##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




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FORM 10-Q

(Mark One)

þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2003

o   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the transition period
from                     to

Commission File Number: 001-16821

UNITED DEFENSE INDUSTRIES, INC.

(Exact Name of Registrant as Specified in its
charter)


|                                                         |  |                                  
|-------------------------------------------------------- |  | ---------------------------------
|Delaware                                                 |  | 52-2059782                       
|(State or other jurisdiction of
    incorporation)       |  | (IRS Employer Identification No.)
|                                                        
|1525 Wilson Boulevard, Suite 700
    Arlington, Virginia |  | 22209                            
|(Address of Principal Executive
    Offices)             |  | (Zip Code)                       



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(703) 312-6100

(Registrants telephone number, including
area code)


(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)

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

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

At July 18, 2003, there were 51,962,221
shares outstanding of the Registrants common stock, par
value $.01 per share.



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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, 2002 and June 30, 2003 (unaudited)                                         |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months and six months ended June 30, 2002 and
    2003      |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the six months ended
    June 30, 2003 |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the six months ended June 30, 2002 and 2003                           |    |      | 5  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements                                                                      |    |      | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis of the
    Results of Operations and Financial Condition                                 |    |      | 13 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                |    |      | 18 | 
|Item 4.                            |  | Controls and Procedures                                                                                                       |    |      | 18 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                             |    |      | 20 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                       |    |      | 20 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                              |    |      | 20 | 
|Signature                          |  |                                                                                                                               | 21 |     
|Certifications                     |  |                                                                                                                               | 22 |     

1



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##### 



UNITED DEFENSE INDUSTRIES, INC.



CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |           |         | 
|-------------------------------------------------------- | ------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ------------- | ------- | - | --------- | --------- | ------- | 
|                                                         |                                      | December 31, 2002                                                                                                                                                         |           | June 30, 2003
|                                                         |                                      |                                                                                                                                                                           |           |              
|                                                         |                                      |                                                                                                                                                                           |           | (Unaudited)  
|ASSETS                                                  
|Current assets:                                          |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         |                                      | Cash and cash equivalents                                                                                                                                                 |           | $             | 106,802 |   |           | $         | 187,856 | 
|                                                         |                                      | Trade receivables, net                                                                                                                                                    |           |               | 192,166 |   |           |           | 189,403 | 
|                                                         |                                      | Long-term contract inventories                                                                                                                                            |           |               | 399,189 |   |           |           | 337,010 | 
|                                                         |                                      | Deferred tax asset                                                                                                                                                        |           |               | 25,436  |   |           |           |        | 
|                                                         |                                      | Other current assets                                                                                                                                                      |           |               | 15,458  |   |           |           | 24,954  | 
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         | Total current assets                 |                                                                                                                                                                           |           | 739,051       |         |   |           | 739,223   |        
|Property, plant and equipment, net                       |                                      |                                                                                                                                                                           | 170,378   |               |         |   | 178,133   |          
|Goodwill, net                                            |                                      |                                                                                                                                                                           | 341,962   |               |         |   | 341,962   |          
|Intangible assets, net                                   |                                      |                                                                                                                                                                           | 32,624    |               |         |   | 26,058    |          
|Prepaid pension and postretirement benefit cost          |                                      |                                                                                                                                                                           | 120,987   |               |         |   | 123,137   |          
|Restricted cash                                          |                                      |                                                                                                                                                                           | 10,120    |               |         |   | 10,991    |          
|Other assets                                             |                                      |                                                                                                                                                                           | 38,848    |               |         |   | 28,128    |          
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|Total assets                                             |                                      | $                                                                                                                                                                         | 1,453,970 |               |         | $ | 1,447,632 |          
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)      
|Current liabilities:                                     |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         |                                      | Current portion of long-term debt                                                                                                                                         |           | $             | 13,011  |   |           | $         | 39,032  | 
|                                                         |                                      | Accounts payable, trade and other                                                                                                                                         |           |               | 121,801 |   |           |           | 94,187  | 
|                                                         |                                      | Advanced payments                                                                                                                                                         |           |               | 491,217 |   |           |           | 439,222 | 
|                                                         |                                      | Accrued and other liabilities                                                                                                                                             |           |               | 139,954 |   |           |           | 118,197 | 
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         | Total current liabilities            |                                                                                                                                                                           |           | 765,983       |         |   |           | 690,638   |        
|Long-term liabilities:                                   |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         |                                      | Long-term debt, net of current portion                                                                                                                                    |           |               | 576,989 |   |           |           | 550,968 | 
|                                                         |                                      | Accrued pension and postretirement benefit cost                                                                                                                           |           |               | 51,964  |   |           |           | 56,447  | 
|                                                         |                                      | Deferred tax liability                                                                                                                                                    |           |               | 15,124  |   |           |           | 19,968  | 
|                                                         |                                      | Other liabilities                                                                                                                                                         |           |               | 73,615  |   |           |           | 83,213  | 
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         | Total liabilities                    |                                                                                                                                                                           |           | 1,483,675     |         |   |           | 1,401,234 |        
|Commitments and contingencies                            |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|Stockholders equity (deficit):                          |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         |                                      | Common stock $.01 par value, 150,000,000 shares
    authorized; 51,695,109 and 51,945,221 issued and outstanding at
    December 31, 2002 and June 30, 2003, respectively |           |               | 517     |   |           |           | 519     | 
|                                                         | Additional paid-in-capital           |                                                                                                                                                                           |           | 177,740       |         |   |           | 179,330   |        
|                                                         | Deferred compensation                |                                                                                                                                                                           |           | (547          | )       |   |           | (507      | )      
|                                                         | Retained deficit                     |                                                                                                                                                                           |           | (194,952      | )       |   |           | (120,497  | )      
|                                                         | Accumulated other comprehensive loss |                                                                                                                                                                           |           | (12,463       | )       |   |           | (12,447   | )      
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|                                                         | Total stockholders equity (deficit) |                                                                                                                                                                           |           | (29,705       | )       |   |           | 46,398    |        
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          
|Total liabilities and stockholders equity
    (deficit) |                                      | $                                                                                                                                                                         | 1,453,970 |               |         | $ | 1,447,632 |          
|                                                         |                                      |                                                                                                                                                                           |           |               |         |   |           |          

See accompanying notes.

2



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##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except shares and per share
data)


|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |            |         | 
|--------------------------------- | ---------------------------------------------------------------- | --------------------------- | ------ | ------------------------- | ------- | ---- | ------ | ---------- | ------- | - | ------ | ---------- | ------- | - | ------- | ---------- | ------- | 
|                                  |                                                                  |                             |        |                          
|                                  |                                                                  | Three months ended June 30, |        | Six months ended June 30,
|                                  |                                                                  |                             |        |                          
|                                  |                                                                  | 2002                        |        | 2003                      |         | 2002 |        | 2003      
|                                  |                                                                  |                             |        |                           |         |      |        |           
|Revenue:                          |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|                                  | Sales                                                            |                             | $      | 318,038                   |         |      | $      | 553,453    |         |   | $      | 674,481    |         |   | $       | 1,019,976  |        
|Costs and expenses:               |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|                                  | Cost of sales                                                    |                             |        | 248,102                   |         |      |        | 447,180    |         |   |        | 544,696    |         |   |         | 809,763    |        
|                                  | Selling, general and administrative expenses                     |                             |        | 32,368                    |         |      |        | 41,868     |         |   |        | 60,485     |         |   |         | 78,938     |        
|                                  | Research and development                                         |                             |        | 9,550                     |         |      |        | 4,155      |         |   |        | 15,214     |         |   |         | 6,035      |        
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|                                  |                                                                  | Total expenses              |        |                           | 290,020 |      |        |            | 493,203 |   |        |            | 620,395 |   |         |            | 894,736 | 
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|Income from operations            |                                                                  |                             | 28,018 |                           |         |      | 60,250 |            |         |   | 54,086 |            |         |   | 125,240 |           
|Other income (expense):           |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|                                  | Earnings (loss) related to investments in
    foreign affiliates |                             |        | 6,309                     |         |      |        | 6,106      |         |   |        | 7,213      |         |   |         | 11,655     |        
|                                  | Interest income                                                  |                             |        | 979                       |         |      |        | 983        |         |   |        | 2,158      |         |   |         | 1,897      |        
|                                  | Interest expense                                                 |                             |        | (6,252                    | )       |      |        | (7,213     | )       |   |        | (12,635    | )       |   |         | (14,701    | )      
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|Total other income (expense)      |                                                                  |                             | 1,036  |                           |         |      | (124   | )          |         |   | (3,264 | )          |         |   | (1,149  | )         
|Income before income taxes        |                                                                  |                             | 29,054 |                           |         |      | 60,126 |            |         |   | 50,822 |            |         |   | 124,091 |           
|Provision for income taxes        |                                                                  |                             | 1,757  |                           |         |      | 24,050 |            |         |   | 4,507  |            |         |   | 49,636  |           
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|Net income                        |                                                                  | $                           | 27,297 |                           |         | $    | 36,076 |            |         | $ | 46,315 |            |         | $ | 74,455  |           
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|Earnings per common share-basic   |                                                                  | $                           | 0.53   |                           |         | $    | 0.70   |            |         | $ | 0.90   |            |         | $ | 1.44    |           
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|                                  | Weighted average common shares outstanding                       |                             |        | 51,196,184                |         |      |        | 51,887,761 |         |   |        | 51,097,051 |         |   |         | 51,809,472 |        
|Earnings per common share-diluted |                                                                  | $                           | 0.52   |                           |         | $    | 0.68   |            |         | $ | 0.87   |            |         | $ | 1.41    |           
|                                  |                                                                  |                             |        |                           |         |      |        |            |         |   |        |            |         |   |         |           
|                                  | Weighted average common shares outstanding                       |                             |        | 52,710,059                |         |      |        | 52,783,806 |         |   |        | 52,676,701 |         |   |         | 52,696,743 |        

See accompanying notes.

3



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UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS


OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)


(In thousands)


|                                                                         |  |        |     |          |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------ | --- | -------- |  | ------------ | ------- | -------- |  | ------------- | ---- | ----- |  | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                         |  |        |     |          |  |              |         |          |  | Accumulated   |      |      
|                                                                         |  |        |     | Addition |  |              |         |          |  | Other         |      |      
|                                                                         |  | Common |     | Paid-In  |  | Deferred     |         | Retained |  | Comprehensive |      |      
|                                                                         |  | Stock  |     | Capital  |  | Compensation |         | Deficit  |  | (Loss)/Gain   |      | Total
|                                                                         |  |        |     |          |  |              |         |          |  |               |      |      
|Balance, December 31,                                                    |  | $      | 517 |          |  | $            | 177,740 |          |  | $             | (547 | )     |  | $ | (194,952 | ) |  | $ | (12,463 | ) |  | $ | (29,705 | )
|                                                                         |  |        |     |          |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                              |  |        |    |          |  |              |        |          |  |               | 40   |       |  |   |         |   |  |   |        |   |  |   | 40      |  
|Exercise of stock options                                                |  |        | 2   |          |  |              | 1,590   |          |  |               |     |       |  |   |         |   |  |   |        |   |  |   | 1,592   |  
|Net foreign currency translation                                         |  |        |    |          |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 1,323   |   |  |   | 1,323   |  
|Change in fair value of foreign and interest rate
    hedges, net of tax |  |        |    |          |  |              |        |          |  |               |     |       |  |   |         |   |  |   | (1,307  | ) |  |   | (1,307  | )
|Net income for the six months ended June 30,
    2003                    |  |        |    |          |  |              |        |          |  |               |     |       |  |   | 74,455   |   |  |   |        |   |  |   | 74,455  |  
|                                                                         |  |        |     |          |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                               |  |        |     |          |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 74,471  |  
|                                                                         |  |        |     |          |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Balance, June 30, 2003                                                   |  | $      | 519 |          |  | $            | 179,330 |          |  | $             | (507 | )     |  | $ | (120,497 | ) |  | $ | (12,447 | ) |  | $ | 46,398  |  
|                                                                         |  |        |     |          |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  

See accompanying notes.

4



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##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                  |                                                             |                  |         |                  |   |   |         |         |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------- | ------- | ---------------- | - | - | ------- | ------- | -
|                                                                                  |                                                             | Six months ended |         | Six months ended
|                                                                                  |                                                             | June 30, 2002    |         | June 30, 2003   
|                                                                                  |                                                             |                  |         |                 
|Operating activities                                                              |                                                             |                  |         |                  |   |   |         |        
|Net income                                                                        |                                                             | $                | 46,315  |                  |   | $ | 74,455  |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                             |                  |         |                  |   |   |         |        
|                                                                                  | Depreciation                                                |                  |         | 10,266           |   |   |         | 13,410  |  
|                                                                                  | Amortization of software                                    |                  |         | 2,802            |   |   |         | 2,415   |  
|                                                                                  | Amortization of other intangibles                           |                  |         | 2,352            |   |   |         | 6,595   |  
|                                                                                  | Amortization of financing costs                             |                  |         | 1,349            |   |   |         | 1,549   |  
|                                                                                  | Net loss from early extinguishment of debt                  |                  |         | 242              |   |   |         |        |  
|                                                                                  | Deferred tax provision (benefit)                            |                  |         |                 |   |   |         | 30,280  |  
|Changes in assets and liabilities:                                                |                                                             |                  |         |                  |   |   |         |        
|                                                                                  | Trade receivables                                           |                  |         | (16,576          | ) |   |         | 4,713   |  
|                                                                                  | Inventories                                                 |                  |         | (75,065          | ) |   |         | 63,480  |  
|                                                                                  | Other assets                                                |                  |         | (19,065          | ) |   |         | (777    | )
|                                                                                  | Prepaid pension and postretirement benefit cost             |                  |         | (1,288           | ) |   |         | (2,150  | )
|                                                                                  | Accounts payable, trade and other                           |                  |         | 12,139           |   |   |         | (30,501 | )
|                                                                                  | Advanced payments                                           |                  |         | 94,853           |   |   |         | (54,933 | )
|                                                                                  | Accrued and other liabilities                               |                  |         | (9,369           | ) |   |         | (13,091 | )
|                                                                                  | Accrued pension and postretirement benefit cost             |                  |         | (3,933           | ) |   |         | 3,355   |  
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|Cash provided by operating activities                                             |                                                             |                  | 45,022  |                  |   |   | 98,800  |        
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|                                                                                 
|Investing activities                                                              |                                                             |                  |         |                  |   |   |         |        
|                                                                                  | Capital expenditures                                        |                  |         | (7,484           | ) |   |         | (23,762 | )
|                                                                                  | Purchase of Cell ITS, net of $0.2 million
    cash acquired |                  |         | (4,135           | ) |   |         |        |  
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|Cash used in investing activities                                                 |                                                             |                  | (11,619 | )                |   |   | (23,762 | )      
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|                                                                                 
|Financing activities                                                              |                                                             |                  |         |                  |   |   |         |        
|                                                                                  | Payments on long-term debt                                  |                  |         | (8,306           | ) |   |         |        |  
|                                                                                  | Proceeds from sale of common stock                          |                  |         | 2,164            |   |   |         | 1,592   |  
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|Cash (used in) provided by financing activities                                   |                                                             |                  | (6,142  | )                |   |   | 1,592   |        
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|Effect of exchange rate changes on cash                                           |                                                             |                  | 6,753   |                  |   |   | 4,424   |        
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|Increase in cash and cash equivalents                                             |                                                             |                  | 34,014  |                  |   |   | 81,054  |        
|Cash and cash equivalents, beginning of year                                      |                                                             |                  | 90,535  |                  |   |   | 106,802 |        
|                                                                                  |                                                             |                  |         |                  |   |   |         |        
|Cash and cash equivalents, end of period                                          |                                                             | $                | 124,549 |                  |   | $ | 187,856 |        
|                                                                                  |                                                             |                  |         |                  |   |   |         |        

See accompanying notes.

5



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##### 



UNITED DEFENSE INDUSTRIES, INC.



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


June 30, 2003


1.     Basis of
Presentation

The financial information presented as of any
date other than December 31 has been prepared from the
books and records without audit. Financial information as of
December 31, 2002 presented in this quarterly report has
been derived from the audited financial statements of United
Defense Industries, Inc., but does not include all the
associated disclosures required by generally accepted accounting
principles. In the opinion of management, the accompanying
unaudited interim financial statements contain all adjustments
(consisting of normal, recurring adjustments) necessary to
present fairly our financial position as of June 30, 2003
and the results of operations for the three months and six
months ended June 30, 2003 and cash flows for the six
months ended June 30, 2002 and 2003. The results of operations
are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. These
unaudited consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year
ended December 31, 2002 and our Quarterly Report on Form
10-Q for the quarter ended March 31, 2003.

2.     Summary of
Significant Accounting Principles

Stock-Based
Compensation

At June 30, 2003, we had a stock-based
employee compensation plan, which is described more fully in our
Form 10-K for the year ended December 31, 2002. We
account for the plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Accordingly, we record compensation expense over the vesting
period in our consolidated statements of operations if the
option price is less than fair value of the common stock at the
date an option is granted. The compensation expense recorded in
the financial statements reflects the amortization based on
vesting of stock options. The following table illustrates the
effect on net income and earnings per share if we had applied
the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                       |                                       |        |                 
|                                                                                                                                                    |                       | Three months ended                    |        | Six months ended
|                                                                                                                                                    |                       | June 30,                              |        | June 30,        
|                                                                                                                                                    |                       |                                       |        |                 
|                                                                                                                                                    |                       | 2002                                  |        | 2003             |  | 2002 |        | 2003
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |     
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | (In thousands, except per share data)
|Net income, as reported                                                                                                                             |                       | $                                     | 27,297 |                  |  | $    | 36,076 |      |  | $ | 46,315 |      |  | $ | 74,455 |     
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |                       |                                       | 15     |                  |  |      | 12     |      |  |   | 30     |      |  |   | 24     |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                                       | (220   | )                |  |      | (1,049 | )    |  |   | (440   | )    |  |   | (2,098 | )   
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|Pro forma net income                                                                                                                                |                       | $                                     | 27,092 |                  |  | $    | 35,039 |      |  | $ | 45,905 |      |  | $ | 72,381 |     
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|Earnings per share:                                                                                                                                 |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Basic  as reported   |                                       | $      | 0.53             |  |      | $      | 0.70 |  |   | $      | 0.90 |  |   | $      | 1.44 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Basic  pro forma     |                                       | $      | 0.53             |  |      | $      | 0.68 |  |   | $      | 0.90 |  |   | $      | 1.40 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  as reported |                                       | $      | 0.52             |  |      | $      | 0.68 |  |   | $      | 0.87 |  |   | $      | 1.41 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  pro forma   |                                       | $      | 0.51             |  |      | $      | 0.66 |  |   | $      | 0.87 |  |   | $      | 1.37 | 
|                                                                                                                                                    |                       |                                       |        |                  |  |      |        |      |  |   |        |      |  |   |        |     

6



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

New
Accounting Pronouncements

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

For the six months ended June 30, 2002 the
loss on extinguishment of debt of $242,000 that was previously
reported as an extraordinary item was reclassified to income
before extraordinary item (interest expense).

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

3.     Investments in
Affiliated Companies

Our investment in our 51% owned foreign joint
venture in Turkey, FNSS Savunma Sistemleri A.S. is accounted for
using the equity method because we do not control it due to our
partners veto rights over most operating decisions. We
have the ability to exercise influence over its operating and
financial policies. In addition, we had a 51% interest in a
joint venture in Saudi Arabia, United Defense Systems
(UDS) which we also accounted for using the equity
method for the same reason. Our share of the earnings related to
our investments was $6.3 million and $6.1 million for
the three months ended June 30, 2002 and 2003 and
$7.2 million and $11.6 million for the six months
ended June 30, 2002 and 2003, respectively. In view of the
declining scale and prospects of UDS, we entered into an
agreement in March 2002 with our Saudi Arabian joint venture
partner to sell our 51% interest. The sale was finalized in
March 2003 for $405,000 and did not result to a significant gain
or loss. Beginning in March 1, 2002 we discontinued
recording our share of earnings from this joint venture because,
under the terms of the sale agreement, we were no longer
entitled to such earnings as of that date.

7



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table, which summarizes financial
information for these joint ventures, reports results from the
joint venture in Turkey for the three months and six months
ended June 30 of each year and Saudi Arabia only through
February of 2002.

|              |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |         | 
|------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | 
|              |  |                    |        |                 
|              |  | Three months ended |        | Six months ended
|              |  | June 30,           |        | June 30,        
|              |  |                    |        |                 
|              |  | 2002               |        | 2003             |  | 2002 |        | 2003
|              |  |                    |        |                  |  |      |        |     
|              |  |                   
|              |  | (In thousands)    
|Sales         |  | $                  | 40,922 |                  |  | $    | 77,879 |      |  | $ | 67,802 |  |  | $ | 119,732 | 
|Cost of Sales |  |                    | 20,129 |                  |  |      | 36,910 |      |  |   | 35,041 |  |  |   | 57,290  | 
|Net Income    |  |                    | 12,370 |                  |  |      | 11,082 |      |  |   | 16,794 |  |  |   | 20,340  | 

4.     Comprehensive
Income

Comprehensive income was $54.1 million and
$74.5 million for the six month periods ended June 30,
2002 and 2003, respectively. Comprehensive income consists
primarily of net income ($74.5 million for the six month
period ended June 30, 2003), net foreign currency
translation adjustments and fair value adjustments of foreign
currency and interest rate hedges, net of taxes.

5.     Long-term
Debt

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

Outstanding borrowings on the term loan
facilities were $590 million at June 30, 2003. The
facilities bear interest at variable rates with a weighted
average rate of 3.12% at June 30, 2003. These loans are due
through 2009 and provide for quarterly principal and interest
payments. No principal payments were due in the first half of
2003 due to early repayments.

6.     Pension and
Other Post Retirement Benefits

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

7.     Commitments
and Contingencies

Termination
Claims

The Crusader program commenced in 1994 to develop
for the U.S. Army an integrated and extensively automated
two-vehicle artillery system consisting of a 155mm,
self-propelled howitzer and a resupply vehicle. Since inception
of the program, we have been the sole-source prime contractor
for its design and development. The Armys plan called for
fielding of 480 Crusader systems, but in May 2002 the Secretary
of Defense announced the termination of the program. The Army
gave us formal notice of termination on August 7, 2002, and
we have subsequently received Army funding to accomplish an
orderly closeout of Crusader activities and to transition key
Crusader technologies to the NLOS-C program. To date, the
Crusader termination has resulted in a reduction to our
workforce of approximately 180 employees. Through the period
ended June 30, 2003, we have invoiced the U.S. Government
for $36.3 million of termination costs and fees, the
majority of which was collected in 2002 and the balance received
in first half of 2003. In order to complete the Crusader

8



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

termination process, we will need to negotiate a
final settlement with the Army, and expect to submit our
settlement proposal in August 2003.

Legal
Proceedings

As a government contractor, we are subject to the
audit, review, and investigative authority of various U.S.
Government agencies. Depending upon the particular
jurisdictional statute, violations of federal procurement rules
may result in contract price reductions or refunds, civil
penalties, and/or criminal penalties. Government contractors
that violate the False Claims Act and/or other applicable laws
may be suspended or debarred from receiving further government
contracts. Given our dependence on U.S. Government contracts,
suspension or debarment is an inherent risk that could readily
have a material adverse effect on us. Our policy is to cooperate
with governmental investigations and inquiries regarding
compliance matters, and we also make voluntary disclosures of
compliance issues to governmental agencies as appropriate. In
the ordinary course of business, we provide information on
compliance matters to various government agencies, and we expect
to continue to do so in the future. For example, as previously
disclosed, on August 8, 2002 we were served with a grand
jury subpoena issued by the United States District Court for the
Eastern District of Virginia, seeking information regarding a
2000 contract between us and the Italian government for the
upgrading of amphibious assault vehicles. We believe that the
grand jury investigation seeks to ascertain whether any
violation of the Foreign Corrupt Practices Act occurred in
connection with the Italian contract. While management is not
aware of any such violation, and we are cooperating with the
investigation, it is too early for us to determine whether the
ultimate outcome of the investigation would have a material
adverse impact on our results of operation or financial position.

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

Environmental
Matters

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

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consists of Allowable Costs. As of June 30,
2003, we had accrued approximately $31.4 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 costs in excess of such accruals may be
incurred. The amount accrued is stated on an undiscounted basis.
The most significant of our estimated liabilities pertain to
ongoing remediation efforts.

Pursuant to a demand from the California Regional
Water Quality Control Board, we are completing a study of
sedimentary contamination in San Diego Bay for the purpose of
establishing clean-up criteria for future remediation work. Once
definitive clean-up criteria are established, we expect that we
will be required to begin remediation procedures with respect to
the contamination. We anticipate that the total costs associated
with the remediation phase will range from $6 million to
$9 million, of which $8.5 million has been accrued,
although it is conceivable that costs could be as high as
$40 million if the most stringent clean-up standard were to
be adopted. Approximately $8.9 million of such remediation
cost, to the extent the costs are not recovered on USMRs
government contracts or from other responsible parties, may be
recoverable from USMRs former shareholders, under an
escrow arrangement established in 1997 when the San Diego
operation was acquired by USMR. An additional $15 million
escrow fund was established in our 2002 acquisition of USMR,
which may be available in respect of USMRs sediment
exposure.

9



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Pursuant to the terms of the 1997 acquisition of
United Defense, L.P., FMC Corporation and Harsco Corporation
(collectively, the Sellers) are required to
reimburse us for 75% of certain remediation costs that are
Non-Allowable Costs through October 6, 2007 for
environmental losses we have previously identified to the
Sellers. Accordingly, we have recorded a receivable for $1.5
million for which we expect to be reimbursed by the Sellers over
approximately the next 5 years under the terms of the 1997
acquisition agreement.

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

8.     United States
Marine Repair Acquisition

Effective July 2, 2002, we completed the
acquisition of 100% of the outstanding stock of USMR from The
Carlyle Group for $305.4 million (net of $7.3 million
of acquired cash), including the repayment of approximately $105
million of USMR debt. We incurred an additional
$1.5 million of transaction costs related to the
acquisition. The acquisition of USMR balances and diversifies
our portfolio, gives us a strategic growth platform and expands
our mission to support the U.S. Navy with superior technology
and services. As a result of the transaction, USMR is now a
wholly owned subsidiary. The transaction was accounted for as a
purchase. We financed the acquisition with cash on hand and by
amending our credit facility to borrow an additional $300
million. We began to consolidate the results of operations of
USMR as of the effective date of the acquisition.

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

|              |                                     |                                       |         |                  |  |      |         |      |  |   |         |      |  |   |           |      | 
|------------- | ----------------------------------- | ------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | ---- |  | - | --------- | ---- | 
|              |                                     |                                       |         |                 
|              |                                     | Three months ended                    |         | Six months ended
|              |                                     | June 30,                              |         | June 30,        
|              |                                     |                                       |         |                 
|              |                                     | 2002                                  |         | 2003             |  | 2002 |         | 2003
|              |                                     |                                       |         |                  |  |      |         |     
|              |                                     |                                      
|              |                                     | (in thousands, except per share data)
|Sales         |                                     | $                                     | 451,490 |                  |  | $    | 553,453 |      |  | $ | 925,724 |      |  | $ | 1,019,976 |     
|Cost of Sales |                                     |                                       | 364,728 |                  |  |      | 447,180 |      |  |   | 760,346 |      |  |   | 809,763   |     
|Net Income    |                                     |                                       | 27,553  |                  |  |      | 36,076  |      |  |   | 49,067  |      |  |   | 74,455    |     
|              | Earnings per common share  basic   |                                       | $       | 0.54             |  |      | $       | 0.70 |  |   | $       | 0.97 |  |   | $         | 1.44 | 
|              | Earnings per common share  diluted |                                       | $       | 0.52             |  |      | $       | 0.68 |  |   | $       | 0.94 |  |   | $         | 1.41 | 

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

Goodwill of $240.3 million resulting from
the USMR acquisition was assigned to the Ship Repair and
Maintenance segment.

9.     Earnings Per
Share

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

10



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

effects of dilutive stock options based on the
treasury stock method in the calculation of diluted earnings per
share.

New stock options to purchase 2,200,500 common
shares granted in January 2003 were included in the computation
of diluted earnings per share.

|                                                                         |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|------------------------------------------------------------------------ |  | ------------------------------------- | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                         |  |                                       |        |                 
|                                                                         |  | Three months ended                    |        | Six months ended
|                                                                         |  | June 30,                              |        | June 30,        
|                                                                         |  |                                       |        |                 
|                                                                         |  | 2002                                  |        | 2003             |  | 2002 |        | 2003
|                                                                         |  |                                       |        |                  |  |      |        |     
|                                                                         |  |                                      
|                                                                         |  | (In thousands, except per share data)
|Net income                                                               |  | $                                     | 27,297 |                  |  | $    | 36,076 |      |  | $ | 46,315 |  |  | $ | 74,455 | 
|                                                                         |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Average common shares outstanding:                                       |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Average common shares outstanding for basic
    computations             |  |                                       | 51,196 |                  |  |      | 51,888 |      |  |   | 51,097 |  |  |   | 51,809 | 
|Dilutive stock options-based on the treasury
    stock method            |  |                                       | 1,514  |                  |  |      | 896    |      |  |   | 1,580  |  |  |   | 888    | 
|                                                                         |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Average number of common shares outstanding for
    diluted computations |  |                                       | 52,710 |                  |  |      | 52,784 |      |  |   | 52,677 |  |  |   | 52,697 | 
|                                                                         |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Earnings per share:                                                      |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Earnings per share  basic                                               |  | $                                     | 0.53   |                  |  | $    | 0.70   |      |  | $ | 0.90   |  |  | $ | 1.44   | 
|                                                                         |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Earnings per share  diluted                                             |  | $                                     | 0.52   |                  |  | $    | 0.68   |      |  | $ | 0.87   |  |  | $ | 1.41   | 
|                                                                         |  |                                       |        |                  |  |      |        |      |  |   |        |  |  |   |        | 

10.     Information
on Business Segments

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

Summary financial data for each of our business
segments for three month and six month periods ended
June 30, 2002 and 2003 follow:

|                                  |                                        |                    |        |                  |   |      |        |         |   |   |         |         |   |   |         |           |  
|--------------------------------- | -------------------------------------- | ------------------ | ------ | ---------------- | - | ---- | ------ | ------- | - | - | ------- | ------- | - | - | ------- | --------- | -
|                                  |                                        |                    |        |                 
|                                  |                                        | Three months ended |        | Six months ended
|                                  |                                        | June 30,           |        | June 30,        
|                                  |                                        |                    |        |                 
|                                  |                                        | 2002               |        | 2003             |   | 2002 |        | 2003   
|                                  |                                        |                    |        |                  |   |      |        |        
|                                  |                                        |                   
|                                  |                                        | (in thousands)    
|Sales:                            |                                        |                    |        |                  |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Defense Systems                        |                    | $      | 318,038          |   |      | $      | 435,421 |   |   | $       | 674,481 |   |   | $       | 776,004   |  
|                                  | Ship Repair and Maintenance            |                    |        |                 |   |      |        | 118,032 |   |   |         |        |   |   |         | 243,972   |  
|                                  |                                        |                    |        |                  |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Total sales                            |                    |        | 318,038          |   |      |        | 553,453 |   |   |         | 674,481 |   |   |         | 1,019,976 |  
|                                 
|Income before interest and taxes: |                                        |                    |        |                  |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Defense Systems                        |                    |        | 39,316           |   |      |        | 62,804  |   |   |         | 69,577  |   |   |         | 129,770   |  
|                                  | Ship Repair and Maintenance            |                    |        |                 |   |      |        | 9,155   |   |   |         |        |   |   |         | 16,525    |  
|                                  | Corporate                              |                    |        | (4,989           | ) |      |        | (5,603  | ) |   |         | (8,278  | ) |   |         | (9,400    | )
|                                  |                                        |                    |        |                  |   |      |        |         |   |   |         |         |   |   |         |          
|                                  | Total income before interest and taxes |                    |        | 34,327           |   |      |        | 66,356  |   |   |         | 61,299  |   |   |         | 136,895   |  
|Interest, net                     |                                        |                    | (5,273 | )                |   |      | (6,230 | )       |   |   | (10,477 | )       |   |   | (12,804 | )        
|                                  |                                        |                    |        |                  |   |      |        |         |   |   |         |         |   |   |         |          
|Income before income taxes        |                                        | $                  | 29,054 |                  |   | $    | 60,126 |         |   | $ | 50,822  |         |   | $ | 124,091 |          

11



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                  |                             |              |   |           |  |  |   |           | 
|----------------- | --------------------------- | ------------ | - | --------- |  |  | - | --------- | 
|                  |                             | December 31, |   | June 30, 
|                  |                             | 2002         |   | 2003     
|                  |                             |              |   |          
|Total assets: (a) |                             |              |   |           |  |  |   |          
|                  | Defense Systems             |              | $ | 884,261   |  |  | $ | 811,379   | 
|                  | Ship Repair and Maintenance |              |   | 421,300   |  |  |   | 422,744   | 
|                  | Corporate and eliminations  |              |   | 148,409   |  |  |   | 213,509   | 
|                  |                             |              |   |           |  |  |   |          
|                  | Total assets                |              | $ | 1,453,970 |  |  | $ | 1,447,632 | 



---



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

11.     Income
Taxes

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

The provision for income taxes for the three and
six month periods ended June 30, 2003, was
$24.1 million and $49.6 million, respectively, which
increased by $22.3 million and $45.1 million,
respectively, from the same periods in 2002 primarily due to
higher taxable income and to the utilization of net operating
loss carryforwards in 2002 to substantially offset income tax
expense. The provision for income taxes in 2003 more closely
reflects underlying statutory tax rates as a result of the
reversal of the valuation allowance against net operating loss
carryforwards and other deferred tax assets in 2002.

12.     Related Party
Transactions

Investment funds sponsored by The Carlyle Group
(Carlyle) continue to own a significant portion of
our common shares. Individuals affiliated with Carlyle are
expected to continue to influence our operations. We have
entered into agreements with four affiliates of our principal
stockholders whereby we have agreed to designate one nominee to
our board of directors on behalf of each of these entities.
These agreements provide for such board representation so long
as Carlyle owns greater than 20% of our voting stock. However,
in conjunction with Carlyles pending sale of
10,800,000 shares of our stock (which would reduce
Carlyles ownership in United Defense from 46.75% to
25.96%), we expect Carlyles representation on our board to
decline proportionately in the months ahead.

In accordance with the management agreement
between United Defense Industries and Carlyle, we accrued a fee
of $1 million for various management services provided by
Carlyle for the six months ended June 30, 2003.

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

We recognized $2.7 million and
$9.1 million of royalties, license fees and technical
service fees during the six month periods ended June 30,
2002 and 2003, respectively, from our Turkish joint venture. We
have also entered into an agreement with our Turkish joint
venture to purchase approximately $2.4 million in miscellaneous
parts and kits for our M113 vehicles and Mk25 canisters.

12



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##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)





|        |                                                                                                                  
|------- | -----------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of the Results of Operations and Financial Condition 
    June 30, 2003

Special Note Regarding Forward Looking
Statements

Our Form 10-Q disclosure and analysis
concerning our operations, cash flows and financial position,
including, in particular, the likelihood of our success in
developing and expanding our business and the realization of
sales from our backlog, include forward-looking statements
within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Statements that are
predictive in nature, that depend upon or refer to future events
or conditions, or that include words such as
expects, anticipates,
intends, plans, believes,
estimates and similar expressions are
forward-looking statements. Although these statements are based
upon assumptions we consider reasonable, they are subject to
risks and uncertainties that are described more fully below and
in our annual report on Form 10-K for the year ended
December 31, 2002, our quarterly report on Form 10-Q
for the three months ended March 31, 2003 and our
Prospectus Supplement dated July 31, 2003. Accordingly, we
can give no assurance that we will achieve the results
anticipated or implied by our forward-looking statements.

Overview

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

The Carlyle Group formed United Defense
Industries, Inc. in October 1997 to facilitate the acquisition
of United Defense, L.P., our predecessor entity. The Carlyle
Group continues to own a significant portion of our common
stock. In July 2002 we acquired United States Marine Repair
(USMR) from The Carlyle Group.

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

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

We use different techniques for estimating and
recording revenues depending on the type and characteristics of
the contract. Sales are recognized on most fixed-price
production contracts when the risks and rewards of ownership
have been transferred to the customer. For our DoD production
contracts, those criteria are typically met when the manufacture
of the product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. Gross margin on each unit delivered or accepted is
recognized

13



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##### 



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


We are a supplier of armored combat vehicles and
weapons delivery systems to the DoD and a number of allied
military forces worldwide. Our products include critical
elements of the U.S. militarys tactical force structure.
We had a firm funded backlog of approximately $2.2 billion
as of June 30, 2003, a substantial majority of which was
derived from sole-source, prime contracts. Approximately 76% of
our sales for the six months ended June 30, 2003 were to
the U.S. government, primarily to agencies of the DoD (excluding
Foreign Military Sales), or through subcontracts with other
government contractors.

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

Business Segments, Products and
Programs

We operate in two business segments: Defense
Systems and Ship Repair and Maintenance. Our Defense Systems
program portfolio consists of a mix of weapons 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 |       | Six months ended
|                            |                                         | June 30,           |       | June 30,        
|                            |                                         |                    |       |                 
|                            |                                         | 2002               |       | 2003             |  | 2002 |       | 2003 
|                            |                                         |                    |       |                  |  |      |       |      
|                            |                                         |                   
|                            |                                         | (In millions)     
|Defense Systems:            |                                         |                    |       |                  |  |      |       |       |  |   |       |       |  |   |         |      
|                            | Bradley Family of Vehicles              |                    | $     | 65.1             |  |      | $     | 121.0 |  |   | $     | 141.0 |  |   | $       | 210.8 | 
|                            | Naval Ordnance                          |                    |       | 32.2             |  |      |       | 73.3  |  |   |       | 84.8  |  |   |         | 117.2 | 
|                            | Vertical Launch Systems                 |                    |       | 27.7             |  |      |       | 27.3  |  |   |       | 58.9  |  |   |         | 49.3  | 
|                            | Combat, Engineering & Recovery Vehicles |                    |       | 36.0             |  |      |       | 26.9  |  |   |       | 65.6  |  |   |         | 66.3  | 
|                            | Artillery Systems (a)                   |                    |       | 79.8             |  |      |       | 68.3  |  |   |       | 166.4 |  |   |         | 120.0 | 
|                            | Assault, Amphibious Vehicles            |                    |       | 8.4              |  |      |       | 34.8  |  |   |       | 21.5  |  |   |         | 64.5  | 
|                            | Other                                   |                    |       | 68.8             |  |      |       | 83.8  |  |   |       | 136.3 |  |   |         | 147.9 | 
|                            |                                         |                    |       |                  |  |      |       |       |  |   |       |       |  |   |         |      
|Total Defense Systems       |                                         |                    | 318.0 |                  |  |      | 435.4 |       |  |   | 674.5 |       |  |   | 776.0   |      
|Ship Repair and Maintenance |                                         |                    | 0.0   |                  |  |      | 118.1 |       |  |   | 0.0   |       |  |   | 244.0   |      
|                            |                                         |                    |       |                  |  |      |       |       |  |   |       |       |  |   |         |      
|Total                       |                                         | $                  | 318.0 |                  |  | $    | 553.5 |       |  | $ | 674.5 |       |  | $ | 1,020.0 |      
|                            |                                         |                    |       |                  |  |      |       |       |  |   |       |       |  |   |         |      



---



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

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

14



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##### 



Results of Operations

Revenue

Revenue for the three months ended June 30,
2003 of $553.5 million was $235.5 million, or 74.1%,
higher than revenue of $318.0 million for the comparable
period in 2002. This increase is partially attributable to
inclusion of $118.1 million of revenue in 2003 resulting from
the acquisition of USMR on July 2, 2002. The remainder of
the revenue increase is attributable to higher sales from
continuing programs in the Defense Systems segment. Revenue for
the Defense Systems segment was $435.4 and $318.0 million
in the three month periods ended June 30, 2003 and 2002,
respectively, an increase of $117.4 million, or 36.9%.
Bradley sales in the quarter of $121.0 million were $55.9
million higher than the same period in 2002 due to the timing of
the Armys A3 upgrade fielding schedule. Naval Ordnance
sales of $73.3 million were $41.1 million higher than the
same period in 2002 driven by the ramp up in the DD(X) Advanced
Gun System (AGS) development work. Assault
Amphibious Vehicle (AAV) sales of $34.8 million
grew by $26.4 million as we continued to ramp up deliveries
to Italy.

Revenue of $1.02 billion for the six months
ended June 30, 2003 was $345.5 million higher than the
$674.5 million for the same period in 2002, an increase of
51.2%. Sales from our Ship Repair and Maintenance segment which
was acquired in July 2002, accounted for $244.0 million of
the increase. Our Defense Systems segment sales were
$776.0 million and $674.5 million for the six months
ended June 30, 2003 and 2002, respectively. The
$101.5 million increased sales in the 2003 period was
attributed to higher Bradley and AAV deliveries and a ramp-up in
DD(X) AGS development work more than offsetting
$46.4 million in lower Artillery System work due to the
cancellation of Crusader in August of 2002.

Gross
profit

Gross profit of $106.3 million in the three
month period ended June 30, 2003 was $36.4 million, or
52% higher than the $69.9 million for the corresponding
period in 2002. This increase was attributable to higher Defense
System segment sales and the inclusion of $17.3 million of
USMR gross profit in the 2003 period. Gross profit as a
percentage of sales for the three months ended June 30,
2003 was 19.2% compared to 22.0% for the same period in 2002.
The major factor influencing the change in gross profit
percentage was the acquisition of USMR in July 2002 since that
segment has a historically lower gross profit rate than our
other programs. The Defense Systems segments gross profit
rate for the three months ended June 30, 2003 and 2002 was
20.4% and 22.0%, respectively. The Ship Repair and Maintenance
segments gross profit rate was 14.7% for the three months
ended June 30, 2003.

Gross profit for the six months ended
June 30, 2003 was $210.2 million, $80.4 million
higher than the $129.8 million in the same prior period.
The increase was attributed primarily to higher sales in our
Defense Systems segment and the inclusion of $32.5 million
of gross profit from USMR in the 2003 period. Gross profit as a
percentage of sales for the six months ended June 30, 2003 was
20.6% compared with 19.2% for the same period last year. Defense
System segments gross profit rate for the six month period
ended June 30, 2003 was 22.9% compared with 19.2% for the
same period in 2002 when the segments profit rate was
19.2%. The increase in the 2003 profit rate is due to an
$8.2 million award fee in 2003 for the Crusader program,
higher royalty payments from our foreign affiliate in Turkey,
and favorable profit adjustments on several production
contracts. The Ship Repair and Maintenance segments gross
profit rate was 13.3% for the six months ended June 30,
2003.

Selling,
general and administrative expenses

Selling, general and administrative expenses for
the three months ended June 30, 2003 were
$41.9 million, or $9.5 million higher than the
$32.4 million for the same period in 2002. The increase was
due primarily to the inclusion of $8.1 million of United
States Marine Repairs general and administrative expenses
in 2003 versus no expenses in 2002 since the acquisition was not
completed until July of 2002.

Selling, general and administrative expenses for
the six months ended June 30, 2003 and 2002 were
$78.9 million and $60.5 million, respectively. The
inclusion of USMR in 2003 results accounted for

15



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##### 



$16.0 million of the $18.4 million increase.
The balance was associated with higher bid and proposal expenses
primarily in support of the development of Future Combat Systems
(FCS) proposals.


Research
and development

Research and development costs were
$4.2 million and $6.0 million for the three and six
month periods ended June 30, 2003, respectively, compared
with $9.6 million and $15.2 million for the
corresponding prior periods. Research and development costs were
higher in 2002 as a result of spending on projects in
preparation for the Armys FCS program and higher spending
on projects related to the AGS and Advanced Vertical Launch
System for the Navys DD(X) destroyer.

Earnings
from foreign affiliates

Earnings from foreign affiliates were
$6.1 million for the three months ended June 30, 2003
as compared with $6.3 million in the same period last year.
For the six months ended June 30, 2003, earnings from
foreign affiliates of $11.7 million compared with
$7.2 million earnings for the same prior year period. The
higher earnings in 2003 were a result of higher vehicle sales at
our Turkish joint venture.

Interest
expense

Net interest expense was $6.2 million in the
three months ended June 30, 2003 compared with
$5.3 million for the same period in 2002. For the six
months ended June 30, 2003, net interest expense of
$12.8 million was $2.3 million higher than the same prior
period. The higher interest expense in 2003 was due to the
increased debt level from the acquisition of USMR offset
slightly by the effect of a lower interest rate on our variable
rate debt in 2003.

Provision
for Income Taxes

The provision for income taxes for the
three-month period ended June 30, 2003 was
$24.1 million compared with $1.8 million for the
corresponding 2002 period. For the six months ended
June 30, 2003, the provision for income taxes was
$49.6 million compared with $4.5 million in the same
period in 2002. The respective increases of $22.3 million
and $45.1 million for the three month and six month periods
in 2003 were due primarily to utilization of net operating loss
carryforwards in 2002 to substantially offset income tax
expense. The provision for income taxes in 2003 was based on an
estimated annual effective income tax rate and more closely
reflects underlying statutory tax rates as a result of the
reversal of the valuation allowance against net operating loss
carryforwards and other deferred tax assets in 2002.

Net
income

As a result of the foregoing factors, we had a
net income of $36.1 million in the three months ended
June 30, 2003, compared with $27.3 million in the same
prior period. For the six months ended June 30, 2003, we
had net income of $74.5 million compared with
$46.3 million for the same period in 2002.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$98.8 million for the six month period ended June 30,
2003 compared with $45.0 million in the same period in
2002, a $53.8 million increase. The primary reasons for the
increase were $28.2 million in higher net income, and
receipt of a $17.1 million earnings distribution, net of
taxes, from our joint venture in Turkey.

Cash used in investing activities was
$23.8 million for the six month period ended June 30,
2003 compared with $11.6 million in the prior year period.
During the second quarter of 2003, capital expenditures included
the purchase of a drydock and the expense to install it at our
USMR Norfolk, Virginia facility. Expenditures for manufacturing,
ship repair, and computer equipment and software primarily
represent the balance of capital expenditures. Cash used for
investing activities in 2002 included the acquisition of Cell
ITS AB for $4.1 million.

16



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##### 



Cash provided by financing activities was
$1.6 million for the six month period ended June 30,
2003, compared with $6.1 million of cash usage in the same
period in 2002. Principal payments on debt in the first half of
2002 was $8.3 million compared to $0 in the same period in
2003. There were no scheduled principal payments on our senior
credit facility for the six months ended June 30, 2003.

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

U.S. Army Transformation

In our Form 10-K Report for the year ended
December 31, 2002, Item 7, Managements
Discussion and Analysis, describes recent and potential
developments affecting our ground combat vehicle business under
the heading, U.S. Army Transformation. The
Armys transformation efforts, including ongoing Stryker
procurements and the development of the FCS program, continue to
receive attention both because of their overall significance in
the Armys evolution and in the context of the 2003 U.S.
military experience in Iraq. Such consideration has focused in
part on the Administrations budget for the DoD for the
fiscal year ending September 30, 2004 (FY04).

The DoD budget tends to have significant
implications for the ground combat vehicle portion of our
Defense Systems segment, primarily regarding the Bradley,
NLOS-C, and FCS programs. While Congressional consideration of
the FY04 DoD budget is unlikely to be completed until later this
year, the pertinent Congressional deliberations and reports to
date suggest that:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Congress will likely provide at least the
    $1.7 billion sought by the Administration for FCS and
    related activities and will attempt to restrict approximately
    $350 million to indirect fire programs. Such funding would
    tend to benefit both our Non-Line-of-Sight Cannon
    (NLOS-C) development program and other FCS combat
    vehicle development activities in which we participate or expect
    to participate.                                                                                                                                 
|
| | (2) | Although the Administration did not propose to
    acquire additional Bradley A3 vehicle upgrades (i.e., beyond
    those covered by our current multiyear contract which expires in
    2005), Congress will likely provide between $60 million and
    $258 million for additional Bradley upgrades. Since such
    appropriations cover both the program administration performed
    by the Army and the vehicle work performed by its contractors,
    we would ordinarily expect to receive a major portion
    (typically, 65-75%), rather than all, of such funding.
|
| | (3) | Congress will likely provide approximately the
    $1 billion sought by the Administration for further
    procurement of Stryker vehicles. As we participate only
    minimally in the Stryker program, the net effect of such funding
    is to place major portion of the Armys combat vehicle
    procurement spending beyond our reach.                                                                                                                                                                                                                               

FY04 funding for our Army-related development
(such as NLOS-C and FCS) activities would likely result in
revenue occurring during 2004 and 2005, and for manufacturing
activity (such as the Bradley) in revenue during 2005 and 2006.

17



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##### 





|        |                                                                               
|------- | ------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk  June 30, 2003

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

Forward Currency Exchange Risk

We conduct some of our operations outside the
U.S. in functional currencies other than the U.S. dollar. To
mitigate the risk associated with fluctuating currencies on
short-term and long-term foreign currency-denominated
transactions, we enter into foreign currency forward exchange
contracts. We do not enter into foreign currency forward
exchange contracts for trading purposes. The following table
provides information with respect to significant contracts at
June 30, 2003. The table presents the U.S. dollar
equivalent notional amounts and weighted average contractual
exchange rates by expected maturity dates. These notional
amounts generally are used to calculate the contractual payments
to be exchanged under the contract.

|                                         |                                   |                                  |   |       |  |           |   |        |  |            |   |        |  |  |   |        |  |  |   |        | 
|---------------------------------------- | --------------------------------- | -------------------------------- | - | ----- |  | --------- | - | ------ |  | ---------- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                         |                                   |                                  |   |       |  |          
|                                         |                                   | Expected Maturity Date           |   |       |  |          
|                                         |                                   |                                  |   |       |  |          
|                                         |                                   | 2003                             |   | 2004  |  | 2005-2006 |   | Total  |  | Fair Value
|                                         |                                   |                                  |   |       |  |           |   |        |  |           
|                                         |                                   |                                 
|                                         |                                   | (U.S. $ equivalent in thousands)
|Receive Swedish krona/pay euros          |                                   |                                  |   |       |  |           |   |        |  |            |   |        |  |  |   |        |  |  |   |       
|                                         | Contract amount                   |                                  | $ | 3,546 |  |           | $ | 3,546  |  |            | $ |       |  |  | $ | 7,092  |  |  | $ | 6,879  | 
|                                         | Average contractual exchange rate |                                  |   | 9.54  |  |           |   | 9.54   |  |            |   |       |  |  |   | 9.54   |  |  |   |        | 
|Receive Swedish krona/pay British pounds |                                   |                                  |   |       |  |           |   |        |  |            |   |        |  |  |   |        |  |  |   |       
|                                         | Contract amount                   |                                  | $ |      |  |           | $ |       |  |            | $ | 16,374 |  |  | $ | 16,374 |  |  | $ | 15,549 | 
|                                         | Average contractual exchange rate |                                  |   |       |  |           |   |       |  |            |   | 13.86  |  |  |   | 13.86  |  |  |   |        | 
|Receive U.S. dollars/pay euros           |                                   |                                  |   |       |  |           |   |        |  |            |   |        |  |  |   |        |  |  |   |       
|                                         | Contract amount                   |                                  | $ |      |  |           | $ | 22,700 |  |            | $ |       |  |  | $ | 22,700 |  |  | $ | 27,088 | 
|                                         | Average contractual exchange rate |                                  |   |       |  |           |   | 1.05   |  |            |   |       |  |  |   | 1.05   |  |  |   |        | 

Interest Rate Risk

Borrowings under our senior secured credit
facility are sensitive to changes in interest rates. The
weighted average interest rate on our borrowings outstanding
under the senior secured credit facility as of June 30,
2003 was 3.12%.

In January 2002, we entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings under our senior secured credit
facility. The notional amount of this interest rate swap
agreement is $173 million. The agreement entitles us to pay
a base interest rate of 3.45%, in return for the right to
receive a floating interest rate which is based on three-month
LIBOR as of each quarterly measurement date. In the event the
three-month LIBOR at the measurement date exceeds 6%, the base
interest rate is adjusted to the then effective LIBOR up to a
maximum of 8%. USMR had also entered into an interest rate
protection agreement to mitigate risks associated with variable
interest rate borrowings. The notional amount of the agreement
is $20 million with a maturity date of January 29,
2004. The agreement entitles us to pay base interest rate of
3.77% in return for the right to receive a floating interest
rate that is based on three month LIBOR as of each quarterly
measurement date. The net cash amounts paid or received on these
agreements are accrued and recognized as an adjustment to
interest expense.

Item 4.     Controls
and Procedures

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

18



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##### 



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
an unconsolidated entity. As we do not control or manage this
entity, our disclosure controls and procedures with respect to
this entity are necessarily substantially more limited than
those we maintain with respect to our consolidated subsidiaries.


As required by SEC Rule 13a-15(b), 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-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. 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 at the reasonable assurance level.

There has been no change in our internal controls
over financial reporting during our most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial
reporting.

19



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##### 



PART II



OTHER INFORMATION


June 30, 2003

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

We held our annual meeting of stockholders on
May 28, 2003. The matters voted upon at the meeting and the
corresponding results are set forth below.

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

|                        |  |     |            |          |  |  |           | 
|----------------------- |  | --- | ---------- | -------- |  |  | --------- | 
|                        |  | For |            | Withheld
|                        |  |     |            |         
|Frank C. Carlucci       |  |     | 46,943,565 |          |  |  | 2,438,644 | 
|Peter J. Clare          |  |     | 46,864,998 |          |  |  | 2,517,211 | 
|William E. Conway, Jr.  |  |     | 42,297,298 |          |  |  | 7,084,911 | 
|C. Thomas Faulders, III |  |     | 47,046,223 |          |  |  | 2,335,986 | 
|Allan M. Holt           |  |     | 42,985,023 |          |  |  | 6,397,186 | 
|J.H. Binford Peay, III  |  |     | 42,786,098 |          |  |  | 6,596,111 | 
|Thomas W. Rabaut        |  |     | 46,943,565 |          |  |  | 2,438,644 | 
|Francis Raborn          |  |     | 46,943,565 |          |  |  | 2,438,644 | 
|John M. Shalikashvili   |  |     | 47,046,223 |          |  |  | 2,335,986 | 

2. Stockholder ratification of the
appointment of Ernst & Young LLP as independent auditors for
the fiscal year ending December 31, 2003:

|           |  |         |         |         |  |                  |       |  |  |  |   | 
|---------- |  | ------- | ------- | ------- |  | ---------------- | ----- |  |  |  | - | 
|For        |  | Against |         | Abstain |  | Broker Non-Votes
|           |  |         |         |         |  |                 
|48,734,401 |  |         | 640,374 |         |  |                  | 7,434 |  |  |  | 0 | 

Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

31.1 Certification of
Chief Executive Officer

31.2 Certification of
Chief Financial Officer

32.1 Certification of
Chief Executive Officer

32.2 Certification of
Chief Financial Officer

(b) Reports on Form 8-K



| |  |                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------
| |  | On April 29, 2003, we filed a report on
    Form 8-K to include our first quarter 2003 earnings press
    release.

20



---



##### 



SIGNATURE

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



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

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

Dated: August 5, 2003

21