##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




---

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 September 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)                       



---

(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 October 31, 2003, there were 52,134,384
shares outstanding of the Registrants common stock, par
value $.01 per share.



---






---



##### 



UNITED DEFENSE INDUSTRIES, INC.

INDEX

|                                   |  |                                                                                                                                     |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                                     |    | Page
|                                   |  |                                                                                                                                     |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Unaudited Consolidated Financial
    Statements  United Defense Industries, Inc.                                                   |    |      |    | 
|                                   |  | Consolidated Balance Sheets as of
    December 31, 2002 and September 30, 2003 (unaudited)                                          |    |      | 2  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the three months and nine months ended September 30,
    2002 and 2003      |    |      | 3  | 
|                                   |  | Unaudited Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the nine months ended
    September 30, 2003 |    |      | 4  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the nine months ended September 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 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                    |    |      | 19 | 
|Signature                          |  |                                                                                                                                     | 20 |     
|Certifications                     |  |                                                                                                                                     | 21 |     

1



---



##### 



UNITED DEFENSE INDUSTRIES, INC.



CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |           |         | 
|-------------------------------------------------------- | ------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------- | ------------------ | ------- | - | --------- | --------- | ------- | 
|                                                         |                                      | December 31, 2002                                                                                                                                                              |           | September 30, 2003
|                                                         |                                      |                                                                                                                                                                                |           |                   
|                                                         |                                      |                                                                                                                                                                                |           | (Unaudited)       
|ASSETS                                                  
|Current assets:                                          |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         |                                      | Cash and cash equivalents                                                                                                                                                      |           | $                  | 106,802 |   |           | $         | 241,114 | 
|                                                         |                                      | Trade receivables, net                                                                                                                                                         |           |                    | 192,166 |   |           |           | 200,662 | 
|                                                         |                                      | Inventories                                                                                                                                                                    |           |                    | 399,189 |   |           |           | 330,652 | 
|                                                         |                                      | Deferred tax asset                                                                                                                                                             |           |                    | 25,436  |   |           |           |        | 
|                                                         |                                      | Other current assets                                                                                                                                                           |           |                    | 15,458  |   |           |           | 15,765  | 
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         | Total current assets                 |                                                                                                                                                                                |           | 739,051            |         |   |           | 788,193   |        
|Property, plant and equipment, net                       |                                      |                                                                                                                                                                                | 170,378   |                    |         |   | 179,009   |          
|Goodwill, net                                            |                                      |                                                                                                                                                                                | 341,962   |                    |         |   | 341,962   |          
|Intangible assets, net                                   |                                      |                                                                                                                                                                                | 32,624    |                    |         |   | 21,041    |          
|Prepaid pension and postretirement benefit cost          |                                      |                                                                                                                                                                                | 120,987   |                    |         |   | 124,439   |          
|Restricted cash                                          |                                      |                                                                                                                                                                                | 10,120    |                    |         |   | 11,333    |          
|Other assets                                             |                                      |                                                                                                                                                                                | 38,848    |                    |         |   | 43,960    |          
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|Total assets                                             |                                      | $                                                                                                                                                                              | 1,453,970 |                    |         | $ | 1,509,937 |          
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)      
|Current liabilities:                                     |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         |                                      | Current portion of long-term debt                                                                                                                                              |           | $                  | 13,011  |   |           | $         | 39,032  | 
|                                                         |                                      | Accounts payable, trade and other                                                                                                                                              |           |                    | 121,801 |   |           |           | 98,099  | 
|                                                         |                                      | Advanced payments                                                                                                                                                              |           |                    | 491,217 |   |           |           | 457,797 | 
|                                                         |                                      | Accrued and other liabilities                                                                                                                                                  |           |                    | 140,914 |   |           |           | 125,732 | 
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         | Total current liabilities            |                                                                                                                                                                                |           | 766,943            |         |   |           | 720,660   |        
|Long-term liabilities:                                   |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         |                                      | Long-term debt, net of current portion                                                                                                                                         |           |                    | 576,989 |   |           |           | 537,957 | 
|                                                         |                                      | Accrued pension and postretirement benefit cost                                                                                                                                |           |                    | 51,964  |   |           |           | 58,822  | 
|                                                         |                                      | Deferred tax liability                                                                                                                                                         |           |                    | 15,124  |   |           |           | 23,002  | 
|                                                         |                                      | Other liabilities                                                                                                                                                              |           |                    | 72,655  |   |           |           | 84,139  | 
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         | Total liabilities                    |                                                                                                                                                                                |           | 1,483,675          |         |   |           | 1,424,580 |        
|Commitments and contingencies                            |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|Stockholders (deficit) equity:                          |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         |                                      | Common stock $.01 par value, 150,000,000 shares
    authorized; 51,695,109 and 52,095,884 issued and outstanding at
    December 31, 2002 and September 30, 2003, respectively |           |                    | 517     |   |           |           | 521     | 
|                                                         | Additional paid-in-capital           |                                                                                                                                                                                |           | 177,740            |         |   |           | 180,027   |        
|                                                         | Deferred compensation                |                                                                                                                                                                                |           | (547               | )       |   |           | (487      | )      
|                                                         | Retained deficit                     |                                                                                                                                                                                |           | (194,952           | )       |   |           | (83,107   | )      
|                                                         | Accumulated other comprehensive loss |                                                                                                                                                                                |           | (12,463            | )       |   |           | (11,597   | )      
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|                                                         | Total stockholders (deficit) equity |                                                                                                                                                                                |           | (29,705            | )       |   |           | 85,357    |        
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          
|Total liabilities and stockholders equity
    (deficit) |                                      | $                                                                                                                                                                              | 1,453,970 |                    |         | $ | 1,509,937 |          
|                                                         |                                      |                                                                                                                                                                                |           |                    |         |   |           |          

See accompanying notes.

2



---



##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except shares and per share
data)


|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |            |           | 
|--------------------------------- | ---------------------------------------------------------------- | ------------------ | ------- | ----------------- | ------- | ---- | ------ | ---------- | ------- | - | ------- | ---------- | --------- | - | ------- | ---------- | --------- | 
|                                  |                                                                  |                    |         |                  
|                                  |                                                                  | Three months ended |         | Nine months ended
|                                  |                                                                  | September 30,      |         | September 30,    
|                                  |                                                                  |                    |         |                  
|                                  |                                                                  | 2002               |         | 2003              |         | 2002 |        | 2003      
|                                  |                                                                  |                    |         |                   |         |      |        |           
|Revenue:                          |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Sales                                                            |                    | $       | 529,701           |         |      | $      | 507,915    |         |   | $       | 1,204,182  |           |   | $       | 1,527,891  |          
|Costs and expenses:               |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Cost of sales                                                    |                    |         | 426,976           |         |      |        | 400,298    |         |   |         | 971,672    |           |   |         | 1,210,061  |          
|                                  | Selling, general and administrative expenses                     |                    |         | 37,528            |         |      |        | 38,065     |         |   |         | 98,013     |           |   |         | 117,003    |          
|                                  | Research and development                                         |                    |         | 7,640             |         |      |        | 10,717     |         |   |         | 22,854     |           |   |         | 16,752     |          
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  |                                                                  | Total expenses     |         |                   | 472,144 |      |        |            | 449,080 |   |         |            | 1,092,539 |   |         |            | 1,343,816 | 
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Income from operations            |                                                                  |                    | 57,557  |                   |         |      | 58,835 |            |         |   | 111,643 |            |           |   | 184,075 |           
|Other income (expense):           |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Earnings (loss) related to investments in
    foreign affiliates |                    |         | (561              | )       |      |        | 5,003      |         |   |         | 6,652      |           |   |         | 16,658     |          
|                                  | Interest income                                                  |                    |         | 1,188             |         |      |        | 1,012      |         |   |         | 3,346      |           |   |         | 2,909      |          
|                                  | Interest expense                                                 |                    |         | (12,611           | )       |      |        | (7,100     | )       |   |         | (25,246    | )         |   |         | (21,801    | )        
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Total other expense               |                                                                  |                    | (11,984 | )                 |         |      | (1,085 | )          |         |   | (15,248 | )          |           |   | (2,234  | )         
|Income before income taxes        |                                                                  |                    | 45,573  |                   |         |      | 57,750 |            |         |   | 96,395  |            |           |   | 181,841 |           
|Provision for income taxes        |                                                                  |                    | 493     |                   |         |      | 20,360 |            |         |   | 5,000   |            |           |   | 69,996  |           
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Net income                        |                                                                  | $                  | 45,080  |                   |         | $    | 37,390 |            |         | $ | 91,395  |            |           | $ | 111,845 |           
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|Earnings per common share-basic   |                                                                  | $                  | 0.88    |                   |         | $    | 0.72   |            |         | $ | 1.78    |            |           | $ | 2.16    |           
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Weighted average common shares outstanding                       |                    |         | 51,513,743        |         |      |        | 52,029,410 |         |   |         | 51,239,233 |           |   |         | 51,883,593 |          
|Earnings per common share-diluted |                                                                  | $                  | 0.85    |                   |         | $    | 0.71   |            |         | $ | 1.73    |            |           | $ | 2.12    |           
|                                  |                                                                  |                    |         |                   |         |      |        |            |         |   |         |            |           |   |         |           
|                                  | Weighted average common shares outstanding                       |                    |         | 52,759,182        |         |      |        | 52,994,910 |         |   |         | 52,706,671 |           |   |         | 52,802,260 |          

See accompanying notes.

3



---



##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS


OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)


(In thousands)


|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------ | --- | ---------- |  | ------------ | ------- | -------- |  | ------------- | ---- | ----- |  | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                  |  |        |     |            |  |              |         |          |  | Accumulated   |      |      
|                                                                                  |  |        |     | Additional |  |              |         |          |  | Other         |      |      
|                                                                                  |  | Common |     | Paid-In    |  | Deferred     |         | Retained |  | Comprehensive |      |      
|                                                                                  |  | Stock  |     | Capital    |  | Compensation |         | Deficit  |  | (Loss)/Gain   |      | Total
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |      
|Balance, December 31, 2002                                                        |  | $      | 517 |            |  | $            | 177,740 |          |  | $             | (547 | )     |  | $ | (194,952 | ) |  | $ | (12,463 | ) |  | $ | (29,705 | )
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                       |  |        |    |            |  |              |        |          |  |               | 60   |       |  |   |         |   |  |   |        |   |  |   | 60      |  
|Exercise of stock options                                                         |  |        | 4   |            |  |              | 2,287   |          |  |               |     |       |  |   |         |   |  |   |        |   |  |   | 2,291   |  
|Net foreign currency translation                                                  |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | 1,270   |   |  |   | 1,270   |  
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |        |    |            |  |              |        |          |  |               |     |       |  |   |         |   |  |   | (404    | ) |  |   | (404    | )
|Net income for the nine months ended
    September 30, 2003                       |  |        |    |            |  |              |        |          |  |               |     |       |  |   | 111,845  |   |  |   |        |   |  |   | 111,845 |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                                        |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   | 112,711 |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  
|Balance, September 30, 2003                                                       |  | $      | 521 |            |  | $            | 180,027 |          |  | $             | (487 | )     |  | $ | (83,107  | ) |  | $ | (11,597 | ) |  | $ | 85,357  |  
|                                                                                  |  |        |     |            |  |              |         |          |  |               |      |       |  |   |          |   |  |   |         |   |  |   |         |  

See accompanying notes.

4



---



##### 



UNITED DEFENSE INDUSTRIES, INC.



UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                  |                                                             |                   |          |          |   |   |         |         |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------- | -------- | -------- | - | - | ------- | ------- | -
|                                                                                  |                                                             |                  
|                                                                                  |                                                             | Nine months ended
|                                                                                  |                                                             | September 30,    
|                                                                                  |                                                             |                  
|                                                                                  |                                                             | 2002              |          | 2003    
|                                                                                  |                                                             |                   |          |         
|Operating activities                                                              |                                                             |                   |          |          |   |   |         |        
|Net income                                                                        |                                                             | $                 | 91,395   |          |   | $ | 111,845 |        
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                             |                   |          |          |   |   |         |        
|                                                                                  | Depreciation                                                |                   |          | 17,664   |   |   |         | 20,170  |  
|                                                                                  | Amortization of software                                    |                   |          | 4,131    |   |   |         | 3,585   |  
|                                                                                  | Amortization of other intangibles                           |                   |          | 6,444    |   |   |         | 11,261  |  
|                                                                                  | Amortization of financing costs                             |                   |          | 2,481    |   |   |         | 2,524   |  
|                                                                                  | Net loss from early extinguishment of debt                  |                   |          | 1,859    |   |   |         |        |  
|                                                                                  | Deferred tax provision                                      |                   |          |         |   |   |         | 33,314  |  
|Changes in assets and liabilities:                                                |                                                             |                   |          |          |   |   |         |        
|                                                                                  | Trade receivables                                           |                   |          | (53,827  | ) |   |         | (6,733  | )
|                                                                                  | Inventories                                                 |                   |          | 19,845   |   |   |         | 71,006  |  
|                                                                                  | Other assets                                                |                   |          | (6,220   | ) |   |         | (7,719  | )
|                                                                                  | Prepaid pension and postretirement benefit cost             |                   |          | (2,185   | ) |   |         | (3,452  | )
|                                                                                  | Accounts payable, trade and other                           |                   |          | (10,184  | ) |   |         | (24,626 | )
|                                                                                  | Advanced payments                                           |                   |          | 44,321   |   |   |         | (37,572 | )
|                                                                                  | Accrued and other liabilities                               |                   |          | (35,334  | ) |   |         | (6,635  | )
|                                                                                  | Accrued pension and postretirement benefit cost             |                   |          | (4,665   | ) |   |         | 5,252   |  
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Cash provided by operating activities                                             |                                                             |                   | 75,725   |          |   |   | 172,220 |        
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Investing activities                                                              |                                                             |                   |          |          |   |   |         |        
|                                                                                  | Capital expenditures                                        |                   |          | (13,174  | ) |   |         | (32,247 | )
|                                                                                  | Purchase of Cell ITS, net of $0.2 million
    cash acquired |                   |          | (4,135   | ) |   |         |        |  
|                                                                                  | Purchase of USMR, net of $7.3 million cash
    acquired     |                   |          | (307,404 | ) |   |         |        |  
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Cash used in investing activities                                                 |                                                             |                   | (324,713 | )        |   |   | (32,247 | )      
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Financing activities                                                              |                                                             |                   |          |          |   |   |         |        
|                                                                                  | Payments on long-term debt                                  |                   |          | (90,900  | ) |   |         | (13,011 | )
|                                                                                  | Proceeds from senior secured facility                       |                   |          | 300,000  |   |   |         |        |  
|                                                                                  | Proceeds from sale of common stock                          |                   |          | 3,281    |   |   |         | 2,291   |  
|                                                                                  | Payments for financing and transaction cost                 |                   |          | (5,470   | ) |   |         |        |  
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Cash provided by (used in) financing activities                                   |                                                             |                   | 206,911  |          |   |   | (10,720 | )      
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Effect of exchange rate changes on cash                                           |                                                             |                   | 6,312    |          |   |   | 5,059   |        
|(Decrease) increase in cash and cash equivalents                                  |                                                             |                   | (35,765  | )        |   |   | 134,312 |        
|Cash and cash equivalents, beginning of year                                      |                                                             |                   | 90,535   |          |   |   | 106,802 |        
|                                                                                  |                                                             |                   |          |          |   |   |         |        
|Cash and cash equivalents, end of period                                          |                                                             | $                 | 54,770   |          |   | $ | 241,114 |        
|                                                                                  |                                                             |                   |          |          |   |   |         |        

See accompanying notes.

5



---



##### 



UNITED DEFENSE INDUSTRIES, INC.



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


September 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 September 30,
2003 and the results of operations for the three months and nine
months ended September 30, 2002 and 2003 and cash flows for
the nine months ended September 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 Reports on Form 10-Q for the quarters ended March
31, and June 30, 2003.

2.     Summary of
Significant Accounting Principles

Stock-Based
Compensation

At September 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                    |        | Nine months ended
|                                                                                                                                                    |                     | September 30,                         |        | September 30,    
|                                                                                                                                                    |                     |                                       |        |                  
|                                                                                                                                                    |                     | 2002                                  |        | 2003              |  | 2002 |        | 2003
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |     
|                                                                                                                                                    |                     |                                      
|                                                                                                                                                    |                     | (In thousands, except per share data)
|Net income, as reported                                                                                                                             |                     | $                                     | 45,080 |                   |  | $    | 37,390 |      |  | $ | 91,395 |      |  | $ | 111,845 |     
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |                     |                                       | 15     |                   |  |      | 12     |      |  |   | 45     |      |  |   | 37      |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                     |                                       | (220   | )                 |  |      | (1,127 | )    |  |   | (660   | )    |  |   | (3,225  | )   
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     
|Pro forma net income                                                                                                                                |                     | $                                     | 44,875 |                   |  | $    | 36,275 |      |  | $ | 90,780 |      |  | $ | 108,657 |     
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     
|Earnings per share:                                                                                                                                 |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     
|                                                                                                                                                    | Basicas reported   |                                       | $      | 0.88              |  |      | $      | 0.72 |  |   | $      | 1.78 |  |   | $       | 2.16 | 
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     
|                                                                                                                                                    | Basicpro forma     |                                       | $      | 0.87              |  |      | $      | 0.70 |  |   | $      | 1.77 |  |   | $       | 2.09 | 
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     
|                                                                                                                                                    | Dilutedas reported |                                       | $      | 0.85              |  |      | $      | 0.71 |  |   | $      | 1.73 |  |   | $       | 2.12 | 
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     
|                                                                                                                                                    | Dilutedpro forma   |                                       | $      | 0.85              |  |      | $      | 0.68 |  |   | $      | 1.72 |  |   | $       | 2.06 | 
|                                                                                                                                                    |                     |                                       |        |                   |  |      |        |      |  |   |        |      |  |   |         |     

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 2003, we granted new stock options to purchase
2,208,000 common shares that vest over three years at exercise
prices of $23.15 and 24.98, which resulted in no additional
compensation expense. There were no options granted in 2002.

New
Accounting Pronouncements

For the nine months ended September 30, 2002
the loss on extinguishment of debt of $1,859,000 previously
reported as an extraordinary item was reclassified to income
before extraordinary item (interest expense) due to the adoption
of FAS 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.

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 many significant decisions,
although we have the ability to exercise influence over its
operating and financial policies. Our share of the earnings
related to our investments was ($0.6) million and
$5.0 million for the three months ended September 30,
2002 and 2003 and $6.7 million and $16.7 million for
the nine months ended September 30, 2002 and 2003,
respectively.

The following table reports financial results
from the joint venture in Turkey for the three months and nine
months ended September 30 of 2002 and 2003.

|              |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |         | 
|------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | 
|              |  |                    |        |                  
|              |  | Three months ended |        | Nine months ended
|              |  | September 30,      |        | September 30,    
|              |  |                    |        |                  
|              |  | 2002               |        | 2003              |  | 2002 |        | 2003
|              |  |                    |        |                   |  |      |        |     
|              |  |                    |        |                   |  |     
|              |  |                    |        | (In thousands)    |  |     
|Sales         |  | $                  | 29,824 |                   |  | $    | 50,848 |      |  | $ | 97,626 |  |  | $ | 170,580 | 
|Cost of Sales |  |                    | 15,098 |                   |  |      | 23,936 |      |  |   | 50,139 |  |  |   | 81,226  | 
|Net Income    |  |                    | 2,698  |                   |  |      | 9,812  |      |  |   | 19,492 |  |  |   | 30,152  | 

4. Comprehensive Income

Comprehensive income was $94.8 million and
$112.7 million for the nine month periods ended
September 30, 2002 and 2003, respectively. Comprehensive
income consists primarily of net income ($91.4 million and
$111.8 million for the nine month periods ended
September 30, 2002 and 2003), net foreign currency
translation adjustments and fair value adjustments of foreign
currency and interest rate hedges, net of taxes.

7



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $577 million at September 30, 2003.
The facilities bear interest at variable rates with a weighted
average rate of 3.08% at September 30, 2003. These loans
are due through 2009 and provide for quarterly principal and
interest payments. A prepayment of $13 million was made on
August 29, 2003. The next scheduled principal payment is
due in the first quarter of 2004.

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 asset rate of
return assumption 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 $5 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 September 30, 2003, the Army has paid us
$36.3 million in termination costs and fees. In order to
complete the Crusader termination process, we are negotiating a
final termination settlement with the Army.

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, in 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

8



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 or threatened that we
expect to 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 consist of Allowable Costs. As of
September 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 have completed 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
$29.3 million if the most stringent clean-up standard were
to be adopted. Up to $8.9 million of such remediation cost,
to the extent the costs are not recovered on USMRs
government contracts or from other responsible parties, may be
recoverable from USMRs former shareholders, under an
escrow arrangement established in 1997 when the San Diego
operation was acquired by USMR. An additional $15 million
escrow fund was established in our 2002 acquisition of USMR,
which is also subject to claims we may make in respect of
USMRs sediment exposure.

Pursuant to the terms of the 1997 acquisition of
United Defense, L.P., FMC Corporation and Harsco Corporation
(collectively, the Sellers) are required to
reimburse us for 75% of certain remediation costs that are
Non-Allowable Costs through October 6, 2007 for
environmental losses we have previously identified to the
Sellers. Accordingly, we have recorded a receivable for $1.3
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 a
manufacturing and engineering facility in Fridley, Minnesota.
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.

9



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 consolidated
results of operations. The nine months ended September 30,
2002 is on a pro forma basis and assumes that the USMR
acquisition occurred at the beginning of the period.

|              |                                   |                    |         |                   |  |      |         |      |  |   |           |      |  |   |           |      | 
|------------- | --------------------------------- | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- | ---- |  | - | --------- | ---- | 
|              |                                   |                    |         |                  
|              |                                   | Three months ended |         | Nine months ended
|              |                                   | September 30,      |         | September 30,    
|              |                                   |                    |         |                  
|              |                                   | 2002               |         | 2003              |  | 2002 |         | 2003
|              |                                   |                    |         |                   |  |      |         |     
|              |                                   |                   
|              |                                   | (In thousands)    
|Sales         |                                   | $                  | 529,701 |                   |  | $    | 507,915 |      |  | $ | 1,455,425 |      |  | $ | 1,527,891 |     
|Cost of Sales |                                   |                    | 426,976 |                   |  |      | 400,298 |      |  |   | 1,187,322 |      |  |   | 1,210,061 |     
|Net Income    |                                   |                    | 45,080  |                   |  |      | 37,390  |      |  |   | 94,147    |      |  |   | 111,845   |     
|              | Earnings per common share-basic   |                    | $       | 0.88              |  |      | $       | 0.72 |  |   | $         | 1.84 |  |   | $         | 2.16 | 
|              | Earnings per common share-diluted |                    | $       | 0.85              |  |      | $       | 0.71 |  |   | $         | 1.79 |  |   | $         | 2.12 | 

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

|                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |         | 
|------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | 
|                                                                          |  |                                       |        |                  
|                                                                          |  | Three months ended                    |        | Nine months ended
|                                                                          |  | September 30,                         |        | September 30,    
|                                                                          |  |                                       |        |                  
|                                                                          |  | 2002                                  |        | 2003              |  | 2002 |        | 2003
|                                                                          |  |                                       |        |                   |  |      |        |     
|                                                                          |  |                                      
|                                                                          |  | (In thousands, except per share data)
|Net Income                                                                |  | $                                     | 45,080 |                   |  | $    | 37,390 |      |  | $ | 91,395 |  |  | $ | 111,845 | 
|                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |         | 
|Average common shares outstanding:                                        |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |         | 
|Average common shares outstanding for basic
    computations              |  |                                       | 51,514 |                   |  |      | 52,029 |      |  |   | 51,239 |  |  |   | 51,884  | 
|Dilutive stock options-based on the treasury
    stock method             |  |                                       | 1,245  |                   |  |      | 966    |      |  |   | 1,468  |  |  |   | 918     | 
|                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |         | 
|Average number of common shares outstanding for
    dilutive computations |  |                                       | 52,759 |                   |  |      | 52,995 |      |  |   | 52,707 |  |  |   | 52,802  | 
|                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |         | 

10



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                    |                                   |                                       |   |                   |  |      |   |      |  |  |   |      |  |  |   |      | 
|------------------- | --------------------------------- | ------------------------------------- | - | ----------------- |  | ---- | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                    |                                   |                                       |   |                  
|                    |                                   | Three months ended                    |   | Nine months ended
|                    |                                   | September 30,                         |   | September 30,    
|                    |                                   |                                       |   |                  
|                    |                                   | 2002                                  |   | 2003              |  | 2002 |   | 2003
|                    |                                   |                                       |   |                   |  |      |   |     
|                    |                                   |                                      
|                    |                                   | (In thousands, except per share data)
|Earnings per share: |                                   |                                       |   |                   |  |      |   |      |  |  |   |      |  |  |   |     
|                    | Earnings per common share-basic   |                                       | $ | 0.88              |  |      | $ | 0.72 |  |  | $ | 1.78 |  |  | $ | 2.16 | 
|                    |                                   |                                       |   |                   |  |      |   |      |  |  |   |      |  |  |   |     
|                    | Earnings per common share-diluted |                                       | $ | 0.85              |  |      | $ | 0.71 |  |  | $ | 1.73 |  |  | $ | 2.12 | 
|                    |                                   |                                       |   |                   |  |      |   |      |  |  |   |      |  |  |   |     

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.

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

|                                       |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|-------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                       |  |                    |         |                  
|                                       |  | Three months ended |         | Nine months ended
|                                       |  | September 30,      |         | September 30,    
|                                       |  |                    |         |                  
|                                       |  | 2002               |         | 2003              |  | 2002 |         | 2003
|                                       |  |                    |         |                   |  |      |         |     
|                                       |  |                   
|                                       |  | (in thousands)    
|Sales:                                 |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                        |  | $                  | 423,962 |                   |  | $    | 375,421 |      |  | $ | 1,098,443 |   |  | $ | 1,151,425 |  
|Ship Repair and Maintenance            |  |                    | 105,739 |                   |  |      | 132,494 |      |  |   | 105,739   |   |  |   | 376,466   |  
|                                       |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total sales                            |  |                    | 529,701 |                   |  |      | 507,915 |      |  |   | 1,204,182 |   |  |   | 1,527,891 |  
|                                      
|Income before interest and taxes:      |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Defense Systems                        |  |                    | 54,656  |                   |  |      | 60,454  |      |  |   | 124,233   |   |  |   | 190,224   |  
|Ship Repair and Maintenance            |  |                    | 6,860   |                   |  |      | 8,347   |      |  |   | 6,860     |   |  |   | 24,872    |  
|Corporate                              |  |                    | (4,520  | )                 |  |      | (4,963  | )    |  |   | (12,798   | ) |  |   | (14,363   | )
|                                       |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Total income before interest and taxes |  |                    | 56,996  |                   |  |      | 63,838  |      |  |   | 118,295   |   |  |   | 200,733   |  
|Interest, net                          |  |                    | (11,423 | )                 |  |      | (6,088  | )    |  |   | (21,900   | ) |  |   | (18,892   | )
|                                       |  |                    |         |                   |  |      |         |      |  |   |           |   |  |   |           |  
|Income before income taxes             |  | $                  | 45,573  |                   |  | $    | 57,750  |      |  | $ | 96,395    |   |  | $ | 181,841   |  

|                            |  |              |           |               |  |   |           | 
|--------------------------- |  | ------------ | --------- | ------------- |  | - | --------- | 
|                            |  | December 31, |           | September 30,
|                            |  | 2002         |           | 2003         
|                            |  |              |           |              
|Total assets: (a)           |  |              |           |               |  |   |           | 
|Defense Systems             |  | $            | 884,261   |               |  | $ | 838,516   | 
|Ship Repair and Maintenance |  |              | 421,300   |               |  |   | 412,735   | 
|Corporate and eliminations  |  |              | 148,409   |               |  |   | 258,686   | 
|                            |  |              |           |               |  |   |           | 
|Total assets                |  | $            | 1,453,970 |               |  | $ | 1,509,937 | 
|                            |  |              |           |               |  |   |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, prepaid
    taxes and deferred financing costs. The substantial increase in
    Corporate assets was primarily due to a very favorable cash
    balance generated during 2003.

11



---



##### 



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
nine month periods ended September 30, 2003, was
$20.4 million and $70.0 million, respectively, which
increased by $19.9 million and $65.0 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. In August
2003, Carlyle (including its affiliated officers and entities)
sold 11,805,336 shares of our stock and on November 5,
2003, completed the sale of an additional 1,491,346 shares,
thereby reducing its current holding to 11,663,903 shares, or
22% of our outstanding shares. Given the decline in
Carlyles holdings, we expect its 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 $1.5 million for various management services provided by
Carlyle for the nine months ended September 30, 2003.

We have entered into an agreement with CPU
Technology, Inc. (CPU/ T) to purchase approximately
$1.5 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 $3.6 million and
$13.5 million of royalties, license fees and technical
service fees during the nine month periods ended
September 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



---



##### 



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 
    September 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 reports on Form 10-Q
for the three months ended March 31 and June 30, 2003,
and our Form S-3 Registration Statement and Prospectus
Supplement dated October 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, such as our July 2002 acquisition of USMR, where
the results of operations for the acquired business are included
in our results only for periods subsequent to the date of
acquisition.

Our contracts typically fall into two categories,
cost-plus and fixed-price. Our contracts for research,
engineering, prototype, 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 accepted 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

13



---



##### 



the risks and rewards of ownership transfer.
Gross margin on each unit delivered or accepted is recognized
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. Our ship repair sales in the United
States under fixed-price contracts are recognized using the
percentage of completion method. Under this 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 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 September 30, 2003, a substantial majority of which
was derived from sole-source, prime contracts. Approximately 79%
of our sales for the nine months ended September 30, 2003 were
to the U.S. government, primarily to agencies of the DoD
(excluding sales under the U.S. Governments Foreign
Military Sales program), or through subcontracts with other
government contractors.

Except as indicated in the U.S. Army
Transformation discussion below, 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 |       | Nine months ended
|                            |                                         | September 30,      |       | September 30,    
|                            |                                         |                    |       |                  
|                            |                                         | 2002               |       | 2003              |  | 2002 |       | 2003 
|                            |                                         |                    |       |                   |  |      |       |      
|                            |                                         |                   
|                            |                                         | (In millions)     
|Defense Systems:            |                                         |                    |       |                   |  |      |       |       |  |   |         |       |  |   |         |      
|                            | Bradley Family of Vehicles              |                    | $     | 125.3             |  |      | $     | 46.7  |  |   | $       | 266.3 |  |   | $       | 257.5 | 
|                            | Naval Ordnance                          |                    |       | 55.9              |  |      |       | 64.1  |  |   |         | 140.7 |  |   |         | 181.3 | 
|                            | Vertical Launch Systems                 |                    |       | 29.8              |  |      |       | 32.0  |  |   |         | 88.7  |  |   |         | 81.3  | 
|                            | Combat, Engineering & Recovery Vehicles |                    |       | 41.8              |  |      |       | 19.5  |  |   |         | 107.4 |  |   |         | 85.8  | 
|                            | Artillery Systems                       |                    |       | 86.3              |  |      |       | 117.5 |  |   |         | 252.7 |  |   |         | 237.5 | 
|                            | Assault, Amphibious Vehicles            |                    |       | 21.3              |  |      |       | 32.5  |  |   |         | 42.8  |  |   |         | 97.0  | 
|                            | Other                                   |                    |       | 63.6              |  |      |       | 63.1  |  |   |         | 199.9 |  |   |         | 211.0 | 
|                            |                                         |                    |       |                   |  |      |       |       |  |   |         |       |  |   |         |      
|Total Defense Systems       |                                         |                    | 424.0 |                   |  |      | 375.4 |       |  |   | 1,098.5 |       |  |   | 1,151.4 |      
|Ship Repair and Maintenance |                                         |                    | 105.7 |                   |  |      | 132.5 |       |  |   | 105.7   |       |  |   | 376.5   |      
|                            |                                         |                    |       |                   |  |      |       |       |  |   |         |       |  |   |         |      
|Total                       |                                         | $                  | 529.7 |                   |  | $    | 507.9 |       |  | $ | 1,204.2 |       |  | $ | 1,527.9 |      
|                            |                                         |                    |       |                   |  |      |       |       |  |   |         |       |  |   |         |      

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

14



---



##### 



Results of Operations

Revenue

Revenue for the three months ended
September 30, 2003 of $507.9 million was
$21.8 million lower than the $529.7 million for the
comparable period in 2002, driven by lower Defense Systems
segment sales which in turn were partially offset by higher Ship
Repair and Maintenance segment sales. Defense Systems segment
revenue of $375.4 million for the three months ended
September 30, 2003 was $48.6 million lower than for the
same period in 2002, primarily due to $78.6 million of
lower Bradley upgrade fieldings which were partially offset by a
ramp-up in NLOS-C and DD(X) Advanced Gun System
(AGS) development work, and higher Assault
Amphibious Vehicle (AAV) kit deliveries. Ship Repair
and Maintenance segment sales of $132.5 million for the
three month period ended September 30, 2003 were
$26.8 million higher than the same period in 2002.
Increased sales in our Ship Repair and Maintenance segment
largely reflect the Navys increased maintenance needs
resulting from the broader and more extended deployment of the
fleet in connection with the Iraq war.

Revenue of $1.5 billion for the nine months
ended September 30, 2003 was $323.7 million higher
than the $1.2 billion for the same period in 2002, an
increase of 26.9%. Sales from our Ship Repair and Maintenance
segment, which was acquired in July 2002 and therefore only
partially included in 2002 results, accounted for
$270.8 million, or 83.7 % of the increase. Our Defense
Systems segment sales of $1.15 billion were
$52.9 million higher in the 2003 period mainly attributed
to higher AAV deliveries and a ramp-up in DD(X) AGS development
work.

Gross
profit

Gross profit of $107.6 million in the three
month period ended September 30, 2003 was $4.9 million
higher than the $102.7 million for the corresponding period
in 2002. Gross profit as a percentage of sales for the three
months ended September 30, 2003 was 21.1% compared with
19.4% for the same period in 2002. This improvement reflects
favorable contract adjustments and higher royalty payments from
our foreign affiliate in Turkey.

Gross profit for the nine months ended
September 30, 2003 was $317.8 million, $85.3 million
higher than the $232.5 million in the same period in 2002.
Gross profit percentage of sales for the nine months ended
September 30, 2003 was 20.8% compared with 19.3% for the
same period in 2002. The increase in the 2003 profit rate was
due to an 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.

Selling,
general and administrative expenses

Selling, general and administrative expenses for
the three months ended September 30, 2003 were
$38.1 million compared with $37.5 million for the same
period in 2002.

Selling, general and administrative expenses for
the nine months ended September 30, 2003 and 2002 were
$117.0 million and $98.0 million, respectively. The
inclusion of USMR for all nine months in 2003 accounted for
$17.0 million of the $19.0 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
$10.7 million and $16.8 million for the three and nine
month periods ended September 30, 2003, respectively,
compared with $7.6 million and $22.9 million for the
corresponding prior periods. Research and development costs were
higher in the three months period ended September 30, 2003
due to spending on development projects for future technologies.
Research and development costs were higher in the nine months of
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.

15



---



##### 



Earnings
(loss) from foreign affiliates

Earnings from foreign affiliates were
$5.0 million for the three months ended September 30,
2003 as compared with ($0.6) million in the same period last
year. For the nine months ended September 30, 2003,
earnings from foreign affiliates was $16.7 million compared
with $6.7 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 $6.1 million in the
three months ended September 30, 2003 compared with
$11.4 million for the same period in 2002. For the nine
months ended September 30, 2003, net interest expense of
$18.9 million was $3.0 million lower than the corresponding
2002 period. The higher interest expense in 2002 was due to the
write-off of unamortized financing costs due to early
extinguishment of debt and higher interest rates.

Provision
for Income Taxes

The provision for income taxes for the
three-month period ended September 30, 2003 was
$20.4 million compared with $0.5 million for the
corresponding 2002 period. For the nine months ended
September 30, 2003, the provision for income taxes was
$70.0 million compared with $5.0 million in the same
period in 2002. The respective increases of $19.9 million
and $65.0 million for the three month and nine 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 is
based on an estimated annual effective income tax rate and more
closely reflects underlying statutory tax rates as a result of
the reversal of the valuation allowance against net operating
loss carryforwards and other deferred tax assets in 2002.

Net
income

As a result of the foregoing factors, we had a
net income of $37.4 million in the three months ended
September 30, 2003, compared with $45.1 million in the
same prior period. For the nine months ended September 30,
2003, we had net income of $111.8 million compared with
$91.4 million for the same period in 2002.

Liquidity, Capital Resources and Financial
Condition

Cash provided by operating activities was
$172.2 million for the nine month period ended
September 30, 2003 compared with $75.7 million in the
same period in 2002, a $96.5 million increase. The primary
reasons for this increase were higher net income, tax payments
less than the tax provision and receipt of higher earnings
distributions, net of taxes, from our joint venture in Turkey.

Cash used in investing activities was
$32.2 million for the nine month period ended
September 30, 2003 compared with $324.7 million in the
prior year period. Capital expenditures of $32.2 million in
2003 were $19.1 million higher than the same prior period,
due primarily to 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 USMR for $307.4 million (net of
$7.3 million cash acquired), and Cell ITS AB for
$4.1 million.

Cash used in financing activities was
$10.7 million for the nine month period ended
September 30, 2003, compared with $206.9 million of
cash provided in the same period in 2002. On July 2, 2002,
we amended our credit facility to borrow an additional
$300 million for the purchase of USMR. This increase was
partially offset by the repayment of $90.9 million of debt
during the nine month period. Principal repayments on debt in
the nine months ended September 30, 2003 were $13.0 million.

Based on current levels of operations and
anticipated growth, we believe that our cash from operations,
together with other available sources of liquidity, including
borrowings available under the revolving credit

16



---



##### 



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

The principal developments involving the U.S.
Army which might significantly affect our ground combat vehicle
business were discussed under the heading, U.S. Army
Transformation in both our Form 10-K Report for the
year ended December 31, 2002 and our Form 10-Q Report
for the three months ended June 30, 2003. Supplementing
such discussion, we note that the DoD appropriation for the
fiscal year ending September 30, 2004 (FY04)
was recently signed into law. The elements of the FY04
appropriation which are likely to have the greatest significance
for the ground combat vehicle portion of our Defense Systems
segment are as follows:



| |     |                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The $1.7 billion sought by the
    Administration for FCS and related activities was provided. In
    doing so, the appropriation act designated the Non-Line of
    Sight-Cannon (NLOS-C) as a separate program element, segregated
    $353 million of the FCS appropriation for NLOS-C, and
    restated the previous statutory requirement that NLOS-C be
    fielded by 2008.
|
| | (2) | $221 million was appropriated for additional
    Bradley upgrades.                                                                                                                                                                                                                                                                                                                
|
| | (3) | Approximately $1 billion was provided for
    Stryker vehicles, meaning that this major share of the
    Armys combat vehicle procurement is to be spent on a
    program in which we participate only minimally.                                                                                                                                                                

Regarding the Bradley and NLOS-C appropriations
for FY04, we continue to note that as such appropriations also
cover program administration by the Army, we ordinarily receive
only a portion (typically, 6575% in our long experience
with the Bradley), rather than all, of such funding. Also,
because FCS and NLOS-C remain in such an early stage and the
subject of ongoing review within the Government, we are not at
all certain as to what portion of this appropriation will
ultimately translate into revenue for the Company.

Finally, there are substantial indications that
the Army expects the production and fielding schedule for the
FCS program overall to be delayed by two or more years. The
effects of delays in NLOS-C and/or FCS more generally could
include (i) reducing our revenues and profits during the
delay period, particularly if vehicle production is postponed,
and (ii) extending the period during which our facilities
involved in the production of ground combat vehicles could
experience a gap between the potential cessation of Bradley work
and the commencement of production of NLOS-C and/or other FCS
vehicles.

17



---



##### 





|        |                                                                                    
|------- | -----------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk - September 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.

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 and swap agreements as
of September 30, 2003 was 3.20%.

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 specified contract 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 specified contract 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 our disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, we have investments in
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-14(c) and 15d-14(c) 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.

18



---



##### 



PART II



OTHER INFORMATION


September 30, 2003



|        |                                     
|------- | ------------------------------------
|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 July 24, 2003, we filed a report on
    Form 8-K to include our second quarter 2003 earnings press
    release.                                                                                                                                                                                                                                                                                                  
|
| |  | On August 5, 2003, we filed a report on
    Form 8-K/ A amending the revenue by program table in our
    second quarter 2003 earnings press release as reported on
    Form 8-K dated July 24, 2003.                                                                                                                                                                                                                
|
| |  | On August 6, 2003, we filed a report on
    Form 8-K indicating we had entered into an Underwriting
    Agreement with Lehman Brothers, Inc. on behalf of several
    Underwriters in conjunction with the public offering of up to
    10,800,000 shares of our common stock (plus an over-allotment
    option to purchase 1,080,000 additional shares of common stock)
    by certain named Selling Stockholders.

19



---



##### 



SIGNATURE

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



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

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

Dated: November 7, 2003

20