##### 









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:     September 30, 2002 | Commission File No. 001-16821



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UNITED DEFENSE INDUSTRIES, INC.

(Exact name of Registrant as specified in its
charter)


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



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1525 Wilson Boulevard,
Suite 700,

Arlington, Virginia, 22209-2411


(703) 312-6100


(Address and telephone number of principal
executive offices of


Registrant and each Co-Registrant)




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

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

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

None


Indicate by check mark
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 October 31, 2002, the aggregate market
value of the common stock held by non-affiliates of the
registrant was $605,651,798 based on the closing price of $22.89
per share on the New York Stock Exchange on such date.

Common Stock, $.01 par value 51,662,214 Shares
Outstanding as of October 31, 2002



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UNITED DEFENSE INDUSTRIES, INC.

INDEX

|                                   |  |                                                                                                                                |    |      |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                   |  |                                                                                                                                |    | Page
|                                   |  |                                                                                                                                |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Unaudited Consolidated Financial
    Statements  United Defense Industries, Inc.                                              |    |      | 2  | 
|                                   |  | Consolidated Balance Sheets as of December 31,
    2001 and September 30, 2002 (unaudited)                                     |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months and nine months ended September 30, 2001
    and 2002 |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statement of Changes in
    Stockholders Deficit for the nine months ended September
    30, 2002      |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the nine months ended September 30, 2001 and 2002                      |    |      | 5  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements                                                                       |    |      | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis of the
    Results of Operations and Financial Condition                                  |    |      | 11 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                 |    |      | 19 | 
|Item 4.                            |  | Controls and Procedures                                                                                                        |    |      | 20 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                              |    |      | 21 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                               |    |      | 21 | 
|Signature                          |  |                                                                                                                                | 22 |     
|Certifications                     |  |                                                                                                                                | 23 |     

1



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##### 



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |           |         | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | --------- | ------------------ | ------- | - | --------- | --------- | ------- | 
|                                                |                                                                                                                                                                                | December 31, 2001         |           | September 30, 2002
|                                                |                                                                                                                                                                                |                           |           |                   
|                                                |                                                                                                                                                                                |                           |           | (Unaudited)       
|ASSETS                                         
|Current assets:                                 |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                | Cash and cash equivalents                                                                                                                                                      |                           | $         | 90,535             |         |   | $         | 54,770    |        
|                                                | Trade receivables                                                                                                                                                              |                           |           | 78,387             |         |   |           | 188,533   |        
|                                                | Long-term contract inventories                                                                                                                                                 |                           |           | 374,435            |         |   |           | 366,793   |        
|                                                | Other current assets                                                                                                                                                           |                           |           | 14,406             |         |   |           | 15,137    |        
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                |                                                                                                                                                                                | Total current assets      |           |                    | 557,763 |   |           |           | 625,233 | 
|Property, plant and equipment, net              |                                                                                                                                                                                |                           | 90,352    |                    |         |   | 169,182   |          
|Goodwill, net                                   |                                                                                                                                                                                |                           | 97,582    |                    |         |   | 336,702   |          
|Intangible assets, net                          |                                                                                                                                                                                |                           | 8,327     |                    |         |   | 33,527    |          
|Prepaid pension and postretirement benefit cost |                                                                                                                                                                                |                           | 127,828   |                    |         |   | 130,013   |          
|Restricted cash                                 |                                                                                                                                                                                |                           | 14,950    |                    |         |   | 16,617    |          
|Other assets                                    |                                                                                                                                                                                |                           | 21,758    |                    |         |   | 32,735    |          
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|Total assets                                    |                                                                                                                                                                                | $                         | 918,560   |                    |         | $ | 1,344,009 |          
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|LIABILITIES AND STOCKHOLDERS
    DEFICIT      
|Current liabilities:                            |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                | Current portion of long-term debt                                                                                                                                              |                           | $         | 8,307              |         |   | $         | 6,100     |        
|                                                | Accounts payable, trade and other                                                                                                                                              |                           |           | 88,273             |         |   |           | 87,835    |        
|                                                | Advanced payments                                                                                                                                                              |                           |           | 394,771            |         |   |           | 469,136   |        
|                                                | Accrued and other liabilities                                                                                                                                                  |                           |           | 111,166            |         |   |           | 113,788   |        
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                |                                                                                                                                                                                | Total current liabilities |           |                    | 602,517 |   |           |           | 676,859 | 
|                                               
|Long-term liabilities:                          |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                | Long-term debt, net of current portion                                                                                                                                         |                           |           | 422,593            |         |   |           | 633,900   |        
|                                                | Accrued pension and postretirement benefit cost                                                                                                                                |                           |           | 22,487             |         |   |           | 30,290    |        
|                                                | Other liabilities                                                                                                                                                              |                           |           | 37,329             |         |   |           | 71,144    |        
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|Total liabilities                               |                                                                                                                                                                                |                           | 1,084,926 |                    |         |   | 1,412,193 |          
|                                               
|Commitments and contingencies (Note 6)          |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|Stockholders deficit:                          |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                | Common stock $.01 par value, 150,000,000 shares
    authorized; 50,915,689 and 51,638,664 issued and outstanding at
    December 31, 2001 and September 30, 2002, respectively |                           |           | 509                |         |   |           | 516       |        
|                                                | Additional paid-in-capital                                                                                                                                                     |                           |           | 167,457            |         |   |           | 170,731   |        
|                                                | Deferred compensation                                                                                                                                                          |                           |           | (648               | )       |   |           | (572      | )      
|                                                | Retained deficit                                                                                                                                                               |                           |           | (329,528           | )       |   |           | (238,133  | )      
|                                                | Accumulated other comprehensive loss                                                                                                                                           |                           |           | (4,156             | )       |   |           | (726      | )      
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                | Total stockholders deficit                                                                                                                                                    |                           |           | (166,366           | )       |   |           | (68,184   | )      
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          
|                                                | Total liabilities and stockholders deficit                                                                                                                                    |                           | $         | 918,560            |         |   | $         | 1,344,009 |        
|                                                |                                                                                                                                                                                |                           |           |                    |         |   |           |          

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 |         | Nine months ended
|                                                                    |                                                                  | September 30,      |         | September 30,    
|                                                                    |                                                                  |                    |         |                  
|                                                                    |                                                                  | 2001               |         | 2002              |         | 2001 |         | 2002      
|                                                                    |                                                                  |                    |         |                   |         |      |         |           
|Revenue:                                                            |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Sales                                                            |                    | $       | 275,055           |         |      | $       | 529,701    |         |   | $       | 913,863    |         |   | $       | 1,204,182  |          
|Costs and expenses:                                                 |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Cost of sales                                                    |                    |         | 215,448           |         |      |         | 426,976    |         |   |         | 728,836    |         |   |         | 971,672    |          
|                                                                    | Selling, general and administrative expenses                     |                    |         | 52,589            |         |      |         | 37,528     |         |   |         | 131,140    |         |   |         | 98,013     |          
|                                                                    | Research and development                                         |                    |         | 6,810             |         |      |         | 7,640      |         |   |         | 16,418     |         |   |         | 22,854     |          
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    |                                                                  | Total expenses     |         |                   | 274,847 |      |         |            | 472,144 |   |         |            | 876,394 |   |         |            | 1,092,539 | 
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|Income from operations                                              |                                                                  |                    | 208     |                   |         |      | 57,557  |            |         |   | 37,469  |            |         |   | 111,643 |           
|Other income (expense):                                             |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Earnings (loss) related to investments in
    foreign affiliates |                    |         | 9,205             |         |      |         | (561       | )       |   |         | 9,187      |         |   |         | 6,652      |          
|                                                                    | Interest income                                                  |                    |         | 1,874             |         |      |         | 1,188      |         |   |         | 4,621      |         |   |         | 3,346      |          
|                                                                    | Interest expense                                                 |                    |         | (6,735            | )       |      |         | (10,994    | )       |   |         | (19,215    | )       |   |         | (23,387    | )        
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|Total other income (expense)                                        |                                                                  |                    | 4,344   |                   |         |      | (10,367 | )          |         |   | (5,407  | )          |         |   | (13,389 | )         
|Income before income taxes                                          |                                                                  |                    | 4,552   |                   |         |      | 47,190  |            |         |   | 32,062  |            |         |   | 98,254  |           
|Provision for income taxes                                          |                                                                  |                    | 12      |                   |         |      | 493     |            |         |   | 6,682   |            |         |   | 5,000   |           
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|Income before extraordinary item                                    |                                                                  |                    | 4,540   |                   |         |      | 46,697  |            |         |   | 25,380  |            |         |   | 93,254  |           
|Extraordinary item  net loss from
    early extinguishment of debt |                                                                  |                    | (22,599 | )                 |         |      | (1,617  | )          |         |   | (22,599 | )          |         |   | (1,859  | )         
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|Net (loss) income                                                   |                                                                  | $                  | (18,059 | )                 |         | $    | 45,080  |            |         | $ | 2,781   |            |         | $ | 91,395  |           
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|Earnings per common share  basic:                                  |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Income before extraordinary item                                 |                    | $       | 0.11              |         |      | $       | 0.91       |         |   | $       | 0.62       |         |   | $       | 1.82       |          
|                                                                    | Extraordinary item                                               |                    |         | (0.55             | )       |      |         | (0.03      | )       |   |         | (0.55      | )       |   |         | (0.04      | )        
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Net (loss) income                                                |                    | $       | (0.44             | )       |      | $       | 0.88       |         |   | $       | 0.07       |         |   | $       | 1.78       |          
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Weighted average common shares outstanding                       |                    |         | 40,739,551        |         |      |         | 51,513,743 |         |   |         | 40,684,041 |         |   |         | 51,239,233 |          
|Earnings per common share  diluted:                                |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Income before extraordinary item                                 |                    | $       | 0.11              |         |      | $       | 0.88       |         |   | $       | 0.59       |         |   | $       | 1.77       |          
|                                                                    | Extraordinary item                                               |                    |         | (0.53             | )       |      |         | (0.03      | )       |   |         | (0.53      | )       |   |         | (0.04      | )        
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Net (loss) income                                                |                    | $       | (0.42             | )       |      | $       | 0.85       |         |   | $       | 0.06       |         |   | $       | 1.73       |          
|                                                                    |                                                                  |                    |         |                   |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                    | Weighted average common shares outstanding                       |                    |         | 42,713,856        |         |      |         | 52,759,182 |         |   |         | 42,754,430 |         |   |         | 52,706,671 |          

See accompanying notes.

3



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS DEFICIT

(In thousands)


|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------ | --- | ---------- |  | ------------ | ------- | -------- |  | ------------- | ---- | ----- |  | - | -------- | - |  | - | ------ | - |  | - | -------- | -
|                                                                      |  |        |     |            |  |              |         |          |  | Accumulated   |      |      
|                                                                      |  |        |     | Additional |  |              |         |          |  | Other         |      |      
|                                                                      |  | Common |     | Paid-In    |  | Deferred     |         | Retained |  | Comprehensive |      |      
|                                                                      |  | Stock  |     | Capital    |  | Compensation |         | Deficit  |  | (Loss)/Gain   |      | Total
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |      
|Balance, December 31, 2001                                            |  | $      | 509 |            |  | $            | 167,457 |          |  | $             | (648 | )     |  | $ | (329,528 | ) |  | $ | (4,156 | ) |  | $ | (166,366 | )
|Amortization of deferred stock compensation                           |  |        |    |            |  |              |        |          |  |               | 76   |       |  |   |         |   |  |   |       |   |  |   | 76       |  
|Exercise of options                                                   |  |        | 7   |            |  |              | 3,274   |          |  |               |     |       |  |   |         |   |  |   |       |   |  |   | 3,281    |  
|Net foreign currency translation                                      |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 6,312  |   |  |   | 6,312    |  
|Change in fair value of foreign currency and
    interest rate hedges |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   | (2,882 | ) |  |   | (2,882   | )
|Net income for the nine months ended
    September 30, 2002           |  |        |     |            |  |              |         |          |  |               |      |       |  |   | 91,395   |   |  |   |        |   |  |   | 91,395   |  
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  
|Total comprehensive income                                            |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   | 94,825   |  
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  
|Balance, September 30, 2002                                           |  | $      | 516 |            |  | $            | 170,731 |          |  | $             | (572 | )     |  | $ | (238,133 | ) |  | $ | (726   | ) |  | $ | (68,184  | )
|                                                                      |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |        |   |  |   |          |  

See accompanying notes.

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOW

(In thousands)


|                                                                                  |                                                                                              |                   |         |          |   |   |          |          |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------- | ------- | -------- | - | - | -------- | -------- | -
|                                                                                  |                                                                                              |                  
|                                                                                  |                                                                                              | Nine months ended
|                                                                                  |                                                                                              | September 30,    
|                                                                                  |                                                                                              |                  
|                                                                                  |                                                                                              | 2001              |         | 2002    
|                                                                                  |                                                                                              |                   |         |         
|Operating activities                                                              |                                                                                              |                   |         |          |   |   |          |         
|Net income                                                                        |                                                                                              | $                 | 2,781   |          |   | $ | 91,395   |         
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                                                              |                   |         |          |   |   |          |         
|                                                                                  | Depreciation                                                                                 |                   |         | 16,086   |   |   |          | 17,664   |  
|                                                                                  | Amortization of software                                                                     |                   |         | 4,698    |   |   |          | 4,131    |  
|                                                                                  | Amortization of intangible assets                                                            |                   |         | 32,249   |   |   |          | 6,444    |  
|                                                                                  | Amortization of financing costs                                                              |                   |         | 3,183    |   |   |          | 2,481    |  
|                                                                                  | Extraordinary loss from write-off of financing
    costs due to early extinguishment of debt |                   |         | 4,525    |   |   |          | 1,859    |  
|                                                                                  | Extraordinary loss from payment of premium on
    retirement of subordinated debt            |                   |         | 18,074   |   |   |          |         |  
|                                                                                  | Non-cash compensation                                                                        |                   |         |         |   |   |          | 76       |  
|Changes in assets and liabilities:                                                |                                                                                              |                   |         |          |   |   |          |         
|                                                                                  | Trade receivables                                                                            |                   |         | (9,724   | ) |   |          | (53,827  | )
|                                                                                  | Inventories                                                                                  |                   |         | (88,945  | ) |   |          | 19,845   |  
|                                                                                  | Other assets                                                                                 |                   |         | 3,695    |   |   |          | (6,296   | )
|                                                                                  | Prepaid pension and postretirement benefit cost                                              |                   |         | (3,584   | ) |   |          | (2,185   | )
|                                                                                  | Accounts payable, trade and other                                                            |                   |         | 895      |   |   |          | (10,184  | )
|                                                                                  | Advanced payments                                                                            |                   |         | 53,575   |   |   |          | 44,321   |  
|                                                                                  | Accrued and other liabilities                                                                |                   |         | (13,981  | ) |   |          | (35,334  | )
|                                                                                  | Accrued pension and postretirement benefit cost                                              |                   |         | (6,576   | ) |   |          | (4,665   | )
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Cash provided by operating activities                                             |                                                                                              |                   | 16,951  |          |   |   | 75,725   |         
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Investing activities                                                              |                                                                                              |                   |         |          |   |   |          |         
|                                                                                  | Capital expenditures                                                                         |                   |         | (13,318  | ) |   |          | (13,174  | )
|                                                                                  | Purchase of Cell ITS, net of $0.2 million
    cash acquired                                  |                   |         |         |   |   |          | (4,135   | )
|                                                                                  | Purchase of USMR, net of $7.3 million cash
    acquired                                      |                   |         |         |   |   |          | (307,404 | )
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Cash used in investing activities                                                 |                                                                                              |                   | (13,318 | )        |   |   | (324,713 | )       
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Financing activities                                                              |                                                                                              |                   |         |          |   |   |          |         
|                                                                                  | Payments on long-term debt                                                                   |                   |         | (269,577 | ) |   |          | (90,900  | )
|                                                                                  | Proceeds from senior secured facility                                                        |                   |         | 600,000  |   |   |          | 300,000  |  
|                                                                                  | Payment of premium on retirement of subordinated
    debt                                    |                   |         | (18,074  | ) |   |          |         |  
|                                                                                  | Proceeds from sale of common stock                                                           |                   |         | 698      |   |   |          | 3,281    |  
|                                                                                  | Payment of stockholders loans                                                               |                   |         | 1,236    |   |   |          |         |  
|                                                                                  | Dividend payments                                                                            |                   |         | (289,703 | ) |   |          |         |  
|                                                                                  | Payments for financing and transaction cost                                                  |                   |         | (19,222  | ) |   |          | (5,470   | )
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Cash provided by financing activities                                             |                                                                                              |                   | 5,358   |          |   |   | 206,911  |         
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Effect of exchange rate changes on cash and
    marketable securities             |                                                                                              |                   | (2,108  | )        |   |   | 6,312    |         
|Increase (decrease) in cash and marketable
    securities                         |                                                                                              |                   | 6,883   |          |   |   | (35,765  | )       
|Cash and cash equivalents, beginning of year                                      |                                                                                              |                   | 113,357 |          |   |   | 90,535   |         
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         
|Cash and cash equivalents, end of period                                          |                                                                                              | $                 | 120,240 |          |   | $ | 54,770   |         
|                                                                                  |                                                                                              |                   |         |          |   |   |          |         

See accompanying notes.

5



---



##### 



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2002


1.     Basis of
Presentation

The financial information presented as of any
date other than December 31 has been prepared from the
books and records without audit. Financial information presented
as of December 31, 2001 has been derived from the audited
financial statements of United Defense Industries, Inc. (the
Company), but does not include all the 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 the Companys financial position as of
September 30, 2002 and the results of its operations for
the three months and nine months ended September 30, 2001
and 2002, and cash flows for the nine months ended
September 30, 2001 and 2002. The results of operations are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2002. These unaudited
consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in
the Companys Annual Report on Form 10-K for the year
ended December 31, 2001 and the Companys Forms 10-Q
for the quarters ended March 31, 2002 and June 30,
2002.

2.     Changes in
Accounting Principles

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

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

|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |      | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------- | ------- | ----------------- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                          |                                           |                                       |         |                  
|                                          |                                           | Three Months Ended                    |         | Nine Months Ended
|                                          |                                           | September 30,                         |         | September 30,    
|                                          |                                           |                                       |         |                  
|                                          |                                           | 2001                                  |         | 2002              |  | 2001 |        | 2002
|                                          |                                           |                                       |         |                   |  |      |        |     
|                                          |                                           |                                      
|                                          |                                           | (In thousands, except per share data)
|Reported income before extraordinary item |                                           | $                                     | 4,540   |                   |  | $    | 46,697 |      |  | $ | 25,380 |      |  | $ | 93,254 |     
|Add back goodwill amortization            |                                           |                                       | 2,725   |                   |  |      |       |      |  |   | 7,133  |      |  |   |       |     
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|Adjusted income before extraordinary item |                                           | $                                     | 7,265   |                   |  | $    | 46,697 |      |  | $ | 32,513 |      |  | $ | 93,254 |     
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|Reported net (loss) income                |                                           | $                                     | (18,059 | )                 |  | $    | 45,080 |      |  | $ | 2,781  |      |  | $ | 91,395 |     
|Add back goodwill amortization            |                                           |                                       | 2,725   |                   |  |      |       |      |  |   | 7,133  |      |  |   |       |     
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|Adjusted net (loss) income                |                                           | $                                     | (15,334 | )                 |  | $    | 45,080 |      |  | $ | 9,914  |      |  | $ | 91,395 |     
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|Earnings per common share  basic:        |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|                                          | Reported income before extraordinary item |                                       | $       | 0.11              |  |      | $      | 0.91 |  |   | $      | 0.62 |  |   | $      | 1.82 | 
|                                          | Add back goodwill amortization            |                                       |         | 0.07              |  |      |        |     |  |   |        | 0.18 |  |   |        |     | 
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|                                          | Adjusted income before extraordinary item |                                       | $       | 0.18              |  |      | $      | 0.91 |  |   | $      | 0.80 |  |   | $      | 1.82 | 
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|Earnings per common share  diluted:      |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|                                          | Reported income before extraordinary item |                                       | $       | 0.11              |  |      | $      | 0.88 |  |   | $      | 0.59 |  |   | $      | 1.77 | 
|                                          | Add back goodwill amortization            |                                       |         | 0.06              |  |      |        |     |  |   |        | 0.17 |  |   |        |     | 
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     
|                                          | Adjusted income before extraordinary item |                                       | $       | 0.17              |  |      | $      | 0.88 |  |   | $      | 0.76 |  |   | $      | 1.77 | 
|                                          |                                           |                                       |         |                   |  |      |        |      |  |   |        |      |  |   |        |     

6



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |      | 
|------------------------------------ | ------------------------------ | ------------------------------------- | - | ----------------- | - | ---- | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                     |                                |                                       |   |                  
|                                     |                                | Three Months Ended                    |   | Nine Months Ended
|                                     |                                | September 30,                         |   | September 30,    
|                                     |                                |                                       |   |                  
|                                     |                                | 2001                                  |   | 2002              |   | 2001 |   | 2002
|                                     |                                |                                       |   |                   |   |      |   |     
|                                     |                                |                                      
|                                     |                                | (In thousands, except per share data)
|Earnings per common share  basic:   |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |     
|                                     | Reported net (loss) income     |                                       | $ | (0.44             | ) |      | $ | 0.88 |  |  | $ | 0.07 |  |  | $ | 1.78 | 
|                                     | Add back goodwill amortization |                                       |   | 0.06              |   |      |   |     |  |  |   | 0.17 |  |  |   |     | 
|                                     |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |     
|                                     | Adjusted net (loss) income     |                                       | $ | (0.38             | ) |      | $ | 0.88 |  |  | $ | 0.24 |  |  | $ | 1.78 | 
|                                     |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |     
|Earnings per common share  diluted: |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |     
|                                     | Reported net (loss) income     |                                       | $ | (0.42             | ) |      | $ | 0.85 |  |  | $ | 0.06 |  |  | $ | 1.73 | 
|                                     | Add back goodwill amortization |                                       |   | 0.06              |   |      |   |     |  |  |   | 0.17 |  |  |   |     | 
|                                     |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |     
|                                     | Adjusted net (loss) income     |                                       | $ | (0.36             | ) |      | $ | 0.85 |  |  | $ | 0.23 |  |  | $ | 1.73 | 
|                                     |                                |                                       |   |                   |   |      |   |      |  |  |   |      |  |  |   |     

The Company has completed the annual required
impairment test of goodwill as of October 1, 2002 and
determined that there is no impairment of goodwill.

In April 2002, the FASB issued Statement
No. 145 (FAS 145), Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. FAS 145 rescinds
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.

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

3.     Investments in
Affiliated Companies

The Companys investment in 51% owned
foreign joint ventures in Turkey and Saudi Arabia are accounted
for using the equity method because, although the Company does
not control them, it has the ability to exercise influence over
their operating and financial policies. Equity in earnings from
these investments, net of amounts paid to the joint venture
partner, was $9.2 million and $(0.6) million for the
three months ended September 30, 2001 and 2002 and
$9.2 million and $6.7 million for the nine months
ended September 30, 2001 and 2002, respectively. The
following table, which summarizes financial information for
these joint ventures, reports results from the joint venture in
Saudi Arabia only through February of 2002:

|              |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|              |  |                    |        |                  
|              |  | Three Months Ended |        | Nine Months Ended
|              |  | September 30,      |        | September 30,    
|              |  |                    |        |                  
|              |  | 2001               |        | 2002              |  | 2001 |        | 2002
|              |  |                    |        |                   |  |      |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 5,080  |                   |  | $    | 29,824 |      |  | $ | 54,365 |  |  | $ | 97,626 | 
|Cost of Sales |  |                    | 3,935  |                   |  |      | 15,098 |      |  |   | 34,512 |  |  |   | 50,139 | 
|Net Income    |  |                    | 18,052 |                   |  |      | 2,698  |      |  |   | 18,028 |  |  |   | 19,492 | 

7



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

4.     Comprehensive
Income (Loss)

Comprehensive income (loss) was
$40.8 million and ($17.8) million for the three-month
periods and $94.8 million and ($1.6) million for the
nine-month periods ended September 30, 2002 and September
2001, respectively. Comprehensive income consists primarily of
net income (loss) ($45.1 million and ($18.1) million
for the three-month periods and $91.4 million and
$2.8 million for the nine-month periods ended
September 30, 2002 and September 30, 2001,
respectively), foreign currency translation adjustments and fair
value adjustments for foreign currency hedges and interest rate
swaps.

5.     Long-term
Debt

In August 2001, the Company 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 the Company amended the credit
facility to borrow an additional $300 million for the
purchase of United States Marine Repair, Inc. (USMR)
(see Note 8).

Outstanding borrowings on the term loan
facilities were $640 million at September 30, 2002.
The facilities bear interest at variable rates with a weighted
average rate of 4.6% at September 30, 2002. These loans are
due through 2009 and provide for quarterly principal and
interest payments.

The Company made debt repayments under the credit
facility of $8.3 million on January 30, 2002 and
$82.6 million on September 30, 2002.

6.     Commitments
and Contingencies

Environmental
Matters

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

As with compliance costs, a significant portion
of the Companys expenditures for remediation of existing
contamination at its facilities consists of Allowable Costs. As
of September 30, 2002 the Company has accrued approximately
$19 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 Company does not believe
there are significant uncertainties affecting the estimated
liabilities or amounts that will be paid in the near term. The
most significant of the estimated liabilities is based on the
Companys experience related to ongoing remediation
efforts. Pursuant to a demand from the California Water Quality
Control Board, USMR is currently conducting a study analyzing
clean-up criteria for future remediation work regarding
sedimentary contamination in the San Diego Bay. Upon completion
of the study, USMR expects that it will be required to begin
remediation procedures with respect to the contamination. USMR
anticipates that the total costs associated with the remediation
phase may range from $2 million to $8 million. In
addition, pursuant to the

8



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

terms of the 1997 acquisition of UDLP by the
Carlyle Group, the Sellers in that transaction are required to
reimburse the Company for 75% of certain remediation costs that
are Non-Allowable Costs through the year 2007 for environmental
losses previously identified by the Company to the Sellers.
Accordingly, the Company has recorded a receivable for
$1.6 million for which it expects to be reimbursed over
approximately the next 5 years by the Sellers under the
terms of the acquisition agreement.

7.     Cell ITS
Acquisition

On March 26, 2002, the Company, through its
subsidiary, Bofors Defence, finalized the acquisition of 100% of
the outstanding stock of Cell ITS AB, a company incorporated
under the laws of Sweden and wholly owned by Cell Network AB.
Cell ITS specializes in interactive training and simulation. As
consideration for the purchase, the Company paid the former
owner, Cell Network AB, 45 million Swedish krona (SEK)
(approximately $4.3 million), of which 20 million SEK
was held in escrow as a lien for the fulfillment of certain
receivables. The transaction was accounted for as a purchase.
Accordingly, the financial statements reflect the results of
operations of Cell ITS from the date of acquisition.

8.     United States
Marine Repair Acquisition

Effective July 2, 2002, the Company
completed the acquisition of 100% of the outstanding stock of
USMR for $305.4 million including the repayment of
approximately $105 million of USMR debt. The Company
incurred an additional $2 million of transaction costs
related to the acquisition. As a result of the transaction, USMR
is now a wholly owned subsidiary of the Company. The transaction
was accounted for as a purchase. The Company financed the
acquisition with cash on hand and by amending its credit
facility to borrow an additional $300 million. In
connection with the purchase of USMR, the Company 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, the Company acquired with USMR an escrow-backed
indemnification right of $8.9 million pertaining to
potential environmental claims which USMR may have against
certain third parties. The Company began to consolidate the
results of operations of USMR as of the effective date of the
transaction.

USMR, based in Norfolk, Va., is the largest
provider of non-nuclear ship repair, modernization, overhaul and
conversion services to the U.S. Navy and related government
agencies. It provides a range of services from standard topside
ship repair to full dry-dock services at six strategically
located ship repair facilities in the ports of Norfolk,
Virginia; San Diego, San Francisco and San Pedro, California;
Pearl Harbor, Hawaii; and Ingleside, Texas. The acquisition of
USMR balances and diversifies the Companys portfolio,
gives the Company a strategic growth platform and expands its
mission to support the U.S. Navy with superior technology and
services.

9



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the preliminary
allocation of purchase price to the estimated fair values of the
assets acquired and liabilities assumed at the date of
USMRs acquisition.

|                                                                 |  |                 |         | 
|---------------------------------------------------------------- |  | --------------- | ------- | 
|                                                                 |  | At July 2, 2002
|                                                                 |  |                
|                                                                 |  | (In thousands) 
|Current assets                                                   |  | $               | 65,169  | 
|Property, plant and equipment                                    |  |                 | 86,911  | 
|Intangible asset: contract rights and customer
    relationships |  |                 | 29,527  | 
|Intangible asset: non-compete                                    |  |                 | 2,000   | 
|Goodwill                                                         |  |                 | 235,313 | 
|Other assets                                                     |  |                 | 5,354   | 
|                                                                 |  |                 |         | 
|Total assets                                                     |  |                 | 424,274 | 
|Current liabilities                                              |  |                 | 64,522  | 
|Long-term liabilities                                            |  |                 | 45,063  | 
|                                                                 |  |                 |         | 
|Total liabilities                                                |  |                 | 109,585 | 
|Net assets acquired                                              |  | $               | 314,689 | 
|                                                                 |  |                 |         | 

The $235.3 million of goodwill was assigned
to USMR. The stepped-up value over the historical net book value
of property and equipment was derived from an increase related
to land and improvements of $4.9 million and an increase
related to drydocks and piers of $15.9 million which are
being depreciated on a straight-line basis over the remaining
life of the assets, which averages approximately 18 years.
The identifiable intangible assets acquired include contract
rights and customer relationships ($29.5 million) and a
non-compete agreement ($2 million). These intangible assets
will be amortized over a period of 4 years, which
represents their estimated economic useful life. The contract
rights will be amortized based on when projected sales are
expected to occur and the non-compete agreement will be
amortized on a straight-line basis.

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

|                                 |                                     |                                       |         |                   |   |      |         |      |  |   |           |       |   |   |           |      | 
|-------------------------------- | ----------------------------------- | ------------------------------------- | ------- | ----------------- | - | ---- | ------- | ---- |  | - | --------- | ----- | - | - | --------- | ---- | 
|                                 |                                     |                                       |         |                  
|                                 |                                     | Three Months Ended                    |         | Nine Months Ended
|                                 |                                     | September 30,                         |         | September 30,    
|                                 |                                     |                                       |         |                  
|                                 |                                     | 2001                                  |         | 2002              |   | 2001 |         | 2002
|                                 |                                     |                                       |         |                   |   |      |         |     
|                                 |                                     |                                      
|                                 |                                     | (In thousands, except per share data)
|Sales                            |                                     | $                                     | 345,017 |                   |   | $    | 529,701 |      |  | $ | 1,147,090 |       |   | $ | 1,455,425 |     
|Cost of Sales                    |                                     |                                       | 271,896 |                   |   |      | 426,976 |      |  |   | 921,872   |       |   |   | 1,187,322 |     
|Income before extraordinary item |                                     |                                       | 3,917   |                   |   |      | 46,697  |      |  |   | 21,944    |       |   |   | 96,006    |     
|                                 | Earnings per common share  basic   |                                       | $       | 0.09              |   |      | $       | 0.91 |  |   | $         | 0.53  |   |   | $         | 1.87 | 
|                                 | Earnings per common share  diluted |                                       | $       | 0.09              |   |      | $       | 0.88 |  |   | $         | 0.51  |   |   | $         | 1.82 | 
|Net income (loss)                |                                     |                                       | (18,682 | )                 |   |      | 45,080  |      |  |   | (655      | )     |   |   | 94,147    |     
|                                 | Earnings per common share  basic   |                                       | $       | (0.46             | ) |      | $       | 0.88 |  |   | $         | (0.02 | ) |   | $         | 1.84 | 
|                                 | Earnings per common share  diluted |                                       | $       | (0.44             | ) |      | $       | 0.85 |  |   | $         | (0.02 | ) |   | $         | 1.79 | 

9.     Information on
Business Segments

With the acquisition of USMR, the Company now
operates 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. The Company uses earnings before interest and
taxes as the measure of financial performance for each segment.

10



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summary financial data for each of the
companys business segments for three-month and nine-month
periods ended September 30, 2001 and 2002 follow:

|                                  |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |           |  
|--------------------------------- | -------------------------------------- | ------------------ | ------ | ------------------ | - | ---- | ------ | ------- | - | - | ------- | ------- | - | - | ------- | --------- | -
|                                  |                                        |                    |        |                   
|                                  |                                        | Three months ended |        | Nine months ended 
|                                  |                                        | September 30,      |        | September 30, 2002
|                                  |                                        |                    |        |                   
|                                  |                                        | 2001               |        | 2002               |   | 2001 |        | 2002   
|                                  |                                        |                    |        |                    |   |      |        |        
|                                  |                                        |                   
|                                  |                                        | (In thousands)    
|Sales:                            |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Defense Systems                        |                    | $      | 275,055            |   |      | $      | 423,962 |   |   | $       | 913,863 |   |   | $       | 1,098,443 |  
|                                  | Ship Repair and Maintenance            |                    |        |                   |   |      |        | 105,739 |   |   |         |        |   |   |         | 105,739   |  
|                                  |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Total sales                            |                    |        | 275,055            |   |      |        | 529,701 |   |   |         | 913,863 |   |   |         | 1,204,182 |  
|Income before interest and taxes: |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Defense Systems                        |                    |        | 31,980             |   |      |        | 55,748  |   |   |         | 78,508  |   |   |         | 124,997   |  
|                                  | Ship Repair and Maintenance            |                    |        |                   |   |      |        | 6,860   |   |   |         |        |   |   |         | 6,860     |  
|                                  | Corporate                              |                    |        | (22,567            | ) |      |        | (5,612  | ) |   |         | (31,852 | ) |   |         | (13,562   | )
|                                  |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Total income before interest and taxes |                    |        | 9,413              |   |      |        | 56,996  |   |   |         | 46,656  |   |   |         | 118,295   |  
|Interest, net                     |                                        |                    | (4,861 | )                  |   |      | (9,806 | )       |   |   | (14,594 | )       |   |   | (20,041 | )        
|                                  |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |          
|Income before income taxes        |                                        | $                  | 4,552  |                    |   | $    | 47,190 |         |   | $ | 32,062  |         |   | $ | 98,254  |          
|                                  |                                        |                    |        |                    |   |      |        |         |   |   |         |         |   |   |         |          

|                  |                             |              |   |               |  |  |   |           | 
|----------------- | --------------------------- | ------------ | - | ------------- |  |  | - | --------- | 
|                  |                             | December 31, |   | September 30,
|                  |                             | 2001         |   | 2002         
|                  |                             |              |   |              
|Total assets: (a) |                             |              |   |               |  |  |   |          
|                  | Defense Systems             |              | $ | 811,530       |  |  | $ | 876,056   | 
|                  | Ship Repair and Maintenance |              |   |              |  |  |   | 395,883   | 
|                  | Corporate and eliminations  |              |   | 107,030       |  |  |   | 72,070    | 
|                  |                             |              |   |               |  |  |   |          
|                  | Total assets                |              | $ | 918,560       |  |  | $ | 1,344,009 | 
|                  |                             |              |   |               |  |  |   |          



---



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



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

Special Note Regarding Forward Looking
Statements

Our Form 10-Q disclosure and analysis
concerning our operations, cash flows and financial position,
including, in particular, the likelihood of our success in
developing and expanding our business and the 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 quarterly report on Form 10-Q for the quarter ended
June 30, 2002. Accordingly, we can give no assurance that
we will achieve the results anticipated or implied by our
forward-looking statements.

11



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Overview

United Defense is a leader in the design,
development and production of combat vehicles, artillery, naval
guns, missile launchers and precision munitions used by the U.S.
Department of Defense (DoD) and more than 40 foreign
militaries, and is the largest U.S. provider of non-nuclear ship
repair, modernization and conversion services to the 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, through our ship
repair facilities in Virginia, California, Hawaii and Texas,
through a manufacturing joint venture in Turkey, and through
co-production programs with various other governments and
foreign contractors.

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

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

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototypes, 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 recognize sales on fixed-price production
contracts when the risks and rewards of ownership have been
transferred to the customer. For our DoD production contracts,
those criteria are typically met when the manufacture of the
product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. However, under recent Bradley production
contracts, sales are not recognized until the U.S. Army fields
individual units because it is at that point that the risks and
rewards of ownership are transferred. This contractual provision
extends the period of time during which these vehicles are
carried as inventory and may result in an uneven distribution of
revenue from these contracts between periods. For our foreign
production contracts, sales are generally recorded upon shipment
of products to the customer, which corresponds to when the risks
and rewards of ownership transfer. We tend to deliver products
to our foreign customers in lots, which also results in an
inventory build-up pending delivery. For fixed-price repair and
maintenance contracts, we recognize sales under the percentage
of completion method based on the ratio of incurred cost to
estimated total costs. We record sales under cost-plus contracts
as costs are incurred and invoiced.

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

12



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periods and a periodic charge to earnings to
reflect changes in the costs of components of inventory. We
expense selling, general, administrative, and research and
development costs in the period incurred. The major components
of these costs include compensation, overhead and amortization
of intangibles.


We are a supplier of armored combat vehicles and
weapons delivery systems to the DoD and a number of allied
military forces worldwide. Our products include critical
elements of the U.S. militarys tactical force structure.
We had a firm funded backlog, including new and existing orders
at USMR, of approximately $2 billion as of
September 30, 2002, a substantial majority of which was
derived from sole-source, prime contracts. Approximately 80% of
our sales for the nine months ended September 30, 2002 were
to the U.S. government, primarily to agencies of the DoD
(excluding Foreign Military Sales), or through subcontracts with
other government contractors.

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

Army Artillery Development Programs

On May 8, 2002 the Secretary of Defense
announced the cancellation of the Crusader program. Crusader was
being developed as the U.S. Armys next generation
self-propelled artillery system, using an advanced technology,
155mm cannon. Since the inception of the Crusader program
in 1994, we have been the systems prime contractor, and in
recent years Crusader has been our largest weapon system
development program. During the nine months ended
September 30, 2002, the Crusader program provided 19.2%, or
$231.5 million, of our revenues. On August 7, 2002 the
Army issued to us notice that our Crusader contract was being
terminated for the convenience of the government.

Also on August 7, 2002, the Army issued to
us a preliminary prime contract to begin adapting key Crusader
technologies to a new cannon artillery system known as the
Non-Line-of-Sight Cannon (NLOS-C). NLOS-C would
provide a next generation, self-propelled, cannon-based field
artillery system as an element of the Armys Future Combat
Systems (discussed below). As such, NLOS-C is intended to be
substantially smaller and lighter in weight than the Crusader
system and may present significant technological and engineering
challenges if it is to be successfully developed. To date, the
Army has assigned $31 million in funding to our NLOS-C
contract.

Assuming that the NLOS-C program continues, it
will require substantial funding during the Governments
FY03 and subsequent budgetary years. The FY03 defense
appropriation law includes $368.5 million for NLOS-C. The
statute specifically requires that DoD plan to fully fund the
system and field it in the 2008 timeframe. We have not yet
ascertained the degree to which the FY03 appropriation will be
reflected in our NLOS-C contract, primarily because the
government offices, which administer weapons programs, typically
consume a portion of the appropriation for their own activities.

To date the Crusader termination and the NLOS-C
program are proceeding favorably. However, the ultimate impact
of the Crusader termination and the advent of NLOS-C upon our
revenues and profits is likely to depend upon several factors
including: (i) the level of continued military and
political support of the NLOS-C program in periods beyond FY03;
(ii) our continuing in the role of prime contractor on
NLOS-C; (iii) the level of our success in performing NLOS-C
program work contracted to us; and (iv) the pace at which
the NLOS-C program develops, given that the Crusader program was
at a relatively mature stage of development when funding levels
can be significantly higher than those at earlier stages of
development.

Future Combat Systems

The U.S. Army has undertaken the Future Combat
Systems (FCS) program as the means by which its
long-term combat force, known as the Objective Force, is to be
developed and produced. FCS is intended to provide an integrated
network of key battlefield components, including manned ground
combat vehicles, robotic elements, and command and control,
communications, intelligence, surveillance, and reconnaissance
systems. The FCS manned ground combat vehicle types are expected
to include infantry, artillery, command,

13



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and engineering vehicles, and would thus come
within areas in which the Company has established expertise and
historical record of engineering and production successes.


On March 7, 2002 the Army selected a
contractor team led by The Boeing Company to manage the initial
phase of the FCS program. The selection of Boeing exemplifies
what may be an emerging trend in U.S. military development and
procurement programs, in which the role of an overall integrator
of otherwise disparate battlefield systems (such as airborne
platforms, ground vehicles, etc.) is awarded to a major defense
contractor with large-scale systems integration expertise. The
effect of such a selection is to reduce the role of the Company
from that of a system prime contractor to that of a
subcontractor, albeit a potentially critical one.

Because of the announced scale and centrality of
the FCS program to the Armys mission, the Company accords
a very high priority to obtaining a substantial role in the
program. On July 3, 2002 Boeing awarded us an initial FCS
subcontract for approximately $1 million to study various
manned and unmanned combat vehicle platforms, subsystems, and
payloads. The Company is currently engaged in discussions with
Boeing and others in an effort to define the nature and scale of
our long-term role on FCS.

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

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

Ship Repair and Maintenance Services

USMR is the largest U.S. provider of non-nuclear
repair, overhaul, and conversion services for naval and other
vessels. Approximately 85% of USMRs revenue is derived
from work on ships owned by the U.S. Navy, Military Sealift
Command, and other federal agencies, such as the Maritime
Administration. The level of USMRs revenue is primarily
determined by (i) the size of the Navys surface ship
fleet, (ii) the level and rate of government funding for
Navy surface ship repair and modernization, (iii) the
nature and pace at which the Navy deploys such vessels, and
(iv) the degree to which USMR prevails in competitive Navy
procurements for shipyard work on its vessels. USMRs
business has benefited in recent years from having established
shipyard facilities in locations where the Navys surface
vessels are home ported, since the Navy prefers to have shipyard
work performed in such locations.

USMR is currently achieving record revenues. For
the nine months ended September 30, 2002, for example, USMR
had revenues of $357.0 million compared to
$233.2 million in the nine months ended September 30,
2001. Management believes that USMRs improved results in
the current year, which are likely to continue at least through
the end of the year, primarily reflect both USMRs success
in winning

14



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competitive procurements, and the Navys
accelerated operations schedule to return various of its vessels
to deployment-ready status.


Two current factors may, by contrast, tend to
reduce USMRs revenues and profits in 2003. First, the Navy
has announced plans to decommission certain vessels ahead of
schedule in order to free up funds otherwise associated with the
operation and maintenance of such vessels for new shipbuilding
and conversion projects. Such vessels include a number of
destroyers and amphibious ships which have historically
constituted an important portion of the vessel population
serviced by USMR. Second, to the extent that the Navy deploys
its surface task forces on an accelerated and sustained basis in
connection with potential operations in Iraq or elsewhere, such
vessels would not be available for shipyard work while such
deployments continue. Thus the Navys operational
deployment needs may tend, for example, to reduce USMRs
business in 2003, but potentially increase it thereafter.

Business Segments, Products and
Programs

With the acquisition of USMR, we now 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         |       | Nine Months Ended
|                                |                                         | September 30  |       | September 30     
|                                |                                         | (in millions) |       | (in millions)    
|                                |                                         |               |       |                  
|                                |                                         | 2001          |       | 2002              |  | 2001 |       | 2002 
|                                |                                         |               |       |                   |  |      |       |      
|Defense Systems:                |                                         |               |       |                   |  |      |       |       |  |   |       |       |  |   |         |      
|                                | Bradley Family of Vehicles              |               | $     | 42.5              |  |      | $     | 125.3 |  |   | $     | 193.0 |  |   | $       | 266.3 | 
|                                | Naval Ordnance                          |               |       | 45.7              |  |      |       | 55.9  |  |   |       | 141.8 |  |   |         | 140.7 | 
|                                | Vertical Launch System                  |               |       | 19.1              |  |      |       | 29.8  |  |   |       | 65.2  |  |   |         | 88.7  | 
|                                | Combat, Engineering & Recovery Vehicles |               |       | 22.6              |  |      |       | 45.7  |  |   |       | 69.7  |  |   |         | 112.9 | 
|                                | Artillery Systems (a)                   |               |       | 74.1              |  |      |       | 86.3  |  |   |       | 204.4 |  |   |         | 252.7 | 
|                                | Assault Amphibious Vehicles             |               |       | 13.1              |  |      |       | 22.9  |  |   |       | 47.7  |  |   |         | 42.8  | 
|                                | Other                                   |               |       | 58.0              |  |      |       | 58.1  |  |   |       | 192.1 |  |   |         | 194.4 | 
|                                |                                         |               |       |                   |  |      |       |       |  |   |       |       |  |   |         |      
|Total Defense Systems           |                                         |               | 275.1 |                   |  |      | 424.0 |       |  |   | 913.9 |       |  |   | 1,098.5 |      
|Ship Repair and Maintenance (b) |                                         |               |      |                   |  |      | 105.7 |       |  |   |      |       |  |   | 105.7   |      
|                                |                                         |               |       |                   |  |      |       |       |  |   |       |       |  |   |         |      
|Total                           |                                         | $             | 275.1 |                   |  | $    | 529.7 |       |  | $ | 913.9 |       |  | $ | 1,204.2 |      
|                                |                                         |               |       |                   |  |      |       |       |  |   |       |       |  |   |         |      



---



|    |                                                            
|--- | -----------------------------------------------------------
|(a) | Includes Crusader, 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 Form 10-K for the
year ended December 31, 2001.

Results of Operations

Revenue

Revenue for the three months ended
September 30, 2002 was $529.7 million, which was
$254.6 million or 92.6% higher than the $275.1 million
for the comparable period in 2001. Revenue for the nine months
ended September 30, 2002 of $1.2 billion increased by
$290.3 million, or 31.8%, from the comparable 2001 period.
The Ship Repair and Maintenance segment contributed
$105.7 million to the increases both for the quarter and
nine-month periods. Ship Repair and Maintenance was a newly
consolidated segment resulting from the acquisition of USMR on
July 2, 2002. Revenue for the Defense Systems segment was
$424.0 million

15



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and $275.1 million in the three-month
periods ended September 30, 2002 and 2001, respectively,
and $1.1 billion and $913.9 million in the nine-month
periods ended September 30, 2002 and 2001, respectively.
The increase in Defense Systems revenue for the three and nine
month periods was primarily due to higher deliveries of Bradley
Fighting Vehicles, shipment of recovery vehicles to the U.S. and
to Egypt under a co-production contract, shipment of the second
propulsor unit for the new Virginia class submarine, and
increased deliveries of VLS canisters. These increases in
Defense Systems were partially offset by fewer deliveries of
Assault Amphibious Vehicles and lower sales pertaining to the
Advanced Gun System program intended for use on the U.S.
Navys new DD(X) destroyer.


Gross
profit

The gross profit rate for the three months ended
September 30, 2002 was 19.4% compared to 21.7% for 2001.
For the nine-month periods ended September 30, 2002 and
2001 the gross profit rate was 19.3% and 20.2%, respectively.
The Defense Systems segment gross profit rate for the three
months ended September 30, 2002 and 2001 was 20.3% and
21.7%, respectively, and 19.7% and 20.2% for the nine months
ended September 30, 2002 and 2001, respectively. The lower
gross profit rates in 2002 for both three-month and nine-month
periods were due to a less profitable mix of contracts in 2002,
mainly the lower margin Crusader development program in the
Defense Systems segment. The Ship Repair and Maintenance segment
gross profit rate for the three months and nine months ended
September 30, 2002 was 15.7%.

Selling,
general and administrative expenses

Selling, general and administrative expenses for
the three months ended September 30, 2002 declined by 28.6%
to $37.5 million, compared with $52.6 million in the
prior period. Selling, general and administrative expenses were
$98 million for the nine months ended September 30,
2002, which declined $33.1 million, or 25%, from the prior
period. Decreases for the three and nine month periods in 2002
were attributable to lower amortization of intangible assets,
including goodwill, related to acquisitions and payment of
performance bonuses and consulting and management fees
associated with a recapitalization in 2001 in the Defense
Systems segment. These decreases were partially offset by an
increase from the inclusion of USMR this quarter.

Research
and development

Research and development costs were
$7.6 million for the three months ended September 30,
2002 compared with $6.8 million for the same prior period.
This increase was primarily associated with spending for
technologies that potentially can be used on Defense Systems
Future Combat Systems program. Research and development costs
increased $6.4 million to $22.9 million for the nine months
ended September 30, 2002. The increased spending was
associated with projects related to Advanced Gun System
development work for the DD(X) destroyer and technologies that
potentially can be used on the Defense System segment Future
Combat Systems program.

Earnings
(loss) from foreign affiliates

Our Defense Systems segment currently has joint
ventures in Turkey and Saudi Arabia (see Note 3.). Earnings
(loss) from foreign affiliates of ($0.6) million for the three
months ended September 30, 2002 was $9.8 million lower
than the same period last year. Earnings from foreign affiliates
were $6.7 million in the nine months ended
September 30, 2002, a decrease of $2.5 million from
$9.2 million in the same prior period. For the three-month and
nine-month periods in 2002 the decrease was primarily due to
higher earnings in 2001 from Defense Systems segment joint
venture in Turkey. The higher earnings in 2001 were a result of
the positive impact of $8.6 million from the joint venture
being able to liquidate its offset requirement. The earnings for
the nine months ended September 30, 2002 were below
expectations due to customer acceptance issues. These issues
have been addressed and should be resolved in the fourth quarter.

16



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Earnings
before interest and taxes (EBIT)

EBIT for the three months ended
September 30, 2002 was $57.0 million compared with
$9.4 million in the same prior period. EBIT for the nine
months ended September 30, 2002 was $118.3 million,
higher by $71.6 million than $46.7 million in the
comparable 2002 period. EBIT for Defense Systems was
$55.7 million and $32.0 million for the three months
ended September 30, 2002 and 2001, respectively, and
$125.0 million and $78.5 million for the nine months
ended September 30, 2002 and 2001, respectively. The
increase in Defense Systems EBIT for the three-month and
nine-month periods for 2002 was primarily due to higher profit
on increased sales, lower operating expenses due to not
amortizing goodwill in 2002 and lower amortization of other
intangible assets related to acquisitions, partially offset by
decreased earnings from foreign affiliates. EBIT for Ship Repair
and Maintenance was $6.9 million for the three and nine
month periods for 2002. Ship Repair and Maintenance includes the
operating results of USMR, a newly consolidated segment acquired
on July 2, 2002.

Interest
expense

Net interest expense was $9.8 million in the
three months ended September 30, 2002 compared with
$4.9 million in the same period in 2001. Net interest
expense was $20.0 million in the nine months ended
September 30, 2002 compared with $14.6 million in the
same prior period. The higher interest expense in 2002 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 2002.

Extraordinary
item

The extraordinary item was $1.6 million in
the three months ended September 30, 2002 compared with
$22.6 million in the comparable period last year. The
extraordinary item was $1.9 million in the nine months
ended September 30, 2002 compared with $22.6 million
in the comparable period last year. In 2001 we had a charge of
$22.6 million for the early liquidation of senior
subordinated notes. The $22.6 million consisted of an
$18.1 million tender premium paid to the debt holders and a
write-off of $4.5 million of unamortized financing costs.
The $1.6 million and $1.9 million extraordinary items
in the three and nine months ended September 30, 2002,
respectively were write-offs of unamortized financing costs for
early payment of debt.

Net
income

As a result of the foregoing factors, we had a
net income of $45.1 million in the three months ended
September 2002, compared with a loss of $18.1 million in
the prior period. For the nine months ended September 30,
2002 and 2001 we had net income of $91.4 million and
$2.8 million, respectively.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$75.7 million for the nine-month period ended
September 30, 2002 compared with $17.0 million in the
same period in 2001. The primary reasons for the increase in
2002 were net income plus non-cash amortization and
depreciation, which almost doubled over the prior year and
advance payments related to international contracts with Korea,
Italy, and Canada exceeding the inventory requirements for these
contracts.

Cash used in investing activities was
$324.7 million for the nine-month period ended
September 30, 2002, compared with $13.3 million in the
prior year period. The purchases of USMR and Cell ITS AB were
the reasons for this increase in investing activity in 2002 from
the prior period. Expenditures for manufacturing and computer
equipment and software primarily represent the capital
expenditure component of cash used for investing activities.

Cash provided by financing activities was
$206.9 million for the nine-month period ended
September 30, 2002, compared with $5.4 million during
the same period in 2001. On July 2, 2002 we amended our
credit facility to borrow an additional $300 million for
the purchase of USMR. This increase was partially offset by the
repayment of $90.9 million of debt during the nine-month
period. In the prior period the net cash provided

17



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was primarily the result of our August 2001
refinancing of $600 million, offset by principal repayments
on that debt of $269.6 million, by a distribution of
$289.7 million, and by refinancing costs of
$37.3 million.


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.

18



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##### 





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

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

Forward Currency Exchange Risk

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

|                                         |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |       | 
|---------------------------------------- | --------------------------------- | -------------------------------- | - | ----- |  | ---- | - | ----- |  | ----- | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                         |                                   |                                  |   |       |  |     
|                                         |                                   | Expected Maturity Date           |   |       |  |     
|                                         |                                   |                                  |   |       |  | Fair
|                                         |                                   | 2002                             |   | 2003  |  | 2004 |   | Total |  | Value
|                                         |                                   |                                  |   |       |  |      |   |       |  |      
|                                         |                                   |                                 
|                                         |                                   | (U.S. $ equivalent in thousands)
|Receive Swedish krona/pay U.S. dollars   |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ | 1,448 |  |      | $ |      |  |       | $ |      |  |  | $ | 1,448 |  |  | $ | 1,534 | 
|                                         | Average contractual exchange rate |                                  |   | 8.81  |  |      |   |      |  |       |   |      |  |  |   | 8.81  |  |  |   |       | 
|Receive British pounds/pay Swedish krona |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ | 3,474 |  |      | $ |      |  |       | $ |      |  |  | $ | 3,474 |  |  | $ | 3,569 | 
|                                         | Average contractual exchange rate |                                  |   | 14.15 |  |      |   |      |  |       |   |      |  |  |   | 14.15 |  |  |   |       | 
|Receive euro/pay Swedish krona           |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ | 1,057 |  |      | $ |      |  |       | $ |      |  |  | $ | 1,057 |  |  | $ | 1,046 | 
|                                         | Average contractual exchange rate |                                  |   | 9.24  |  |      |   |      |  |       |   |      |  |  |   | 9.24  |  |  |   |       | 
|Receive Swedish krona/pay euro           |                                   |                                  |   |       |  |      |   |       |  |       |   |       |  |  |   |       |  |  |   |      
|                                         | Contract amount                   |                                  | $ |      |  |      | $ | 3,053 |  |       | $ | 3,054 |  |  | $ | 6,107 |  |  | $ | 5,944 | 
|                                         | Average contractual exchange rate |                                  |   |       |  |      |   | 9.54  |  |       |   | 9.54  |  |  |   | 9.54  |  |  |   |       | 

Interest Rate Risk

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

In January 2002, we entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings under our senior secured credit
facility. The notional amount of this interest rate swap
agreement is $173 million. We entered into this agreement
as a hedge to manage interest costs and risks associated with
fluctuating interest rates. The agreement entitles us to pay a
base interest rate of 3.45%, in return for the right to receive
a floating interest rate which is based on three-month LIBOR as
of each quarterly measurement date. In the event the three-month
LIBOR at the measurement date exceeds 6%, the base interest rate
is adjusted to the then effective LIBOR up to a maximum of 8%.
The net cash amounts paid or received on the agreement are
accrued and recognized as an adjustment to interest expense. The
fair value of the interest rate swap agreement was ($5.3)
million and is included in other liabilities and accumulated
comprehensive loss in stockholders equity.

USMR had also entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings. The agreement entitles us to pay our
lenders at a fixed rate in return for the right to receive
variable interest at a rate approximating the underlying
variable rate of our debt, thereby creating the equivalent of a
fixed rate obligation. The net cash amounts paid or received on
the agreement are

19



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##### 



accrued and recognized as an adjustment to
interest expense. The following table summarizes the financial
terms of interest rate swap agreements as of September 30,
2002:


|               |     |            |  |                |       |                 |  |            |           |  |  |  |           |  |  |    |     |  
|-------------- | --- | ---------- |  | -------------- | ----- | --------------- |  | ---------- | --------- |  |  |  | --------- |  |  | -- | --- | -
|Notional Value |     | Fixed Rate |  | Effective Date |       | Expiration Date |  | Fair Value
|               |     |            |  |                |       |                 |  |           
|$              | 40M |            |  |                | 6.08% |                 |  |            | 3/10/2000 |  |  |  | 3/10/2003 |  |  | ($ | 0.9 | )
|$              | 20M |            |  |                | 3.77% |                 |  |            | 1/29/2002 |  |  |  | 1/20/2004 |  |  | ($ | 0.6 | )

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 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.

20



---



##### 



PART II



OTHER INFORMATION


September 30, 2002

Item 1.     Legal
Proceedings

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

Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits



| |      |                                                             
| | ---- | ------------------------------------------------------------
| | 10.1 | Amendment No. 1 to the United Defense Stock
    Option Plan.
|
| | 10.2 | Amendment No. 2 to the United Defense Stock
    Option Plan.

(b) Reports on Form 8-K

On July 17, 2002 the Company filed a report
on Form 8-K regarding the completion of its acquisition of
United States Marine Repair, Inc. (USMR).

On August 13, 2002, the Company filed a
report on Form 8-K setting forth the certifications
respectively provided by our Chief Executive and Chief Financial
Officers regarding the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 and
certain other Company reports under the Securities Exchange Act
of 1934.

On September 13, 2002 the Company filed a
report on Form 8-K, providing financial statements and pro
forma financial information reflecting the acquisition of USMR.

21



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##### 



SIGNATURE

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



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

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

Dated: November 14, 2002

22



---



##### 



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: November 14, 2002



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

23



---



##### 



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: November 14, 2002



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

24