnerable to funding pre-emption by the FCS
program.

17



---



##### 



Products and Programs

Our program portfolio consists of a balanced mix
of current production, upgrade and life-cycle support, and
development programs. Revenue generated from each of our major
programs is summarized below.

|                                            |  |               |       |                  |  |      |       |      |  |   |       |  |  |   |       | 
|------------------------------------------- |  | ------------- | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                            |  |               |       |                 
|                                            |  | Three Months  |       | Six Months Ended
|                                            |  | Ended June 30 |       | June 30         
|                                            |  | (in millions) |       | (in millions)   
|                                            |  |               |       |                 
|                                            |  | 2001          |       | 2002             |  | 2001 |       | 2002
|                                            |  |               |       |                  |  |      |       |     
|Bradley Family of Vehicles                  |  | $             | 94.3  |                  |  | $    | 65.1  |      |  | $ | 150.5 |  |  | $ | 141.0 | 
|Naval Ordnance (a)                          |  |               | 45.3  |                  |  |      | 32.2  |      |  |   | 96.1  |  |  |   | 84.8  | 
|Vertical Launch System                      |  |               | 22.2  |                  |  |      | 27.7  |      |  |   | 46.1  |  |  |   | 58.9  | 
|Crusader                                    |  |               | 75.3  |                  |  |      | 69.8  |      |  |   | 112.8 |  |  |   | 152.5 | 
|Combat, Engineering & Recovery Vehicles (b) |  |               | 24.9  |                  |  |      | 36.0  |      |  |   | 47.1  |  |  |   | 67.2  | 
|M109 Howitzer System                        |  |               | .9    |                  |  |      | 10.0  |      |  |   | 17.5  |  |  |   | 13.9  | 
|Assault Amphibious Vehicles                 |  |               | 17.4  |                  |  |      | 8.4   |      |  |   | 34.6  |  |  |   | 19.9  | 
|Other                                       |  |               | 66.4  |                  |  |      | 68.8  |      |  |   | 134.1 |  |  |   | 136.3 | 
|                                            |  |               |       |                  |  |      |       |      |  |   |       |  |  |   |       | 
|Total                                       |  | $             | 346.7 |                  |  | $    | 318.0 |      |  | $ | 638.8 |  |  | $ | 674.5 | 
|                                            |  |               |       |                  |  |      |       |      |  |   |       |  |  |   |       | 



---



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(a) | Includes Mk 45, Advanced Gun Systems
    (AGS), and other naval services and equipment.              
|   
|(b) | Includes vehicles such as the M88 recovery
    vehicle, M9 ACE and other engineering related equipment.

For a more detailed description of our business
and principal operating programs, see the Form 10-K for the
year ended December 31, 2001.

Results of Operations



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Three Months Ended June 30, 2002
    Compared with Three Months Ended June 30,
    2001.



| |        
| | -------
| | Revenue

Revenue for the three months ended June 30,
2002 was $318.0 million, which was $28.7 million or
8.3% below the comparable period in 2001. The decrease was
primarily due to the timing for fielding Bradley Fighting
Vehicles and delays in the DD(X) program because of a protest to
the prime contract award, partially offset by new shipments of
artillery systems to an international customer and higher
deliveries of Hercules recovery vehicles to the U.S. Government.



| |             
| | ------------
| | Gross Profit

Gross profit for the three months ended
June 30, 2002 was $69.9 million, which was
$5.4 million or 8.4% more than the comparable period in
2001. Although the revenue was lower for the period, gross
profit increased in 2002 mainly due to the receipt of a
$7.2 million award fee for the Crusader and improved
margins for several programs.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses were
$32.4 million for the three months ended June 30,
2002, a decrease of $4.0 million, or 10.9%, from the prior
period. The decrease was attributable to lower amortization of
intangible assets, including goodwill, related to acquisitions.



| |                         
| | ------------------------
| | Research and Development

Research and development costs were
$9.6 million for the three months ended June 30, 2002,
an increase of $4.3 million or 82.2% from the prior period.
The higher spending was associated with the acceleration of
projects related to DD(X) development work and an increase in
spending for technologies that potentially can be used on the
Future Combat System.

18



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##### 





| |                                 
| | --------------------------------
| | Earnings from Foreign Affiliates

Earnings from foreign affiliates were
$6.3 million in the three months ended June 30, 2002
compared to ($0.7) million for the same period last year.
Earnings recognized from the Turkey joint venture were higher
versus the same period in 2001, reflecting the catch-up of
vehicle deliveries delayed from the first quarter of 2002.



| |                 
| | ----------------
| | Interest Expense

Net interest expense was $5.3 million in the
three months ended June 30, 2002 compared to
$5.2 million in the same period in 2001. Although the debt
level was higher in 2002, interest expense of $6.3 million
was about the same as in 2001 because of a lower interest rate
on our variable rate debt.



| |           
| | ----------
| | Net Income

As a result of the foregoing, we had a net income
of $27.3 million in 2002, compared with $15.7 million
in the prior period.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Six Months Ended June 30, 2002
    Compared with Six Months Ended June 30, 2001.



| |        
| | -------
| | Revenue

Revenue for the six months ended June 30,
2002 of $674.5 million increased by $35.7 million, or
5.6%, over the same prior period. The improvement was
attributable to higher Crusader program sales, shipments of
Hercules recovery vehicles to the U.S. Government, and an
increase in VLS canister deliveries partially offset by fewer
deliveries of upgrades of Bradley and Assault Amphibious
Vehicles to the U.S. Government and lower DD(X) sales.



| |             
| | ------------
| | Gross Profit

Gross Profit for the six months ended
June 30, 2002 was $129.8 million, which was
$4.4 million more than the prior year and is attributable
to higher sales. The gross profit rate slightly to 19.2% from
19.6% due to a less profitable mix of contracts in 2002, mainly
the lower margin Crusader development program which represents a
higher percentage of our sales in 2002.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses were
$60.5 million for the six months ended June 30, 2002,
which declined $18.1 million, or 23%, from the prior
period. The decrease was mainly due to the lower amortization of
intangible assets, including goodwill, related to acquisitions.



| |                         
| | ------------------------
| | Research and Development

Research and development costs increased
$5.6 million to $15.2 million for the six months ended
June 30, 2002. The increased spending was associated with
projects related to DD(X) development work and technologies that
potentially can be used on the Future Combat System program.



| |                                 
| | --------------------------------
| | Earnings from Foreign Affiliates

Earnings from foreign affiliates were
$7.2 million higher in the six months ended June 30,
2002, which was attributable to the increase of earnings
recognized from the Turkey joint venture in the second quarter
and the completion of intangible amortization for the foreign
affiliates in 2001.

19



---



##### 





| |                 
| | ----------------
| | Interest Expense

Net interest expense was $10.2 million in
2002, a slight increase of $0.5 million from the prior period
resulting from lower income generated by cash balances. Although
the debt level was higher in 2002, interest expense of
$12.4 million in 2002 was about the same as in 2001 because
of a lower interest rate on our variable rate debt.



| |           
| | ----------
| | Net income

As a result of the foregoing, we had a net income
of $46.3 million in 2002, after the extraordinary loss of
$0.2 million for the early extinguishment of debt, compared
with $20.8 million in the prior year.

Liquidity, Capital Resources and Financial
Condition.

Cash provided by operating activities was
$45.0 million for the six-month period ended June 30,
2002 compared with $43.3 million in the prior year. The
principal factors generating funds in 2002 were net income,
which more than doubled over the prior year, and advance
payments related to international contracts with Korea, Italy,
and Canada exceeding the inventory requirements for these
contracts during the period.

Cash used in investing activities was
$11.6 million for the six-month period ended June 30,
2002, compared with $7.9 million in the prior year period.
The purchase of Cell ITS AB and the assumption of its debt for
$4.1 million in cash was the reason for the increase in
investing activity in 2002 from the prior period. Expenditures
for computer equipment and software represent the capital
expenditure component of cash used for investing activities.

Cash used in financing activities was
$6.1 million for the six-month period ended June 30,
2002, compared with $86.1 million during the same period in
2001. The primary use of cash used in financing activities was
for debt repayment. We arranged to borrow an additional
$300 million for the purchase of USMR. The new loan became
available on July 2, 2002. We also retained a
$34.0 million higher cash balance at June 30, 2002
from year-end 2001 to ensure sufficient funds were available for
the USMR purchase.

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

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##### 





|        |                                                                               
|------- | ------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk  June 30, 2002

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

Forward Currency Exchange Risk

We conduct some of our operations outside the
U.S. in functional currencies other than the U.S. dollar. To
mitigate the risk associated with fluctuating currencies on
short-term foreign currency-denominated transactions, Bofors
Defence enters into foreign currency forward exchange contracts.
The following table provides information concerning the U.S.
dollar functional currency of Bofors forward exchange
contracts at June 30, 2002. The table presents the U.S.
dollar equivalent notional amounts and weighted average
contractual exchange rates by expected maturity dates. These
notional amounts generally are used to calculate the contractual
payments to be exchanged under the contract.

|                                         |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |       | 
|---------------------------------------- | --------------------------------- | -------------------------------- | - | ----- |  | ---- | - | ----- |  | ----- | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                         |                                   |                                  |   |       |  |     
|                                         |                                   | Expected Maturity Date           |   |       |  |     
|                                         |                                   |                                  |   |       |  | Fair
|                                         |                                   | 2002                             |   | 2003  |  | 2004 |   | Total |  | Value
|                                         |                                   |                                  |   |       |  |      |   |       |  |      
|                                         |                                   |                                 
|                                         |                                   | (U.S. $ equivalent in thousands)
|Receive Swedish krona/pay U.S. dollars   |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ | 6,062 |  |      | $ |      |  |       | $ |      |  |  | $ | 6,062 |  |  | $ | 6,115 | 
|                                         | Average contractual exchange rate |                                  |   | 9.13  |  |      |   |      |  |       |   |      |  |  |   | 9.13  |  |  |   |       | 
|Receive British pounds/pay Swedish krona |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ | 3,515 |  |      | $ |      |  |       | $ |      |  |  | $ | 3,515 |  |  | $ | 3,538 | 
|                                         | Average contractual exchange rate |                                  |   | 14.15 |  |      |   |      |  |       |   |      |  |  |   | 14.15 |  |  |   |       | 
|Receive euro/pay Swedish krona           |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ | 1,881 |  |      | $ |      |  |       | $ |      |  |  | $ | 1,881 |  |  | $ | 1,888 | 
|                                         | Average contractual exchange rate |                                  |   | 9.09  |  |      |   |      |  |       |   |      |  |  |   | 9.09  |  |  |   |       | 
|Receive Swedish krona/pay euro           |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ |      |  |      | $ | 3,090 |  |       | $ | 3,090 |  |  | $ | 6,180 |  |  | $ | 5,996 | 
|                                         | Average contractual exchange rate |                                  |   |       |  |      |   | 9.54  |  |       |   | 9.54  |  |  |   | 9.54  |  |  |   |       | 

Interest Rate Risk

Borrowings under our senior secured credit
facility are sensitive to changes in interest rates. The
weighted average interest rate on our borrowings outstanding
under the senior secured credit facility as of June 30,
2002 was 4.6%.

In January 2002, we entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings under our senior secured credit
facility. The notional amount of this interest rate swap
agreement is $173 million. We entered into this agreement
as a hedge to manage interest costs and risks associated with
fluctuating interest rates. The agreement entitles us to pay a
base interest rate of 3.45%, in return for the right to receive
a floating interest rate which is based on three-month LIBOR as
of each quarterly measurement date. In the event the three-month
LIBOR at the measurement date exceeds 6%, the base interest rate
is adjusted to the then effective LIBOR up to a maximum of 8%.
The net cash amounts paid or received on the agreement are
accrued and recognized as an adjustment to interest expense. The
fair value of the interest rate swap agreement was ($1.4)
million and is included in other liabilities and accumulated
comprehensive income in stockholders equity.

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##### 



PART II



OTHER INFORMATION


June 30, 2002

Item 1.     Legal
Proceedings

We are subject to claims and lawsuits arising in
the ordinary course of business. Management believes that the
outcome of any such proceedings to which we are a party will not
have a material adverse effect on the Company.

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

We held our annual meeting of stockholders on
May 21, 2002. The matters voted upon at the meeting and the
corresponding results are set forth below.

1.     The election of
nine directors to hold office until the next annual meeting of
stockholders and until their respective successors have been
elected or appointed:

|                       |  |     |            |          |  |  |           | 
|---------------------- |  | --- | ---------- | -------- |  |  | --------- | 
|                       |  | For |            | Withheld
|                       |  |     |            |         
|Frank C. Carlucci      |  |     | 46,380,175 |          |  |  | 2,181,690 | 
|Peter J. Clare         |  |     | 46,380,175 |          |  |  | 2,181,690 | 
|William E. Conway, Jr. |  |     | 46,380,175 |          |  |  | 2,181,690 | 
|Allan M. Holt          |  |     | 46,380,175 |          |  |  | 2,181,690 | 
|Robert M. Kimmitt      |  |     | 46,380,175 |          |  |  | 2,181,690 | 
|J.H. Binford Peay, III |  |     | 46,380,175 |          |  |  | 2,181,690 | 
|Thomas W. Rabaut       |  |     | 44,832,355 |          |  |  | 3,729,510 | 
|Francis Raborn         |  |     | 44,832,355 |          |  |  | 3,729,510 | 
|John M. Shalikashvili  |  |     | 46,380,175 |          |  |  | 2,181,690 | 

2.     Stockholder
approval of the amendment of the United Defense Stock Option
Plan to increase the number of shares issuable under such plan
by 4,000,000 shares and to allow for the grant of restricted
stock to eligible individuals:

|    |            |         |  |         |           |                  |  |  |        |  |  |  |           | 
|--- | ---------- | ------- |  | ------- | --------- | ---------------- |  |  | ------ |  |  |  | --------- | 
|For |            | Against |  | Abstain |           | Broker Non-Votes
|    |            |         |  |         |           |                 
|    | 36,709,419 |         |  |         | 9,048,603 |                  |  |  | 74,537 |  |  |  | 2,729,306 | 

3.     Stockholder
ratification of the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending
December 31, 2002:

|    |            |         |  |         |         |                  |  |  |       |  |  |  |   | 
|--- | ---------- | ------- |  | ------- | ------- | ---------------- |  |  | ----- |  |  |  | - | 
|For |            | Against |  | Abstain |         | Broker Non-Votes
|    |            |         |  |         |         |                 
|    | 47,782,677 |         |  |         | 772,373 |                  |  |  | 6,815 |  |  |  | 0 | 



|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

On June 3, 2002 the Company filed a report
on Form 8-K, indicating that the Company had entered into a
definitive agreement to acquire United States Marine Repair,
Inc. (USMR).

22



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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.



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

| |                                               
| | ----------------------------------------------
| |                                               
| | Francis Raborn                                
| | Principal Financial and Accounting
    Officer
| | and Authorized Signatory                      

Dated: August 13, 2002

23