##### 









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: March 31, 2003 | Commission File No. 001-16821



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UNITED DEFENSE INDUSTRIES, INC.

(Exact name of registrant as specified in its
charter)


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



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1525 Wilson Boulevard, Suite 700,

Arlington, Virginia, 22209-2411


(703) 312-6100


(Address and telephone number of principal
executive offices of


Registrant and each Co-Registrant)




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

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

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

None


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

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

As of April 30, 2003 the aggregate market
value of the common stock held by non-affiliates of the
registrant was $647,161,526 based on the closing price of $24.42
per share on the New York Stock Exchange on such date.

Common Stock, $.01 par value 51,849,221 Shares
Outstanding as of April 30, 2003.



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UNITED DEFENSE INDUSTRIES, INC.

INDEX

|                                   |  |                                                                                                                                  |    |      |    | 
|---------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                                  |    | Page
|                                   |  |                                                                                                                                  |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Unaudited Consolidated Financial
    Statements  United Defense Industries, Inc.                                                |    |      |    | 
|                                   |  | Consolidated Balance Sheets as of
    December 31,2002 and March 31, 2003 (unaudited)                                            |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months ended March 31, 2002 and 2003                           |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the three months ended
    March 31, 2003 |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the three months ended March 31, 2002 and 2003                           |    |      | 5  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements                                                                         |    |      | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis of the
    Results of Operations and Financial Condition                                    |    |      | 14 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                   |    |      | 18 | 
|Item 4.                            |  | Controls and Procedures                                                                                                          |    |      | 18 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                                |    |      | 20 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                 |    |      | 20 | 
|Signature                          |  |                                                                                                                                  | 21 |     
|Certifications                     |  |                                                                                                                                  | 22 |     

1



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##### 



UNITED DEFENSE INDUSTRIES, INC.



CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |           |         | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | --------- | -------------- | ------- | - | --------- | --------- | ------- | 
|                                                   |                                                                                                                                                                            | December 31, 2002              |           | March 31, 2003
|                                                   |                                                                                                                                                                            |                                |           |               
|                                                   |                                                                                                                                                                            |                                |           | (Unaudited)   
|ASSETS                                            
|Current assets:                                    |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   |                                                                                                                                                                            | Cash and cash equivalents      |           | $              | 106,802 |   |           | $         | 155,760 | 
|                                                   |                                                                                                                                                                            | Trade receivables, net         |           |                | 192,166 |   |           |           | 167,277 | 
|                                                   |                                                                                                                                                                            | Long-term contract inventories |           |                | 399,189 |   |           |           | 398,928 | 
|                                                   |                                                                                                                                                                            | Deferred tax asset             |           |                | 25,436  |   |           |           | 1,726   | 
|                                                   |                                                                                                                                                                            | Other current assets           |           |                | 15,458  |   |           |           | 16,419  | 
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   | Total current assets                                                                                                                                                       |                                |           | 739,051        |         |   |           | 740,110   |        
|Property, plant and equipment, net                 |                                                                                                                                                                            |                                | 170,378   |                |         |   | 166,104   |          
|Goodwill, net                                      |                                                                                                                                                                            |                                | 341,962   |                |         |   | 341,962   |          
|Intangible assets, net                             |                                                                                                                                                                            |                                | 32,624    |                |         |   | 29,337    |          
|Prepaid pension and postretirement benefit cost    |                                                                                                                                                                            |                                | 120,987   |                |         |   | 121,844   |          
|Restricted cash                                    |                                                                                                                                                                            |                                | 10,120    |                |         |   | 10,360    |          
|Other assets                                       |                                                                                                                                                                            |                                | 38,848    |                |         |   | 23,984    |          
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|Total assets                                       |                                                                                                                                                                            | $                              | 1,453,970 |                |         | $ | 1,433,701 |          
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|                                                   | Current portion of long-term debt                                                                                                                                          |                                | $         | 13,011         |         |   | $         | 26,021    |        
|                                                   | Accounts payable, trade and other                                                                                                                                          |                                |           | 121,801        |         |   |           | 104,892   |        
|                                                   | Advanced payments                                                                                                                                                          |                                |           | 491,217        |         |   |           | 492,976   |        
|                                                   | Accrued and other liabilities                                                                                                                                              |                                |           | 139,954        |         |   |           | 95,399    |        
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   | Total current liabilities                                                                                                                                                  |                                |           | 765,983        |         |   |           | 719,288   |        
|Long-term liabilities:                             |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   | Long-term debt, net of current portion                                                                                                                                     |                                |           | 576,989        |         |   |           | 563,979   |        
|                                                   | Accrued pension and postretirement benefit cost                                                                                                                            |                                |           | 51,964         |         |   |           | 54,601    |        
|                                                   | Deferred tax liability                                                                                                                                                     |                                |           | 15,124         |         |   |           | 15,124    |        
|                                                   | Other liabilities                                                                                                                                                          |                                |           | 73,615         |         |   |           | 69,370    |        
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|Total liabilities                                  |                                                                                                                                                                            |                                | 1,483,675 |                |         |   | 1,422,362 |          
|Commitments and contingencies                      |                                                                                                                                                                            |                                |           |                |         |   |           |          
|Stockholders equity (deficit):                    |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   | Common stock $.01 par value, 150,000,000 shares
    authorized; 51,695,114 and 51,803,030 issued and outstanding at
    December 31, 2002 and March 31, 2003, respectively |                                |           | 517            |         |   |           | 518       |        
|                                                   | Additional paid-in-capital                                                                                                                                                 |                                |           | 177,740        |         |   |           | 178,218   |        
|                                                   | Deferred compensation                                                                                                                                                      |                                |           | (547           | )       |   |           | (527      | )      
|                                                   | Retained deficit                                                                                                                                                           |                                |           | (194,952       | )       |   |           | (156,573  | )      
|                                                   | Accumulated other comprehensive loss                                                                                                                                       |                                |           | (12,463        | )       |   |           | (10,297   | )      
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   | Total stockholders equity (deficit)                                                                                                                                       |                                |           | (29,705        | )       |   |           | 11,339    |        
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          
|                                                   | Total liabilities and stockholders equity
    (deficit)                                                                                                                   |                                | $         | 1,453,970      |         |   | $         | 1,433,701 |        
|                                                   |                                                                                                                                                                            |                                |           |                |         |   |           |          

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 March 31,
|                                  |                                                           |                             
|                                  |                                                           | 2002                         |        | 2003      
|                                  |                                                           |                              |        |           
|Revenue:                          |                                                           |                              |        |            |         |   |        |           
|                                  | Sales                                                     |                              | $      | 356,443    |         |   | $      | 466,523    |        
|Costs and expenses:               |                                                           |                              |        |            |         |   |        |           
|                                  | Cost of sales                                             |                              |        | 296,594    |         |   |        | 362,583    |        
|                                  | Selling, general and administrative expenses              |                              |        | 28,117     |         |   |        | 37,070     |        
|                                  | Research and development                                  |                              |        | 5,664      |         |   |        | 1,880      |        
|                                  |                                                           |                              |        |            |         |   |        |           
|                                  |                                                           | Total expenses               |        |            | 330,375 |   |        |            | 401,533 | 
|                                  |                                                           |                              |        |            |         |   |        |           
|Income from operations            |                                                           |                              | 26,068 |            |         |   | 64,990 |           
|                                  | Earnings related to investments in foreign
    affiliates |                              |        | 904        |         |   |        | 5,549      |        
|                                  | Interest income                                           |                              |        | 1,179      |         |   |        | 914        |        
|                                  | Interest expense                                          |                              |        | (6,383     | )       |   |        | (7,488     | )      
|                                  |                                                           |                              |        |            |         |   |        |           
|Total other expense               |                                                           |                              | (4,300 | )          |         |   | (1,025 | )         
|                                  |                                                           |                              |        |            |         |   |        |           
|Income before income taxes        |                                                           |                              | 21,768 |            |         |   | 63,965 |           
|Provision for income taxes        |                                                           |                              | 2,750  |            |         |   | 25,586 |           
|                                  |                                                           |                              |        |            |         |   |        |           
|Net income                        |                                                           | $                            | 19,018 |            |         | $ | 38,379 |           
|                                  |                                                           |                              |        |            |         |   |        |           
|Earnings per common share-basic   |                                                           | $                            | 0.37   |            |         | $ | 0.74   |           
|                                  |                                                           |                              |        |            |         |   |        |           
|                                  | Weighted average common shares outstanding                |                              |        | 50,997,154 |         |   |        | 51,730,313 |        
|Earnings per common share-diluted |                                                           | $                            | 0.36   |            |         | $ | 0.73   |           
|                                  |                                                           |                              |        |            |         |   |        |           
|                                  | Weighted average common shares outstanding                |                              |        | 52,721,048 |         |   |        | 52,652,524 |        

See accompanying notes.

3



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##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS


OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)


(In thousands)


|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------ | --- | ---------- |  | ------------ | ------- | -------- |  | ------------- | ---- | ----- |  | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                  |  |        |     |            |  |              |         |          |  | Accumulated   |      |      
|                                                                                  |  |        |     | Additional |  |              |         |          |  | Other         |      |      
|                                                                                  |  | Common |     | Paid-In    |  | Deferred     |         | Retained |  | Comprehensive |      |      
|                                                                                  |  | Stock  |     | Capital    |  | Compensation |         | Deficit  |  | (Loss)/Gain   |      | Total
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |      
|Balance, December 31, 2002                                                        |  | $      | 517 |            |  | $            | 177,740 |          |  | $             | (547 | )     |  | $ | (194,952 | ) |  | $ | (12,463 | ) |  | $ | (29,705 | )
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                       |  |        |    |            |  |              |        |          |  |               | 20   |       |  |   |         |   |  |   |        |   |  |   | 20      |  
|Exercise of stock options                                                         |  |        | 1   |            |  |              | 478     |          |  |               |     |       |  |   |         |   |  |   |        |   |  |   | 479     |  
|Net foreign currency translation                                                  |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 601     |   |  |   | 601     |  
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 1,565   |   |  |   | 1,565   |  
|Net income for the quarter ended March 31,
    2003                               |  |        |    |            |  |              |        |          |  |               |     |       |  |   | 38,379   |   |  |   |        |   |  |   | 38,379  |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                                        |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 40,545  |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Balance, March 31, 2003                                                           |  | $      | 518 |            |  | $            | 178,218 |          |  | $             | (527 | )     |  | $ | (156,573 | ) |  | $ | (10,297 | ) |  | $ | 11,339  |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  

See accompanying notes.

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                            |                                                             |                    |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------ | ------- | ------- | - | - | ------- | ------- | -
|                                                                                            |                                                             |                   
|                                                                                            |                                                             | Three months ended
|                                                                                            |                                                             | March 31,         
|                                                                                            |                                                             |                   
|                                                                                            |                                                             | 2002               |         | 2003   
|                                                                                            |                                                             |                    |         |        
|Operating activities                                                                        |                                                             |                    |         |         |   |   |         |        
|Net income                                                                                  |                                                             | $                  | 19,018  |         |   | $ | 38,379  |        
|Adjustments to reconcile net income to cash (used
    in) provided by operating activities: |                                                             |                    |         |         |   |   |         |        
|                                                                                            | Depreciation                                                |                    |         | 4,907   |   |   |         | 6,472   |  
|                                                                                            | Amortization of software                                    |                    |         | 1,388   |   |   |         | 1,200   |  
|                                                                                            | Amortization of other intangibles                           |                    |         | 1,174   |   |   |         | 3,295   |  
|                                                                                            | Amortization of financing costs                             |                    |         | 680     |   |   |         | 775     |  
|                                                                                            | Net loss from early extinguishment of debt                  |                    |         | 242     |   |   |         |        |  
|                                                                                            | Deferred tax provision                                      |                    |         |        |   |   |         | 23,710  |  
|Changes in assets and liabilities:                                                          |                                                             |                    |         |         |   |   |         |        
|                                                                                            | Trade receivables                                           |                    |         | (27,891 | ) |   |         | 25,316  |  
|                                                                                            | Inventories                                                 |                    |         | (13,605 | ) |   |         | 673     |  
|                                                                                            | Other assets                                                |                    |         | 532     |   |   |         | 13,038  |  
|                                                                                            | Prepaid pension and postretirement benefit cost             |                    |         | (403    | ) |   |         | (857    | )
|                                                                                            | Accounts payable, trade and other                           |                    |         | (14,014 | ) |   |         | (17,255 | )
|                                                                                            | Advanced payments                                           |                    |         | 33,227  |   |   |         | 870     |  
|                                                                                            | Accrued and other liabilities                               |                    |         | (18,044 | ) |   |         | (47,350 | )
|                                                                                            | Accrued pension and postretirement benefit cost             |                    |         | 963     |   |   |         | 2,312   |  
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|Cash (used in) provided by operating activities                                             |                                                             |                    | (11,826 | )       |   |   | 50,578  |        
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|                                                                                           
|Investing activities                                                                        |                                                             |                    |         |         |   |   |         |        
|                                                                                            | Capital expenditures                                        |                    |         | (2,346  | ) |   |         | (3,401  | )
|                                                                                            | Purchase of Cell ITS, net of $0.2 million
    cash acquired |                    |         | (4,135  | ) |   |         |        |  
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|                                                                                            | Cash used in investing activities                           |                    |         | (6,481  | ) |   |         | (3,401  | )
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|                                                                                           
|Financing activities                                                                        |                                                             |                    |         |         |   |   |         |        
|                                                                                            | Payments on long-term debt                                  |                    |         | (8,306  | ) |   |         |        |  
|                                                                                            | Proceeds from sale of common stock                          |                    |         | 659     |   |   |         | 479     |  
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|Cash (used in) provided by financing activities                                             |                                                             |                    | (7,647  | )       |   |   | 479     |        
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|Effect of exchange rate changes on cash                                                     |                                                             |                    | 2,716   |         |   |   | 1,302   |        
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|(Decrease) increase in cash and cash equivalents                                            |                                                             |                    | (23,238 | )       |   |   | 48,958  |        
|Cash and cash equivalents, beginning of year                                                |                                                             |                    | 90,535  |         |   |   | 106,802 |        
|                                                                                            |                                                             |                    |         |         |   |   |         |        
|Cash and cash equivalents, end of period                                                    |                                                             | $                  | 67,297  |         |   | $ | 155,760 |        
|                                                                                            |                                                             |                    |         |         |   |   |         |        

See accompanying notes.

5



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##### 



UNITED DEFENSE INDUSTRIES, INC.



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


March 31, 2003


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, 2002 presented in this quarterly report has
been derived from the audited financial statements of United
Defense Industries, Inc., but does not include all the
associated disclosures 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 our financial position as of March 31, 2003
and the results of operations and cash flows for the three
months ended March 31, 2002 and 2003. The results of
operations are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003.
These unaudited consolidated financial statements should be read
in conjunction with the financial statements and the notes
thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2002.

2.     Summary of
Significant Accounting Principles

Stock-Based
Compensation

On December 31, 2002, the Financial
Accounting Standards Board issued FASB Statement No. 148,
Accounting for Stock-Based Compensation  Transition
and Disclosure. Statement 148 amends FASB Statement
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for companies electing to adopt Statement 123s fair value
method of accounting for stock-based employee compensation.
Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. The disclosure
provisions of Statement 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of
Statement 123 or the intrinsic value method of APB Opinion
No. 25.

At March 31, 2003, we had a stock-based
employee compensation plan, which is described more fully in our
Form 10K for the year ended December 31, 2002. We
account for the plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations.
Accordingly, we record compensation expense over the vesting
period in our consolidated statements of operations if the
option price is less than fair value of the common stock at the
date an option is granted. The compensation recorded in the
financial statements reflects the amortization based on vesting
of stock options. The following table illustrates the effect on
net income and earnings per share if we had applied the fair
value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to
stock-based employee compensation.

|                                                                                                                                                    |  |                       |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                    |  |                      
|                                                                                                                                                    |  | Three months ended   
|                                                                                                                                                    |  | March 31,            
|                                                                                                                                                    |  |                      
|                                                                                                                                                    |  | 2002                  |        | 2003
|                                                                                                                                                    |  |                       |        |     
|                                                                                                                                                    |  |                      
|                                                                                                                                                    |  | (In thousands, except
|                                                                                                                                                    |  | per share data)      
|Net income, as reported                                                                                                                             |  | $                     | 19,018 |      |  | $ | 38,379 |  
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |  |                       | 15     |      |  |   | 12     |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |                       | (220   | )    |  |   | (1,049 | )
|                                                                                                                                                    |  |                       |        |      |  |   |        |  
|Pro forma net income                                                                                                                                |  | $                     | 18,813 |      |  | $ | 37,342 |  
|                                                                                                                                                    |  |                       |        |      |  |   |        |  

6



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                    |                       |                       |   |      |  |  |   |      | 
|------------------- | --------------------- | --------------------- | - | ---- |  |  | - | ---- | 
|                    |                       |                      
|                    |                       | Three months ended   
|                    |                       | March 31,            
|                    |                       |                      
|                    |                       | 2002                  |   | 2003
|                    |                       |                       |   |     
|                    |                       |                      
|                    |                       | (In thousands, except
|                    |                       | per share data)      
|Earnings per share: |                       |                       |   |      |  |  |   |     
|                    | Basic  as reported   |                       | $ | 0.37 |  |  | $ | 0.74 | 
|                    |                       |                       |   |      |  |  |   |     
|                    | Basic  pro forma     |                       | $ | 0.37 |  |  | $ | 0.72 | 
|                    |                       |                       |   |      |  |  |   |     
|                    | Diluted  as reported |                       | $ | 0.36 |  |  | $ | 0.73 | 
|                    |                       |                       |   |      |  |  |   |     
|                    | Diluted  pro forma   |                       | $ | 0.36 |  |  | $ | 0.71 | 
|                    |                       |                       |   |      |  |  |   |     

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

In January 2003, we granted new stock options to
purchase 2,200,500 common shares that vest over three years at
an exercise price of $23.15, which resulted in no additional
compensation expense. There were no options granted in 2002.

New
Accounting Pronouncements

In April 2002, the FASB issued Statement
No. 145 (FAS 145), Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. FAS 145 which became effective
January 31, 2003 rescinds Statement 4, which required all
gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of
the related income tax effect. As a result, the criteria in APB
30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, now will be used to classify those gains and
losses. Under APB 30, gains and losses on early extinguishment
of debt would only be classified as extraordinary if the
extinguishment is considered unusual and infrequent.

For the three months ended March 31, 2002
the loss on extinguishment of debt of $242,000 that was
previously reported as an extraordinary item was reclassified to
income before extraordinary item (interest expense).

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

3.     Investments in
Affiliated Companies

Our investment in our 51% owned foreign joint
venture in Turkey, FNSS Savunma Sistemleri A.S. is accounted for
using the equity method because we do not control it due to our
partners veto rights over most operating decisions. We
have the ability to exercise influence over its operating and
financial policies. We also had a 51% interest in a joint
venture in Saudi Arabia, United Defense Systems
(UDS) which we also accounted for using the equity
method for the same reason. Our share of the earnings related to
our

7



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

investments was $0.9 million and
$5.5 million for the three months ended March 31, 2002 and
2003, respectively. In view of the declining scale and prospects
of UDS, we entered into an agreement in March 2002 with our
Saudi Arabian joint venture partner to sell our 51% interest.
The sale was finalized in March 2003 for $405,000 and did not
result to a significant gain or loss. Beginning in March 1,
2002 we discontinued recording our share of earnings from this
joint venture because, per the terms of the sale agreement, we
are no longer entitled to such earnings as of that date.

The following table, which summarizes financial
information for these joint ventures, reports results from the
joint venture in Turkey for the three months of each year and
Saudi Arabia only through February of 2002.

|              |  |                    |        |      |  |   |        | 
|------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|              |  |                   
|              |  | Three months ended
|              |  | March 31,         
|              |  |                   
|              |  | 2002               |        | 2003
|              |  |                    |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 26,880 |      |  | $ | 41,853 | 
|Cost of Sales |  |                    | 14,912 |      |  |   | 20,380 | 
|Net Income    |  |                    | 4,424  |      |  |   | 9,258  | 

4.     Comprehensive
Income

Comprehensive income was $25.4 million and
$40.5 million for the three-month periods ended
March 31, 2002 and 2003, respectively. Comprehensive income
consists primarily of net income ($19.0 million and
$38.4 million for the three month periods ended
March 31, 2002 and 2003, respectively), net foreign
currency translation adjustments and fair value adjustments of
foreign currency and interest rate hedges, net of taxes.

5.     Long-term
Debt

In August 2001, we entered into a credit facility
with various banks that included $600 million of term loan
facilities and a $200 million revolving credit facility. On
July 2, 2002 we amended the credit facility to borrow an
additional $300 million for the purchase of United States
Marine Repair, Inc. (USMR).

Outstanding borrowings on the term loan
facilities were $590 million at March 31, 2003. The
facilities bear interest at variable rates with a weighted
average rate of 3.56% at March 31, 2003. These loans are
due through 2009 and provide for quarterly principal and
interest payments. No principal payments were due in the first
quarter of 2003.

6.     Pension and
Other Post Retirement Benefits

At December 31, 2002, we revised the
discount rate assumption used in the determination of net
pension and post retirement costs and benefit obligations from
7% to 6.5%. On January 1, 2003 we revised the rate of
return assumption used for the actuarial estimates of these
benefit programs from 9% to 8.5%. The impact of these two
changes is estimated to result in an increase in pension and
post-retirement benefit costs for the full year 2003 of
approximately $7.0 million compared with the estimated 2003
expense if the changes in assumptions had not been made.

7.     Commitments
and Contingencies

Termination
Claims

The Crusader program commenced in 1994 to develop
for the U.S. Army an integrated and extensively automated
two-vehicle artillery system consisting of a 155mm,
self-propelled howitzer and a resupply vehicle. Since inception
of the program, we have been the sole-source prime contractor
for its design and development. The Armys plan called for
fielding of 480 Crusader systems, but in May 2002 the Secretary
of Defense

8



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

announced the termination of the program. The
Army gave us formal notice of termination on August 7,
2002, and we have since continued to receive Army funding to
accomplish an orderly closeout of Crusader activities and to
transition key Crusader technologies to the NLOS-C program. To
date, the Crusader termination has resulted in a reduction to
our workforce of approximately 180 employees. Through the period
ended March 31, 2003, we incurred and invoiced the U.S.
Government for $25.7 million of termination costs, the
majority of which was collected in 2002 and the balance received
in the first quarter of 2003. In order to complete the Crusader
termination process, we will need to negotiate a final
settlement with the Army, and expect to submit our settlement
proposal in August 2003.

Legal
Proceedings

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

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

Environmental
Matters

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

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consists of Allowable Costs. As of March 31,
2003, we had accrued approximately $27 million to cover any
investigation and/or remediation costs that may not be Allowable
Costs under U.S. Government contracts. The amount accrued is
based on reasonable estimates, although there is a possibility
that amounts in excess of amounts accrued may be incurred. The
amount accrued is stated on an undiscounted basis. The most
significant of the estimated liabilities are related to ongoing
remediation efforts. Pursuant to a demand from the California
Water Quality Control Board, we are completing a study of
sedimentary contamination in San Diego Bay for the purpose of
establishing clean-up criteria for future remediation work. Once
definitive clean-up criteria are established we expect that we
will be required to begin remediation procedures with respect to
the contamination. We anticipate that the total costs associated
with the remediation phase will range from $6 million to
$9 million, of which $8.5 million has been

9



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accrued, although it is conceivable that costs
could be as high as $40 million if the most stringent
clean-up standard were to be adopted. Up to $8.9 million of
such remediation cost, to the extent the costs are not recovered
on USMRs government contracts or from other responsible
parties, may be recoverable from USMRs former
shareholders, under an escrow arrangement established in 1997
when the San Diego operation was acquired by USMR. Also a
further $15 million escrow fund was established in our 2002
acquisition of USMR, which may be available in respect of
USMRs sediment exposure.

Pursuant to the terms of the 1997 acquisition of
United Defense, L.P., FMC Corporation and Harsco Corporation
(collectively, the Sellers) are required to
reimburse us for 75% of certain remediation costs that are
Non-Allowable Costs through the year 2007 for environmental
losses we have previously identified to the Sellers.
Accordingly, we have recorded a receivable for $1.5 million for
which we expect to be reimbursed by the Sellers over
approximately the next 5 years under the terms of the 1997
acquisition agreement.

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

8.     United States
Marine Repair Acquisition

Effective July 2, 2002, we completed the
acquisition of 100% of the outstanding stock of USMR from The
Carlyle Group for $305.4 million (net of $7.3 million of
acquired cash), including the repayment of approximately
$105 million of USMR debt. We incurred an additional $1.5
million of transaction costs related to the acquisition. The
acquisition of USMR balances and diversifies our portfolio,
gives us a strategic growth platform and expands our mission to
support the U.S. Navy with superior technology and services. As
a result of the transaction, USMR is now a wholly owned
subsidiary. The transaction was accounted for as a purchase. We
financed the acquisition with cash on hand and by amending our
credit facility to borrow an additional $300 million. In
connection with the purchase of USMR, we received
indemnification for pre-existing environmental liabilities and
other matters, which indemnification is limited to an escrow
account that currently contains approximately $15 million.
Additionally, we acquired with USMR an escrow-backed
indemnification right of $8.9 million pertaining to
potential claims which USMR may have against certain third
parties. We began to consolidate the results of operations of
USMR as of the effective date of the acquisition.

10



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following are our unaudited pro forma
consolidated results of operations, assuming the USMR
acquisition occurred at the beginning of each period presented.

|              |                                     |                    |         |      |  |   |         |      | 
|------------- | ----------------------------------- | ------------------ | ------- | ---- |  | - | ------- | ---- | 
|              |                                     |                   
|              |                                     | Three months ended
|              |                                     | March 31,         
|              |                                     |                   
|              |                                     | 2002               |         | 2003
|              |                                     |                    |         |     
|Sales         |                                     | $                  | 474,234 |      |  | $ | 466,523 |     
|Cost of Sales |                                     |                    | 395,618 |      |  |   | 362,583 |     
|Net Income    |                                     |                    | 21,514  |      |  |   | 38,379  |     
|              | Earnings per common share  basic   |                    | $       | 0.42 |  |   | $       | 0.74 | 
|              | Earnings per common share  diluted |                    | $       | 0.41 |  |   | $       | 0.73 | 

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

Goodwill of $240.3 million resulting from
the USMR acquisition was assigned to the Ship Repair and
Maintenance segment. Goodwill of $101.6 million resulting from
all previous acquisitions was assigned to the Defense Systems
segment.

9.     Earnings Per
Share

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

The new stock options to purchase 2,200,500
common shares that were granted in January 2003 were not
included in the computation of diluted earnings per share
because to do so would have been antidilutive for the period
ended March 31, 2003.

|                                                                         |  |                       |        |      |  |   |        | 
|------------------------------------------------------------------------ |  | --------------------- | ------ | ---- |  | - | ------ | 
|                                                                         |  |                      
|                                                                         |  | Three months ended   
|                                                                         |  | March 31,            
|                                                                         |  |                      
|                                                                         |  | 2002                  |        | 2003
|                                                                         |  |                       |        |     
|                                                                         |  |                      
|                                                                         |  | (In thousands, except
|                                                                         |  | per share data)      
|Net income                                                               |  | $                     | 19,018 |      |  | $ | 38,379 | 
|                                                                         |  |                       |        |      |  |   |        | 
|Average common shares outstanding:                                       |  |                       |        |      |  |   |        | 
|Average common shares outstanding for basic
    computations             |  |                       | 50,997 |      |  |   | 51,730 | 
|Dilutive stock options-based on the treasury
    stock method            |  |                       | 1,724  |      |  |   | 923    | 
|                                                                         |  |                       |        |      |  |   |        | 
|Average number of common shares outstanding for
    diluted computations |  |                       | 52,721 |      |  |   | 52,653 | 
|                                                                         |  |                       |        |      |  |   |        | 
|Earnings per share:                                                      |  |                       |        |      |  |   |        | 
|Earnings per share  basic                                               |  | $                     | 0.37   |      |  | $ | 0.74   | 
|                                                                         |  |                       |        |      |  |   |        | 
|Earnings per share  diluted                                             |  | $                     | 0.36   |      |  | $ | 0.73   | 
|                                                                         |  |                       |        |      |  |   |        | 

10.     Information
on Business Segments

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

11



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summary financial data for each of our business
segments for three-month periods ended March 31, 2002 and
2003 follow:

|                                  |                                        |                    |        |         |   |   |        |         |  
|--------------------------------- | -------------------------------------- | ------------------ | ------ | ------- | - | - | ------ | ------- | -
|                                  |                                        |                   
|                                  |                                        | Three months ended
|                                  |                                        | March 31,         
|                                  |                                        |                   
|                                  |                                        | 2002               |        | 2003   
|                                  |                                        |                    |        |        
|                                  |                                        |                   
|                                  |                                        | (In thousands)    
|Sales:                            |                                        |                    |        |         |   |   |        |        
|                                  | Defense Systems                        |                    | $      | 356,443 |   |   | $      | 340,583 |  
|                                  | Ship Repair and Maintenance            |                    |        |        |   |   |        | 125,940 |  
|                                  |                                        |                    |        |         |   |   |        |        
|                                  | Total sales                            |                    |        | 356,443 |   |   |        | 466,523 |  
|Income before interest and taxes: |                                        |                    |        |         |   |   |        |        
|                                  | Defense Systems                        |                    |        | 30,261  |   |   |        | 66,966  |  
|                                  | Ship Repair and Maintenance            |                    |        |        |   |   |        | 7,370   |  
|                                  | Corporate                              |                    |        | (3,289  | ) |   |        | (3,797  | )
|                                  |                                        |                    |        |         |   |   |        |        
|                                  | Total income before interest and taxes |                    |        | 26,972  |   |   |        | 70,539  |  
|Interest, net                     |                                        |                    | (5,204 | )       |   |   | (6,574 | )      
|                                  |                                        |                    |        |         |   |   |        |        
|Income before income taxes        |                                        | $                  | 21,768 |         |   | $ | 63,965 |        
|                                  |                                        |                    |        |         |   |   |        |        

|                  |                             |              |   |           |  |  |   |           | 
|----------------- | --------------------------- | ------------ | - | --------- |  |  | - | --------- | 
|                  |                             | December 31, |   | March 31,
|                  |                             | 2002         |   | 2003     
|                  |                             |              |   |          
|Total assets: (a) |                             |              |   |           |  |  |   |          
|                  | Defense Systems             |              | $ | 884,261   |  |  | $ | 836,790   | 
|                  | Ship Repair and Maintenance |              |   | 421,300   |  |  |   | 421,630   | 
|                  | Corporate and eliminations  |              |   | 148,409   |  |  |   | 175,281   | 
|                  |                             |              |   |           |  |  |   |          
|                  | Total assets                |              | $ | 1,453,970 |  |  | $ | 1,433,701 | 
|                  |                             |              |   |           |  |  |   |          



---



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

11.     Income
Taxes

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

The provision for income taxes for the
three-month period ended March 31, 2003 was
$25.6 million, which increased by $22.8 million from
the same period in 2002 primarily due to higher taxable income
and to the utilization of net operating loss carryforwards in
2002 to substantially offset income tax expense. The provision
for income taxes in 2003 more closely reflects underlying
statutory tax rates as a result of the reversal of the valuation
allowance against net operating loss carryforwards and other
deferred tax assets in 2002.

12.     Related Party
Transactions

Investment funds sponsored by The Carlyle Group
(Carlyle) continue to own a significant portion of
our common shares. Individuals affiliated with Carlyle are
expected to continue to influence our operations.

12



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We have entered into agreements with four
affiliates of our principal stockholders whereby we have agreed
to designate one nominee to our board of directors on behalf of
each of these entities. These agreements will remain in effect
so long as Carlyle owns greater than 20% of our voting stock.

In accordance with the management agreement
between United Defense Industries and Carlyle, we incurred a fee
of $500,000 for various management services provided by Carlyle
for the quarter ended March 31, 2003.

We have entered into an agreement with CPU
Technology, Inc. (CPU/ T) to purchase approximately
$1.4 million in component and design services regarding
electronic subsystems for the Bradley program. Certain Carlyle
affiliates are minority stockholders of CPU/ T and collectively
have the right to appoint two of the six members of CPU/
Ts board.

We recognized $1.2 million and
$8.6 million of royalties, license fees and technical
service fees during the three-month periods ended March 31,
2002 and 2003, respectively, from our Turkish joint venture.

13



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##### 





|        |                                                                                                                   
|------- | ------------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of the Results of Operations and Financial Condition 
    March 31, 2003

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 realization of
sales from our backlog, include forward-looking statements
within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Statements that are
predictive in nature, that depend upon or refer to future events
or conditions, or that include words such as
expects, anticipates,
intends, plans, believes,
estimates and similar expressions are
forward-looking statements. Although these statements are based
upon assumptions we consider reasonable, they are subject to
risks and uncertainties that are described more fully below and
in our annual report on Form 10-K for the year ended
December 31, 2002. Accordingly, we can give no assurance
that we will achieve the results anticipated or implied by our
forward-looking statements.

Overview

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

The Carlyle Group formed United Defense
Industries, Inc. in October 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. In July 2002 we acquired USMR from The Carlyle Group.

Our results of operations, particularly revenue,
gross profits and cash flows, vary significantly from period to
period, depending largely upon the timing of our delivery of
finished products, the terms of our contracts and our level of
export sales. As a result, period-to-period comparisons may show
substantial changes disproportionate to our underlying business
activity. Period to period comparisons are also affected by
acquisitions where the results of operations for the acquired
business are included in our results only for periods subsequent
to the date of acquisition. This is the case for the July 2002
acquisition of USMR.

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototypes, and some other matters are typically
cost-plus arrangements under which we are reimbursed for
approved costs and also receive a fee. Our production contracts
are typically fixed-price arrangements under which we assume the
risk of cost overruns and receive the benefit of cost savings.
Our repair and maintenance contracts are a mix of fixed-price
and cost-plus arrangements with a recent trend toward cost-plus.
All of our DoD contracts, whether we are the prime contractor or
a subcontractor, are subject to audit and cost controls. As a
result, the DoD 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 use different techniques for estimating and
recording revenues depending on the type and characteristics of
the contract. Sales are recognized on most fixed-price
production contracts when the risks and rewards of ownership
have been transferred to the customer. For our DoD production
contracts, those criteria are typically met when the manufacture
of the product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. Gross margin on each unit delivered or accepted is
recognized

14



---



##### 



based on an estimate of the margin that will be
realized over the life of the related contract. We evaluate
estimates of gross margin on production contracts and recognize
changes in estimates of gross margins during the period in which
those changes are determined. Sales under fixed-price ship
repair and maintenance contracts are recognized using the
percentage of completion method. Under this percentage of
completion method, contract costs are expensed as incurred and
sales are recognized simultaneously based on the ratio of direct
labor inputs and other costs incurred to date compared to
estimated total direct labor inputs and total costs. Sales under
cost reimbursement contracts for research, engineering,
prototypes, ship repair and maintenance and certain other
contracts are recorded as costs are incurred and include
estimated fees in the proportion that costs incurred to date
bear to total estimated costs. We charge any anticipated losses
on a contract to operations as soon as those losses are
determined.


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 $2.2 billion
as of March 31, 2003, a substantial majority of which was
derived from sole-source, prime contracts. Approximately 80% of
our sales for the three months ended March 31, 2003 were to
the U.S. government, primarily to agencies of the DoD (excluding
Foreign Military Sales), or through subcontracts with other
government contractors.

There were no material changes to our major
programs from those described in our Form 10-K Report for
the year ended December 31, 2002, other than normal
additional funding as new contracts are negotiated and awarded.

Business Segments, Products and
Programs

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

|                                |                                         |                    |       |      |  |   |       |      | 
|------------------------------- | --------------------------------------- | ------------------ | ----- | ---- |  | - | ----- | ---- | 
|                                |                                         |                   
|                                |                                         | Three months ended
|                                |                                         | March 31,         
|                                |                                         | (in millions)     
|                                |                                         |                   
|                                |                                         | 2002               |       | 2003
|                                |                                         |                    |       |     
|Defense Systems:                |                                         |                    |       |      |  |   |       |     
|                                | Bradley Family of Vehicles              |                    | $     | 75.9 |  |   | $     | 89.8 | 
|                                | Naval Ordnance                          |                    |       | 52.6 |  |   |       | 43.9 | 
|                                | Vertical Launch System                  |                    |       | 31.2 |  |   |       | 22.0 | 
|                                | Combat, Engineering & Recovery Vehicles |                    |       | 29.6 |  |   |       | 39.4 | 
|                                | Artillery Systems (a)                   |                    |       | 86.6 |  |   |       | 51.7 | 
|                                | Assault Amphibious Vehicles             |                    |       | 13.1 |  |   |       | 29.7 | 
|                                | Other                                   |                    |       | 67.4 |  |   |       | 64.1 | 
|                                |                                         |                    |       |      |  |   |       |     
|Total Defense Systems           |                                         |                    | 356.4 |      |  |   | 340.6 |     
|Ship Repair and Maintenance (b) |                                         |                    |      |      |  |   | 125.9 |     
|                                |                                         |                    |       |      |  |   |       |     
|Total                           |                                         | $                  | 356.4 |      |  | $ | 466.5 |     
|                                |                                         |                    |       |      |  |   |       |     



---



|    |                                                              
|--- | -------------------------------------------------------------
|(a) | Includes Crusader, FCS/ NLOS-C, and M109 Howitzer
    systems
|   
|(b) | Includes ship repair and maintenance activities
    at USMR  

For a more detailed description of our business
and principal operating programs, see our Form 10-K for the
year ended December 31, 2002.

15



---



##### 



Results of Operations



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

Revenue for the three months ended March 31,
2003 of $466.5 million was $110.1 million (30.9%)
higher than the $356.4 million for the comparable period in
2002. This increase is attributable to inclusion of revenue of
$125.9 million in 2003 resulting from the acquisition of USMR on
July 2, 2002. Revenue for the Defense Systems segment was
$340.6 and $356.4 million in the three-month periods ended
March 31, 2003 and 2002, respectively. In our Defense
Systems segment, Bradley sales in the quarter of
$89.8 million were $14 million higher than the same
period in 2002 due to the timing of the Armys A3 upgrade
fielding schedule and Assault Amphibious Vehicle sales of
$29.7 million grew by $16.6 million as we continued to
ramp up deliveries to Italy. Artillery Systems revenue was
$34.9 million lower in the transition from Crusader to the
Future Combat Systems NLOS-C, and revenue from Vertical
Launching Systems was down approximately $10.0 million due
to timing of launcher deliveries.



| |             
| | ------------
| | Gross profit

Gross profit of $103.9 million in the
three-month period ended March 31, 2003 was
$44.1 million (73%) higher than the $59.8 million for
the corresponding period in 2002. This increase was partially
attributable to the acquisition of USMR on July 2, 2002 and
the resulting inclusion of $15.2 million in the 2003 period.
Gross profit as a percentage of sales for the three months ended
March 31, 2003 was 22.3% compared to 16.8% for the same
period in 2002. The Defense Systems segments gross profit
rate for the three months ended March 31, 2003 and 2002 was
26% and 16.8%, respectively. The higher gross profit rate in
2003 was due to an $8.7 million award fee in 2003 for the Future
Combat Systems NLOS-C contract and a $1.2 million award fee
in 2003 for the DD(X) Advanced Gun System contract versus no
award fee for either in 2002, higher royalty payments from our
foreign affiliate in Turkey, and favorable profit adjustments on
several production contracts. The Ship Repair and Maintenance
segments gross profit rate was 12.1% for the three months
ended March 31, 2003.



| |                                                 
| | ------------------------------------------------
| | Selling, general and administrative
    expenses

Selling, general and administrative expenses for
the three months ended March 31, 2003 were
$37.0 million, or 31.8% higher than the $28.1 million
for the same period in 2002. The increase was due primarily to
the inclusion of $7.9 million of United States Marine
Repairs general and administrative expenses in 2003 versus
no expenses in 2002 since the acquisition was not completed
until July of 2002.



| |                         
| | ------------------------
| | Research and development

Research and development costs were
$1.9 million for the three months ended March 31, 2003
compared with $5.6 million for the corresponding prior
period. The decrease was primarily associated with 2002 spending
on projects in preparation for the Armys Future Combat
Systems program and higher 2002 spending on projects related to
the Advanced Gun System and Advanced Vertical Launch System for
the Navys DD(X) destroyer.



| |                                 
| | --------------------------------
| | Earnings from foreign affiliates

Earnings from foreign affiliates of
$5.5 million for the three months ended March 31, 2003
was $4.6 million higher than the same period last year. The
higher earnings in 2003 were a result of higher vehicle sales at
our Turkish joint venture.



| |                 
| | ----------------
| | Interest expense

Net interest expense was $6.6 million in the
three months ended March 31, 2003 compared with
$5.2 million in the same period in 2002. The higher
interest expense in 2003 was due to the increased debt level
from the acquisition of USMR offset slightly by the effect of a
lower interest rate on our variable rate debt in 2003.

16



---



##### 





| |                           
| | --------------------------
| | Provision for Income Taxes

The provision for income taxes for the
three-month period ended March 31, 2003 was
$25.6 million compared with $2.8 million for the same
prior period. This $22.8 million increase was primarily due
to higher taxable income and the utilization of net operating
loss carryforwards in 2002 to substantially offset income tax
expense. The provision for income taxes in 2003 is based on an
estimated annual effective income tax rate and more closely
reflects underlying statutory tax rates as a result of the
reversal of the valuation allowance against net operating loss
carryforwards and other deferred tax assets in 2002.



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

As a result of the foregoing factors, we had a
net income of $38.4 million in the three months ended
March 31, 2003, compared with $19.0 million in the
prior period.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$50.6 million for the three-month period ended
March 31, 2003 compared with cash usage of $11.8 million in
the same period in 2002, a $62.4 million increase. The
primary reasons for the significant increase were
$19.4 million in higher net income, very favorable
collections of accounts receivable, and receipt of a
$16.0 million, net of taxes, earnings distribution from our
joint venture in Turkey.

Cash used in investing activities was
$3.4 million for the three-month period ended
March 31, 2003 compared with $6.5 million in the prior
year period. The purchase of Cell ITS AB for $4.1 million
in the 2002 period more than offset the inclusion of USMR
capital expenditures in 2003. Expenditures for manufacturing,
ship repair, and computer equipment and software primarily
represent the capital expenditure component of cash used for
investing activities.

Cash provided by financing activities was
$0.5 million for the three-month period ended
March 31, 2003, compared with $7.6 million of cash
usage in the same period in 2002. Debt repaid in the first
quarter of 2002 was $8.3 million compared to $0 in the same
period in 2003. There were no scheduled principal payments on
our senior credit facility for the three months ended
March 31, 2003.

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.

17



---



##### 





|        |                                                                                
|------- | -------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk  March 31, 2003

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

Forward Currency Exchange Risk

We conduct some of our operations outside the
U.S. in functional currencies other than the U.S. dollar. To
mitigate the risk associated with fluctuating currencies on
short-term and long-term foreign currency-denominated
transactions, we enter into foreign currency forward exchange
contracts. We do not enter into foreign currency forward
exchange contracts for trading purposes. The following table
provides information with respect to significant contracts at
March 31, 2003. 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
|                                         |                                   | 2003                             |   | 2004  |  | 2005 |   | Total  |  | Value
|                                         |                                   |                                  |   |       |  |      |   |        |  |      
|                                         |                                   |                                 
|                                         |                                   | (U.S. $ equivalent in thousands)
|Receive Swedish krona/pay euros          |                                   |                                  |   |       |  |      |   |        |  |       |   |        |  |  |   |        |  |  |   |       
|                                         | Contract amount                   |                                  | $ | 3,342 |  |      | $ | 3,342  |  |       | $ |       |  |  | $ | 6,684  |  |  | $ | 6,548  | 
|                                         | Average contractual exchange rate |                                  |   | 9.54  |  |      |   | 9.54   |  |       |   |       |  |  |   | 9.54   |  |  |   |        | 
|Receive Swedish krona/pay British pounds |                                   |                                  |   |       |  |      |   |        |  |       |   |        |  |  |   |        |  |  |   |       
|                                         | Contract amount                   |                                  | $ |      |  |      | $ |       |  |       | $ | 15,434 |  |  | $ | 15,434 |  |  | $ | 15,002 | 
|                                         | Average contractual exchange rate |                                  |   |       |  |      |   |       |  |       |   | 13.47  |  |  |   | 13.47  |  |  |   |        | 
|Receive U.S. dollars/pay euros           |                                   |                                  |   |       |  |      |   |        |  |       |   |        |  |  |   |        |  |  |   |       
|                                         | Contract amount                   |                                  | $ |      |  |      | $ | 22,700 |  |       | $ |       |  |  | $ | 22,700 |  |  | $ | 21,968 | 
|                                         | Average contractual exchange rate |                                  |   |       |  |      |   | 1.05   |  |       |   |       |  |  |   | 1.05   |  |  |   |        | 

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 March 30,
2003 was 3.56%.

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. 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%. USMR had also entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings. The notional amount of the agreement
is $20 million with a maturity date of January 29,
2004. The agreement entitles us to pay base interest rate of
3.77% in return for the right to receive a floating interest
rate that is based on three month LIBOR as of each quarterly
measurement date. The net cash amounts paid or received on these
agreements are accrued and recognized as an adjustment to
interest expense.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our reports under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can
provide only

18



---



##### 



reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, we have investments in
certain unconsolidated entities. As we do not control or manage
these entities, our disclosure controls and procedures with
respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated
subsidiaries.


Within the 90-day period prior to the filing of
this report, an evaluation was performed under the supervision
and with the participation of United Defense Industries, Inc.
management, including our principal executive officer and our
principal financial officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, our
management, including our principal executive officer and our
principal financial officer, concluded that the design and
operation of these disclosure controls and procedures were
effective. No significant changes were made in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.

19



---



##### 



PART II

OTHER INFORMATION

March 31, 2003

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 us.

Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

None

20



---



##### 



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: May 2, 2003

21



---



##### 



CERTIFICATIONS

Certification of Chief Executive Officer and
Director

I, Thomas W. Rabaut, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of United Defense Industries, Inc.;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or
persons performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 2, 2003



| |                               
| | ------------------------------
| | /s/ THOMAS W. RABAUT          
| |                               
| | Title: Chief Executive Officer

22



---



##### 



Certification of Vice President, Chief
Financial Officer and Director

I, Francis Raborn, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of United Defense Industries, Inc.;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or
persons performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 2, 2003



| |                                     
| | ------------------------------------
| | /s/ FRANCIS RABORN                  
| |                                     
| | Title: Vice President,              
| | Chief Financial Officer and Director

23