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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934




|                                 |                              
|-------------------------------- | -----------------------------
|For Year Ended: December 31,2002 | Commission File No. 001-16821



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UNITED DEFENSE INDUSTRIES, INC.

(Exact name of registrant as specified in its
charter)


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



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1525 Wilson Boulevard,
Suite 700,

Arlington, Virginia, 22209-2411


(703) 312-6100


(Address and telephone number of principal
executive offices of


Registrant and each Co-Registrant)




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

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

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

None


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

Indicate by check mark if the disclosure of
delinquent filers pursuant to Item 405 or
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in part III of this Form 10-K or any amendment to
this
Form 10-K.     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

As of February 28, 2003, the aggregate
market value of the common stock held by non-affiliates of the
registrant was $575,160,788 based on the closing price of $21.48
per share on the New York Stock Exchange on such date.

Common Stock, $.01 par value 51,725,625 Shares
Outstanding as of February 28, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the registrants
definitive Proxy Statement for its 2002 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A no later
than April 30, 2003, is incorporated by reference in Part
III of this Report.



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TABLE OF CONTENTS



|                         |                                                                                                   |  |  |  |  |  |  | 
|------------------------ | ------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS       
|                         | ITEM 1. Description of Business                                                                  
|                         | ITEM 2. Properties                                                                               
|                         | ITEM 3. Legal Proceedings                                                                        
|                         | ITEM 4. Submission of Matters to a Vote of Security Holders                                      
|                         | ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters                    
|                         | ITEM 6. Selected Financial Data                                                                  
|                         | ITEM 7. Managements Discussion and Analysis of the Results of Operations and Financial Condition
|                         | ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk                               
|                         | ITEM 8. Consolidated Financial Statements and Supplementary Data                                 
|                         | ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                         
|SIGNATURES              
|CERTIFICATIONS          
|CERTIFICATIONS          
|Consent of Ernst & Young
|Notice                  
|Notice                  



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TABLE OF CONTENTS

|         |  |                                                                                                   |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                   |  | Page
|         |  |                                                                                                   |  |     
|PART I  
|Item 1.  |  | Business                                                                                          |  |      | 2  | 
|Item 2.  |  | Properties                                                                                        |  |      | 19 | 
|Item 3.  |  | Legal Proceedings                                                                                 |  |      | 20 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                           |  |      | 20 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Shareholder Matters                         |  |      | 21 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                              |  |      | 21 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations         |  |      | 22 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about
    Market Risk                                    |  |      | 29 | 
|Item 8.  |  | Consolidated Financial Statements and
    Supplementary Data  Contents                           |  |      | 30 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure          |  |      | 31 | 
|PART III
|Item 10. |  | Directors and Executive Officers                                                                  |  |      | 32 | 
|Item 11. |  | Executive Compensation                                                                            |  |      | 32 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matter |  |      | 32 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                    |  |      | 32 | 
|Item 14. |  | Controls and Procedures                                                                           |  |      | 32 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                               |  |      | 33 | 



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Special Note Regarding Forward-Looking
Statements

Our Form 10-K 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
under the caption Risk Factors. Accordingly, we can
give no assurance that we will achieve the results anticipated
or implied by our forward-looking statements.

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ITEM
1.     Description of
Business

Overview

United Defense Industries, Inc. was incorporated
in 1997 to acquire United Defense, L.P. (UDLP), a global leader
in the design, development, and production of combat vehicles,
artillery systems, naval guns, and missile launchers used by the
U.S. Department of Defense and allied militaries throughout the
world. In 2000, we acquired Bofors Defence, based in Sweden, a
leading producer of artillery systems, air defense and naval
guns, and precision munitions. In 2002, we acquired United
States Marine Repair, Inc. (USMR), the leading
provider of ship repair, maintenance and modernization services
to the U.S. Navy, other U.S. defense related agencies, and
commercial customers. With the acquisition of USMR, we are now
organized into two separate product and service lines which are
each considered separate reportable segments: Defense Systems
and Ship Repair and Maintenance. Our Defense Systems program
portfolio consists of a mix of weapons system development,
production, upgrade, and life cycle support programs. Our Ship
Repair and Maintenance business segment consists of ship repair,
maintenance, and modernization service programs.

Our Defense Systems segments primary
military programs include upgrades of the Bradley Fighting
Vehicle (BFV) and its derivatives, Naval Ordnance
production and development programs, and development for several
manned ground vehicle types within the Armys Future Combat
Systems (FCS) program, including the
Non-Line-of-Sight Cannon (NLOS-C). Since 1981, the
BFV has served as the leading domestically produced vehicle able
to fulfill the dual role of troop transport and armored fighting
vehicle. We have maintained our prime contractor position on the
BFV program since production began, and have added a number of
technology-based upgrades and derivative vehicles that continue
to extend the programs life cycle. In addition to managing
the BFV vehicle programs, we serve as the prime contractor for a
number of military programs, several of which have spanned
decades, including the M88 tank recovery vehicle since 1960, the
M113 armored personnel carrier since 1960, and the U.S.
Navys Mk45 naval gun system since 1968. However, many of
our traditional Army programs are expected to be supplanted by
the Armys Stryker and/or FCS programs (discussed below).

The Ship Repair and Maintenance segments
primary military contracts relate to long-term maintenance
programs on U.S. surface ships including, guided missile
destroyers, cruisers, mine countermeasures ships, cargo, and
amphibious assault ships.

Business Segments, Products and
Programs

Revenue generated from each of our segments and
major programs is summarized below.

|                                        |  |                         |         |      |  |      |         |  |  |   |         | 
|--------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                        |  |                        
|                                        |  | Year Ended December 31,
|                                        |  |                        
|                                        |  | 2000                    |         | 2001 |  | 2002
|                                        |  |                         |         |      |  |     
|                                        |  |                        
|                                        |  | (in millions)          
|Defense Systems:                        |  |                         |         |      |  |      |         |  |  |   |         | 
|Bradley Family of Vehicles              |  | $                       | 284.8   |      |  | $    | 275.7   |  |  | $ | 335.9   | 
|Naval Ordnance                          |  |                         | 175.5   |      |  |      | 230.7   |  |  |   | 219.0   | 
|Vertical Launch System                  |  |                         | 98.8    |      |  |      | 85.4    |  |  |   | 114.5   | 
|Combat, Engineering & Recovery Vehicles |  |                         | 144.5   |      |  |      | 102.0   |  |  |   | 154.8   | 
|Artillery Systems (a)                   |  |                         | 226.6   |      |  |      | 292.1   |  |  |   | 309.7   | 
|Assault Amphibious Vehicles             |  |                         | 57.0    |      |  |      | 55.3    |  |  |   | 65.3    | 
|Other                                   |  |                         | 196.7   |      |  |      | 277.3   |  |  |   | 270.7   | 
|                                        |  |                         |         |      |  |      |         |  |  |   |         | 
|Total Defense Systems                   |  | $                       | 1,183.9 |      |  | $    | 1,318.5 |  |  | $ | 1,469.9 | 
|Ship Repair and Maintenance (b)         |  |                         |        |      |  |      |        |  |  |   | 255.4   | 
|                                        |  |                         |         |      |  |      |         |  |  |   |         | 
|Total                                   |  | $                       | 1,183.9 |      |  | $    | 1,318.5 |  |  | $ | 1,725.3 | 
|                                        |  |                         |         |      |  |      |         |  |  |   |         | 



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|    |                                                          
|--- | ---------------------------------------------------------
|(a) | Includes Crusader, NLOS-C, and M109 Howitzer
    systems.



|    |                                                             
|--- | ------------------------------------------------------------
|(b) | Includes ship repair and maintenance activities
    at USMR.

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| |                        
| | -----------------------
| | Defense Systems Segment

The Bradley Fighting
Vehicle.We have been the sole-source,
prime contractor of the BFV to the U.S. Army (the
Army) since its initial production in 1981. The BFV
is a tracked armored vehicle with a 25mm cannon, TOW missiles
and a stabilized turret, and is the leading domestically
produced vehicle able to fulfill the dual role of troop
transport and armored fighting vehicle. The BFV is outfitted
with armor and day/night sights, and can transport up to nine
soldiers across rough terrain. The vehicles combination of
lethality, survivability, and mobility has established it as a
critical component of the U.S. Governments full-spectrum
warfare strategy. A total of 7,178 BFVs and derivatives have
been built, of which 400 were for the Saudi Arabian Army.

Although new BFVs are no longer being built, we
derive significant revenue from upgrading the Armys
existing fleet of BFVs. We initiated delivery of the latest
upgrade, the BFV A3 version, in October of 1998 as part of a low
rate initial production contract awarded in July of 1997. The
BFV A3 provides enhancements such as situation awareness
capability and improved lethality, survivability and
sustainability as a component of the U.S. Armys program to
digitize the battlefield. The U.S. Army is in the process of
upgrading 595 older version BFVs to the A3 configuration, with
annual funding allocations over the seven-year period between
FY1997-2003. We had been awarded four single year contracts for
A3 upgrades (FY1997-2000) for a total of 206 vehicles, and in
May 2001, we received a multi-year contract (FY2001-2003) for an
additional 389 vehicles. Of these 595 vehicles, 69 were
delivered in 2002 and 159 in prior years. Production under the
BFV multi-year contract is expected to be completed by June 2005.

On February 3, 2003 the Administration
announced its FY04 budget and various information related to DoD
financial and program planning. In order to fund the FCS program
(discussed below), the Army intends to sharply curtail spending
on the BFV and other systems. Unless such intention is revised
by the Administration or a different approach results from the
legislative process, we believe that our BFV production work
would largely terminate following the completion of our current
multi-year contract.

BFV Derivatives and
Support.The BFV has served as a
platform for a number of derivative vehicles we have developed.
One such derivative, the Multiple Launch Rocket System
(MLRS) carrier, was developed to provide a carrier
for a long-range rocket artillery system and is outfitted with
rockets, a launcher and fire control system developed and
produced by Lockheed Martin Missiles and Fire Control. We were
awarded a contract to initiate an MLRS remanufacture program,
with the first delivery completed in August 1997. Another
derivative, the Fire Support Vehicle, supports armor and
mechanized forces by pinpointing enemy targets using laser
technology, which allows more accurate and timely calls for fire
to the artillery. We provided 22 kits to convert BFVs under
a workshare arrangement with Red River Army Depot to produce
Fire Support Vehicles. Another such vehicle is the Command and
Control Vehicle (C2V). The C2V is a self-contained
vehicle used for communications and operational control of
forces that keeps pace with armored maneuver forces while
providing the crew with a protected environment. We were awarded
a three-year production contract for C2V conversions in December
1998 with scheduled deliveries to be completed in May 2001.
However, the Army removed additional production funding for the
C2V in FY01 and cancelled the FY00 award.

In addition to the development and manufacture of
BFV derivatives, we provide BFV upgrade kits and field services.
Kits allow for the upgrade of BFVs to incorporate advances in
technology. We also deploy experts to provide on-site training
and advice to customers, complete maintenance and repairs, and
assess the necessity of replacement parts. We are under contract
with the U.S. Armys Simulation, Training and
Instrumentation Command for the development and demonstration of
a multi-purpose simulator/trainer for the BFV family of
vehicles. An award for the production and installation of
13 Bradley Advanced Training Systems (BATS) was
received in July 1999 and deliveries were completed in 2002. A
second year production contract for a follow on quantity of
11 BATS was awarded in May 2002 with deliveries scheduled
for 2003.

Mk45 Naval Gun System
(Mk45).United Defense is
the sole source producer of the Navys 5-inch Mk45 gun
system for the Navys current class of destroyers, the
Arleigh Burke DDG 51 class (DDG51). We are
under contract through FY02 requirements. The U.S. Navy
currently plans to continue building DDG51 class ships through
at least FY06. We are also the prime contractor for the Naval
Surface Fire Support (NSFS) program. This NSFS
program includes upgrading the Mk45 gun system with the
capability to fire Extended Range Guided Munitions. Due to the
NSFS program, we anticipate a sole-source contract to upgrade
Mk45 guns

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on the Navys Ticonderoga class ships from
Mod0/1 to Mod4 configurations, which extends the Mk45s
range and improves surface fire support capability. We have
already received contracts to upgrade the first eight MK45 guns
to the Mod4 configuration. Furthermore, the U.S. Government
supports allied navies having compatible armaments, and provides
us assistance in efforts to place Mk45s on foreign ships. We
believe the improvements included in the Mod4 configuration,
which provide significantly greater range, will make the Mk45
more competitive internationally. In October 2002, we contracted
with the Danish Navy for two Mk45 Mod4s, and in December
2002 signed a contract for the second batch of three Korean Mk45
Mod4s.


Overhaul, Repair, Maintenance and
Other.We provide aftermarket service
for the Mk45 and smaller caliber gun mounts, guided missile
launching systems, vertical launching systems, surface vessel
torpedo tubes, gun fire control systems, target and decoy
launchers and other naval combat systems equipment for the U.S.
Navy and various international allied forces. These services
include engineering, repair, upgrade, maintenance, logistic
support, replacement parts and onboard technical assistance. A
significant amount of the work is performed at our Louisville,
Kentucky operation, which is located at the facilities of the
former U.S. Navy operated Naval Ordnance Station. Work is also
performed in San Diego, California; Norfolk, Virginia; and
Mayport, Florida.

Advanced Gun System
(AGS).The U.S. Navy is
currently developing its next-generation destroyer, the DD(X),
with land attack as its primary mission. We are the sole-source
developer of AGS, the primary gun weapon system on DD(X), acting
as a subcontractor to Northrop Grumman Ship Systems, which won
the DD(X) development contract. Each of the destroyers is
expected to have two of the AGS on board, providing the
equivalent firepower of two battalions of U.S. Marine Corps M198
howitzers, at ranges of up to 100 nautical miles. Funded
gun development was initiated in 1999, with completion of
development scheduled for 2006. We are currently in System
Development and Demonstration for the AGS. The prototype ship is
scheduled to begin construction in FY05. In addition to
designing the gun and associated magazine, we have been selected
as the source selection authority for development of its
projectile.

Submarine Propulsor.We are the sole-source prime contractor of U.S. submarine
propulsors, which enables a submarine to meet stealth mission
requirements. We believe we were chosen for the contract because
of our advanced manufacturing facilities and extensive
experience working with a variety of materials. We are currently
under contract to produce six propulsors for Virginia Class
submarines for delivery through 2004. The first three systems
have been delivered ahead of schedule. In addition, we have been
selected to be the sole source prime contractor for the
follow-on multi-year propulsor contract.

Launching Systems.The MK 41 Vertical Launching System (VLS) is
the U.S. and nine allied navies primary multi-mission,
multi-missile launcher on surface combatant warships such as
destroyers and cruisers. VLS launches the anti-air Standard
Missile, strike mission-related Tomahawk cruise missile,
vertical launch anti-submarine rocket (VLASROC), and ship
self-defense Sea Sparrow missile. We manufacture all the major
structural assemblies and electrical cables for the VLS launcher
under subcontracts to Lockheed Martin Corporation, the prime
contractor of the VLS launcher. We have a MK 41 VLS teaming
agreement with Lockheed Martin, which covers both U.S. and
foreign sales through December 31, 2011. We are the
designated mechanical design agent for the VLS launcher and the
design agent for all VLS canisters. We are the sole-source,
prime contractor of VLS canisters to the US Navy and foreign
navies. The U.S. Navy installs the VLS, like the Mk45, on all
DDG51s, each of which contains twelve 8-cell VLS modules. The
DDG51 program plan calls for deliveries to be complete by 2010.
We signed a three-year launcher production contract with
Lockheed Martin in 2002, with deliveries extending through
mid-2006. In 1999, we entered into a five-year contract with the
U.S. Navy for VLS canisters, and are currently in negotiations
for the 2003 canister production requirements with deliveries
extending into 2005.

United Defense and Lockheed Martin just completed
a major test milestone for the Quadpack Evolved Sea Sparrow
Missile Launching System (QPELS) in December 2002,
preparing for the competitive award of the U.S. Navys
Evolved Seasparrow Launching System program for aircraft
carriers and amphibious assault ships. The QPELS provides rapid
reaction ship self-defense launch capability for large and small
ships, and is a single-cell modular adaptation of the MK 41
VLS.

As indicated above, the U.S. Navy awarded the
initial design contract for the next-generation destroyer, the
DD(X) to Northrop Grumman. We are a teammate and subcontractor
to Raytheon Corporation for the systems

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engineering of the next generation Advanced VLS
(AVLS) for the DD(X), and will design and fabricate
the mechanical portions of the AVLS engineering development
model. The contract will be completed in 2005, with the
follow-on production start slated to begin in 2005 after the
DD(X) Critical Design Review.


M88 Armored Recovery Vehicle
(M88).We have been the
sole-source, prime contractor of the M88 to the U.S. Army since
1960. The M88 currently has an installed base of more than 3,325
vehicles in 19 countries throughout the world. The M88
performs towing, lifting and winching tasks in the recovery of
impaired tanks or in basic tracked vehicle maintenance. In
preparation for the deployment of heavier M1 tanks by the U.S.
Army, in 1986 we began the development effort for the M88A2
(HERCULES) upgrade, in order to handle 70-ton
vehicles. The enhanced capabilities of HERCULES enable a single
system with three crewmembers to lift a tank turret or upright
and tow an M1A1/A2 tank, tasks which would otherwise
require eight soldiers and two recovery vehicles. In addition to
the development and manufacturing of vehicles, we also provide
M88 upgrade kits and field services, conduct maintenance and
repairs, and provide expert on-site and off-site training to
customers. The U.S. Army has been awarding annual contracts for
M88 upgrades since 1994. Our U.S. Marine Corps
(USMC) contract started in 2000. We are under
contract to deliver 78 vehicles to the U.S. Army and USMC
through May 2004. We are working with the U.S. Army to define
the requirements for a FY03 contract, which may be spares and
support in lieu of additional vehicles. Under the
Administrations proposed FY04 budget, further procurement
for HERCULES production would cease after current contracts are
completed. We also have an ongoing co-production contract with
Egypt for 66 M88A2 kits through March 2004. This vehicle
has also been fielded in both Thailand and Kuwait.

M9 Armored Combat Earthmover (M9
ACE).The M9 ACE is an
18-ton, fully tracked, aluminum armored vehicle, used on the
battlefield to bulldoze, rough grade, excavate, haul and scrape.
With a crew of one, the multi-purpose M9 ACE can attain
road speeds of up to 35 miles per hour, and unlike a
standard bulldozer, requires no transport vehicle. It is also
small and light enough to be transported in C-130 aircraft.
The M9 ACE can serve as the prime mover of vehicles
weighing up to 39,000 pounds and can clear debris left in the
wake of battles or civil disasters. We completed production of
52 vehicles in November 1999. Those vehicles have been
fielded to Army engineering units at Ft. Hood, Texas and
Ft. Stewart, Georgia. We continue to provide Systems
Technical Support for this vehicle.

M992 Field Artillery Ammunition Supply Vehicle
(FAASV).The single
mission of the FAASV, the battlefield partner of the M109, is to
safely transport personnel, ammunition, and supplies to
self-propelled howitzers on the battlefield during both firing
and non-firing conditions. By utilizing synchronized and
semi-automated resupply strategies and mechanisms to carry the
artillery ammunition, the FAASV enables the howitzer to remain
in the field longer and thereby increase its lethality. The
heavily armored chassis provides ballistic protection to its
munitions supply crew and accommodates all standard 155mm
rounds. In 1999, we completed a production contract for
96 new vehicles and 36 converted vehicles. We were
awarded an option to deliver 6 additional converted FAASVs
in 2000, and production for those vehicles was completed in 2000.

M109 Self-Propelled Howitzer
(M109).The M109 has been
the most widely used field artillery howitzer for the U.S.
military and certain foreign governments since we first produced
it in 1974. The M109 is recognized for its ability to deliver
rapid and high volume artillery support and to maximize
survivability through mobility. The latest generation is the
M109A6 Paladin. We completed deliveries of 7 Paladins in
2001 and received a follow-on order for 18 additional units in
January 2002. We have various non-production activities on
Paladin, specifically engineering and training contracts. We
also design and produce unique configurations of the M109 and
offer M109 upgrade kits, servicing and training to various
foreign governments.

Crusader Advanced Artillery
System.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 since continued to receive Army
funding to accomplish an orderly closeout of Crusader activities
and to transition key Crusader technologies to the NLOS-C
program described below. To date, the Crusader termination has
resulted in a reduction to our workforce of approximately

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180 employees. In order to complete the
Crusader termination process, we will need to negotiate a final
settlement with the Army, and expect to submit our settlement
proposal in August 2003.


Objective Force Indirect Fire,
Non-Line-of-Sight Cannon (NLOS-C).Concurrent with the termination of the Crusader program, we were
awarded a letter contract by the Army to begin developing the
indirect fire cannon system intended to be part of the
Armys Objective Force. This contract included funding for
systems engineering, design engineering and fabrication of
technology demonstrators. An objective of this program was to
transfer technology from Crusader in support of the advanced
engineering development of Objective Force capabilities. The
contract has a period of performance from August 2002 through
September 2003. To fund this effort, the Army reallocated
$32 million of FY 02 funding from the Crusader program
and Congress authorized and appropriated $368.5 million in
FY 03 funding. Further development of the NLOS-C is
expected to be included in the System Development and
Demonstration phase of the Future Combat Systems
(FCS) program. Current plans are for the Army to acquire
720 NLOS-C systems as part of the Objective Force. Public
Law 107-314, enacted in December 2002, mandates the
fielding of NLOS-C by 2008.

Assault Amphibious Vehicle
(AAV).The AAV has been
the U.S. Marine Corps amphibious assault vehicle for over
two decades with more than 1,500 vehicles delivered. In July
1998, we were awarded a $158 million four year contract by
USMC to rebuild the existing fleet of AAVs in a partnering
arrangement with the Albany, Georgia, and Barstow, California
Marine Corps Logistic Bases. We do not expect to build any new
AAVs for the USMC, as the AAV is ultimately expected to be
replaced by a successor design, the Advanced Assault Amphibious
Vehicle, a program in which we do not participate. We do,
however, produce different kit configurations of the AAV for
foreign customers such as Korea, Spain and Italy, and then
assist these countries in assembling the kits locally.

M113 Armored Personnel Carrier
(M113).The M113 has been
the main troop transport vehicle used by the U.S. military and
allied governments throughout the world, with more than 80,000
units delivered since initial production in 1960. We have
produced several M113 models in cooperation with U.S. allies,
including various configurations of the Armored Infantry
Fighting Vehicle, historically produced in Europe and currently
produced by our Turkish affiliate, FNSS. The U.S. Army, which
received our last delivery of new M113s in 1992, continues to
upgrade its M113s to the latest A3 configuration. This upgrade
work currently occurs in our Anniston, Alabama facility. The
upgrade work is performed in a partnering arrangement with the
Anniston Army Depot. In 2002, we were awarded a one-year
contract with four priced options to produce the OPFOR-MBT (an
M113A2 converted to the A3 configuration with visual
modifications). If all four options are awarded,
145 vehicles will be produced in partnership with the
Anniston Army Depot.

In addition, we are supplying kits for the
Canadian Army to upgrade their M113A2 vehicles to the latest
M113A3 configuration and to produce the new improved Mobile
Tactical Vehicle Light (MTVL). The MTVL variant,
which is a patented UDLP M113 derivative, has significantly
more cross-country mobility, payload capacity and under armor
volume than the standard M113A3.

Future Combat
Systems.The Future Combat Systems, or
FCS program, is the Armys announced means by which its
long-term combat force, known as the Objective Force, is to be
developed and produced. FCS is intended to provide an
electronically linked network of surveillance, command and
control, and combat capabilities, including manned and unmanned
vehicles, by which the Army would prosecute future combat
missions. As such, it is expected to embrace the missions
historically provided by Army combat systems such as our
Bradley, artillery (M109/FAASV and Crusader), and battlefield
transport (M113) systems. In March 2002 the Army selected a
contractor team led by The Boeing Company to act as the
so-called Lead Systems Integrator in managing the initial phase
of the FCS program. Ground combat vehicles, most likely a
mixture of manned and unmanned types, are expected to comprise a
major element of FCS. In January 2003 the Army announced that
the development and integration of the manned ground combat
vehicles (MGVs) for FCS would be performed by a team
composed of ourselves and General Dynamics. Since the Army
anticipates spending over $13 billion on the FCS program
over the next six years, the critical role envisioned for us on
the programs MGV component could be of long-term
significance to our revenues and potential profits.

However, the FCS program is still at a very early
stage, and its significance to us is subject to substantial
risks and uncertainties, including (1) whether MGVs
ultimately are adopted as a critical element of any

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configuration of the FCS program which might
reach production; (2) whether FCS adheres to the
Armys current schedule for the program  which
envisions fielding the first unit in 2008 and achieving initial
operating capability by 2010  or instead is delayed
substantially, since the program may be dependent upon the
future achievement of critical technological developments both
in the MGV sector and in FCS sectors in which we are not
involved; (3) the levels of political support and funding
which FCS may receive, both from the Administration and
Congress, since the lack of such support could lead to the
postponement, reduction in scope or scale, or even the
cancellation of FCS; and (4) the impact of potential
competition to FCS, both in terms of mission capability and
available DoD funding, from the Armys interim
transformational program, known as Stryker, which may involve
the acquisition of over 2,000 combat vehicles by 2008.


Bofors Defence
(Bofors).United Defense
Industries acquired Bofors Weapon Systems, a Swedish Company, in
September 2000 from Celsius AB. Subsequent to the acquisition,
the name was changed to Bofors Defence. During 2002, Bofors
refocused its business areas to emphasize Precision Strike and
Intelligent Systems. As a result, Bofors major business
areas are now: Intelligent Ammunition, Launching Systems,
Technology Studies, and System Design and Integration. Bofors
has retained key competencies in precision Strike and
intelligent systems and has added a key competency in modeling
and simulation through the acquisition of Cell-ITS
(C-ITS) in 2002. During 2002, Bofors received key
contracts to commence the manufacture of a new armor-piercing
round, to initiate studies for a new self-propelled howitzer for
Sweden, and to merge the Joint US  SE Trajectory
Correctable Munitions Program with the US Excalibur Program.
Bofors Defence entered 2003 with a backlog of approximately
$148 million. In January 2003 Bofors Defence booked a key
ammunition order with the United Kingdom, which raised their
backlog to approximately $166 million.

Military Vehicle
Tracks.Most U.S. tracked combat
vehicles use a track system composed of linked track shoes which
have a steel core and an external rubber surface for traction.
We produce the steel components for the tracks on many of the
Armys principal vehicles, including the M1 tank, the BFV,
and the M113. Production orders for various track types
typically result from DoD programs to build or overhaul the
corresponding vehicles, and also from wear and damage occurring
in training and military deployments. We typically provide track
components as a subcontractor to Goodyear Tire and Rubber
Company, which provides the rubber elements and then sells the
completed track assembly to the government. We are unable to
predict whether, or in what manner, any change in
Goodyears financial or legal position would affect our
track business, but we do not believe that any such impact would
be material to our revenues or profits.



| |                                        
| | ---------------------------------------
| | Ship Repair and Maintenance
    Segment

Ship Repair and
Maintenance.United States Marine
Repair, Inc. was acquired in July 2002 and its operations
comprise our Ship Repair and Maintenance segment. USMRs
principal customer is the U.S. Navy and its largest contracts
are multi-year, multi-ship maintenance programs on major classes
of surface vessels. In addition, USMR performs ship repair
services for other departments and agencies of the U.S.
Government as well as for some commercial customers. USMR
performs a full scope of ship repair services including
inspection, preservation and repair of tanks, hull valves,
internal piping systems, ships rudder, main propulsion shaft
bearings, sonar domes, and underwater hull surfaces. The
projected repairs to restore a ship to its design parameters can
be grouped into two main categories. The first category is
topside repairs that are performed without lifting the ship out
of the water. The second category, called dry-dock repairs,
require that the vessel be raised out of the water in order to
access underwater parts of the vessel. In addition to repair
work, USMR also performs ship modernization to upgrade vessels
with new capabilities. The key capabilities required for both
repair and modernization work include machinery work, electrical
work, steel fabrication, piping, and renewal of marine coatings.

Joint Ventures

We have a joint venture located in Turkey. At the
beginning of 2002, we also owned a 51% joint venture in Saudi
Arabia described below, but elected to sell our interest in
March of 2002. The joint ventures are accounted for using the
equity method, as we do not control them due to our
partners veto rights over most operating decisions, but we
do have the ability to exercise influence over their operating
and financial policies.

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FNSS-Turkey.The
FNSS Savunma Sistemleri A.S. (FNSS) joint venture
was formed in 1987 to pursue armored combat vehicle sales to the
Turkish Army. We own 51% of FNSS. The initial contract, which
became effective in 1989, was for 1,698 armored combat vehicles
consisting of four variants with a common chassis: personnel
carrier, fighting vehicle, TOW missile vehicle and mortar
vehicle. The initial production contract for 1,698 vehicles has
been completed, and a follow-on contract for 551 additional
personnel carrier vehicles was signed in 2000 with deliveries
beginning at the end of 2001. In 1998, FNSS signed its first
export contract with the United Arab Emirates (Abu Dhabi) to
provide 133 vehicles comprised of a mix of forward
observation vehicles, engineer squad vehicles and recovery
vehicles, with deliveries starting mid 1999 and ending in early
2001. In August 2000, FNSS signed a second major export order to
supply 211 vehicles in eleven configurations to the
government of Malaysia. This contract will also include
co-production through a sub licensee company in Malaysia. The
orders for the Turkish government and the Malaysian government
provide backlog through 2004.

FNSS is pursuing new business opportunities with
the Turkish government for additional armored combat vehicles,
amphibious vehicles, self-propelled howitzers and tanks, and
recovery vehicles. FNSS is also pursuing additional orders with
the UAE and Malaysia, as well as other export opportunities
within its licensed territory, which includes much of the Middle
East.

United Defense
Systems-Arabia
(UDS). We owned 51% of United Defense Systems,
Ltd., a Saudi Arabian company, in partnership with Al-Hejailan
Projects Company, Ltd. (Al-Hejailan). The joint
venture had U.S. Foreign Military Sales contracts to support the
Royal Saudi Land Forces Infantry Corps. One set of contracts,
worth approximately $300 million, was for logistics and
training support for Bradley Fighting Vehicle units. Work on
these contracts was discontinued in early 2002 and UDS does not
anticipate any future sales for Bradley logistics and training
support. In early 1997, UDS was awarded a second contract to
modernize 523 of Saudi Arabias M113s to an A3
configuration. Because of Saudi Arabian government budget
constraints, the funding for the M113 program was delayed, with
the result that UDS operated the program at a substantially
reduced level during 1999 through 2001. Current funding will
support work in Saudi Arabia through March of 2003.

In view of the declining scale and prospects of
this joint venture, we have entered into an agreement with
Al-Hejailan, under which we agreed to sell our interest in the
joint venture to Al-Hejailan for approximately $408,000.
Finalization of the sale is expected to occur by April 2003
subject to required approvals from the Saudi government.
Beginning March 1, 2002, we no longer received a share of
earnings from this joint venture per the sale agreement.

Research and Development and Engineering
Capabilities

Our Defense Systems segment conducts research and
development of new technologies for application to weapon
systems and upgrades. Our ability to compete for new Defense
Systems contracts depends to a large extent on the success and
innovation of our research and development programs.

The engineering capability of the Defense Systems
segment has been a critical component of its success. Extensive
experience in simulation, systems integration, armor, mobility,
survivability and armaments, as well as our software
development, engineering and electronics capabilities, have
allowed us to stay at the forefront of the development,
manufacture and upgrade of our products and to apply our
technologies to other products.

A recent example of this occurred in 2002, when
our Defense Systems segment competed for and won a
$7.9 million contract from GM Defence of Canada to
design and develop add-on-armor for the Stryker vehicles that
GM Defence jointly produces with General Dynamics
Corporation for the U.S. Army. The contract, which we expect to
be increased in early 2003 for design and manufacture of
59 surrogate armor kits, contains options for the
production of up to 1,000 armor kits for the Stryker vehicles.

We expended $15.8 million,
$23.7 million and $27.7 million on research and
development in 2000, 2001 and 2002, respectively, a substantial
portion of which was included in overhead allocable to both U.S.
Government and foreign government contracts.

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Competition

In the markets we serve, we face a variety of
major domestic and foreign competitors. In the Defense Systems
segment, competitors include Alvis-Vickers, Ltd., The Boeing
Company, General Dynamics Corporation, GIAT, Krauss Maffei
Wegmann, Lockheed Martin Corporation, Oto Melara, Raytheon
Company, Steyr Daimler Puch and Textron. In the Ship Repair and
Maintenance segment, competitors include General Dynamics
Corporation, Northrop Grumman Corporation, Metro Machine
Corporation, Todd Shipyards Corporation, Marine Hydraulics
International, Inc., Deytens Shipyards, Inc., and Baltimore
Marine Industries, Inc.

Management believes that we will continue to be
able to compete successfully based upon the quality,
technological advancement and cost competitiveness of our
products and services. As the electronic and software content of
our products increases, we expect to encounter increased
competition from electronics and aerospace companies whose
activities historically have been largely unrelated to our
products and programs. Our ability to compete for new Defense
Systems segment contracts depends to a large extent on the
success and innovation of our research and development programs,
our capability as a systems integrator, whether we can partner
with military industrial facilities owned by DoD (known as
depots), our ability to offer best value to our government
customers, our success in obtaining subcontracts on those
programs where we are not the prime contractor, and our
readiness in facilities, equipment and personnel to undertake
the programs for which we compete. Major factors involved in
competition for the Ship Repair and Maintenance segment include
the geographic proximity of the ship repair facility and the
vessel, technical skills, price, and facility requirements such
as dry-docks, cranes, and berthing capabilities.

In some instances, Defense Systems programs are
sole-sourced by the U.S. Government to a single supplier, and in
other cases involve a prime contractor and multiple suppliers.
In cases where we are the sole-source provider, there may be
other suppliers who have the capability to compete for the
programs involved, but they can only enter or reenter the market
if the U.S. Government should choose to reopen the particular
program to competition. Our customers, particularly the
industrial facilities operated by DoD, often compete with us for
aftermarket business, such as upgrade work and various overhaul
and servicing work we perform.

Major Customers

Our sales are predominantly derived from
contracts with agencies of the U.S. Government. See Note 14
to the Consolidated Financial Statements, included in
Item 8.

Backlog

As of December 31, 2002, our funded backlog
was approximately $2.0 billion, of which $1.9 billion
was associated with our Defense Systems segment and just over
$100 million with our Ship Repair and Maintenance segment.
Funded backlog does not include the awarded but unfunded portion
of total contract values. This backlog provides management with
a useful tool to project sales and plan its business on an
on-going basis. We expect to earn as revenues a substantial
majority of the backlog at December 31, 2002 by the end of
2003.

Our near-term revenue forecasts could be impacted
adversely by a conflict with Iraq. For example, our Ship Repair
and Maintenance segments sales may be lower because ships
previously scheduled for repair are deployed instead, and our
Defense Systems segments scheduled fieldings of BFV A3
vehicles may be disrupted. However, longer-term revenues might
increase if more ships end up needing repairs and, as was the
case after Operation Desert Storm, modifications from
lessons learned are incorporated into our products.

Intellectual Property

Although we own a number of patents and have
filed applications for additional patents, we do not believe
that our operations depend upon our patents. In addition, our
U.S. Government contracts generally license us to use patents
owned by others. Similar provisions in the U.S. Government
contracts awarded to other companies make it impossible for us
to prevent the use by other companies of our patents in most
domestic work. Additionally, we own certain data rights in our
products under certain of our government contracts. The
protection of data developed by us from use by other government
contractors is from time to time a source of

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negotiation between us and the U.S. Government,
and the extent of our data rights in any particular product
generally depends upon the degree to which that product was
developed by us, rather than with U.S. Government funds. We
routinely enter into confidentiality and non-disclosure
agreements with our employees to protect our trade secrets.


Employees

At December 31, 2002, we had approximately
7,400 employees and approximately 300 contract workers
(excluding employees of the foreign joint venture).
Approximately 2,000 of these employees at nine locations are
represented by eleven unions, including the Glass, Molders,
Pottery, Plastics and Allied Workers (Anniston, Alabama); the
International Association of Machinists (Louisville, Kentucky
and Santa Clara, California); the United Automobile, Aerospace
and Agricultural Implement Workers (Minneapolis, Minnesota); the
International Guards (Minneapolis); the International
Brotherhood of Teamsters (Santa Clara); the United Steelworkers
(York, Pennsylvania); Armament Systems Guards Firefighters
(Minneapolis); the International Brotherhood of Boilermakers,
Iron Ship Builders, Blacksmiths, Forgers and Helpers (Norfolk,
Virginia); the Pacific Coast Metal Trades District Council (San
Francisco, California); the Swedish Trade Union Cooperation
(Sweden); and the Federation of Salaried Employees in Industry
and Services (Sweden). While we have from time to time
experienced strikes by our unionized employees, we believe that
currently relations with our employees are good.

Sources and Availability of Raw
Materials

Our manufacturing operations require raw
materials, primarily aluminum and steel, which are purchased in
the open market and are normally available from a number of
suppliers. We purchase a variety of electronic and mechanical
components for which we have multiple commercial sources. We
have not experienced any significant delays in obtaining timely
deliveries of essential raw materials.

Environmental Matters

Our operations are subject to federal, state and
local laws and regulations relating to, among other things,
emissions to air, discharges to water, the handling and disposal
of hazardous and solid wastes and the cleanup of hazardous
substances (Environmental Laws). We continually
assess our compliance status and believe that our operations
currently are in substantial compliance with Environmental Laws.

Operating and maintenance costs associated with
environmental compliance and prevention of pollution at our
facilities are a normal, recurring part of operations, are not
significant relative to total operating costs or cash flows, and
are generally allowable as contract costs under our contracts
with the U.S. Government (Allowable Costs). Such
costs have not been material in the past and, based on
information presently available to us and on U.S. Government
environmental policies relating to Allowable Costs in effect at
this time (all of which are subject to change), are not expected
to have a material adverse effect on us.

Under existing U.S. environmental laws, so-called
potentially responsible parties may be jointly and severally
liable and, therefore, we are potentially liable to the
government or third parties for the full cost of remediating
contamination at our sites or at third party sites. In the
unlikely event that we were required to fully fund the
remediation of a site, the statutory framework would allow us to
pursue rights of contribution from other potentially responsible
parties for their share.

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consists of Allowable Costs. As of
December 31, 2002, we had accrued approximately
$27 million to cover any investigation and/or remediation
costs that may not be Allowable Costs under U.S. Government
contracts. The amount accrued is based on reasonable estimates,
although there is a possibility that amounts in excess of
amounts accrued may be incurred. The most significant of the
estimated liabilities are related to ongoing remediation
efforts. Pursuant to a demand from the California Regional Water
Quality Control Board, we are completing a study of sedimentary
contamination in San Diego Bay for the purpose of establishing
clean-up criteria for future remediation work. Once definitive
clean-up criteria are established, we expect that we will be
required to begin remediation procedures with respect to the
contamination. We anticipate that the total cost associated with
the remediation phase will range from $6 to $9 million,
although it is conceivable that costs

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could be as high as $40 million if the most
stringent clean-up standard were to be adopted. Up to
$9 million of such remediation cost, to the extent the
costs are not recovered on USMRs government contracts or
from other responsible parties, may be recoverable from
USMRs former shareholders, under an escrow arrangement
established in 1997 when the San Diego operation was acquired by
USMR. Also a further $15 million escrow fund was
established in our 2002 acquisition of USMR, which may be
available in respect of USMRs sediment exposure.


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

Since approximately 1941, we (and, prior to our
formation, our predecessors) have operated the Fridley,
Minnesota facility. The majority of the Fridley facility is
owned by the U.S. Navy (the Navy property), but
operated by us under a contract with and on behalf of the Navy.
(We own the remainder of the facility.) Since 1991, the Navy has
expended approximately $27 million in remediation costs,
including site investigation, on the Navy property, and the Navy
anticipates spending a further $9 million on such matters
at the site. From time to time the Navy has engaged us in
discussions as to whether we should pay a portion of such
expenses, and recently 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 sustain at Fridley would
constitute Allowable Costs. However, there is substantial
uncertainty regarding the ultimate terms on which the matter
might be resolved (whether by settlement, legal proceedings, or
otherwise).

Available Information

We make available free of charge on our internet
website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K,
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. You can find these
reports on our website at www.uniteddefense.com under the
Investors heading.

Risk Factors

Our
government contracts entail risks.

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



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on key contracts with U.S.
    Government entities for a significant portion of our sales. A
    substantial reduction in these contracts would materially
    adversely affect our operating results.

We derive revenues predominantly from contracts
with agencies of, and prime contractors to, the DoD.
Approximately 79% of our sales for the year ended
December 31, 2002, were made directly or indirectly to
agencies of the U.S. Government, excluding U.S. Foreign Military
Sales contracts. Any significant disruption or deterioration in
our relationship with the U.S. Government and a corresponding
reduction in these contracts would significantly reduce our
revenues. See, for example, Results of
Operations  Army Transformation under
Item 7, Managements Discussion and Analysis, below.

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| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in defense procurement models may
    make it more difficult for us to successfully bid on projects as
    a prime contractor and limit sole-source opportunities available
    to us.

In recent years, the trend in combat system
design and development appears to be evolving towards the
technological integration of various battlefield components,
including combat vehicles, command and control network
communications, advanced technology artillery systems and
robotics. If the U.S. military procurement approach continues to
require this kind of overall battlefield combat system
integration, we expect to be subject to increased competition
from aerospace and defense companies who have significantly
greater resources than we do. This trend could create a role for
a prime contractor with broader capabilities that would be
responsible for integrating various battlefield component
systems and potentially eliminating or reducing the role of
sole-source providers or prime contractors of component weapon
systems. For example, the U.S. Army recently awarded the prime
contractor role in its Future Combat Systems (FCS)
program (discussed below) to The Boeing Company in the capacity
of overall integrator for FCS, instead of awarding separate
prime contracts for major FCS elements such as ground vehicles,
air vehicles, and network electronics.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The ultimate results of the Future Combat
    Systems program are uncertain, and the scale of the program may
    impair funding for other important U.S. Army programs in which
    we participate.

See Results of Operations  Army
Transformation under Item 7, Managements
Discussion and Analysis, below, for a discussion of the
potential impact of the FCS program on our other U.S. Army
programs and our overall business prospects.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Government contracts contain termination
    provisions unfavorable to us and are subject to audit and
    modification by the government at its sole
    discretion.

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



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

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

As a U.S. Government contractor, we are subject
to financial audits and other reviews by the U.S. Government of
our costs and performance, accounting and general business
practices relating to these contracts. Like most large
government contractors, we are audited and reviewed on a
continual basis. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees,
including allocated indirect costs. Although adjustments arising
from government audits and reviews have not had a material
adverse effect on our results of operations in the past, there
can be no assurance that future audits and reviews would not
have such effects. In addition, under U.S. Government purchasing
regulations, some of our costs, including most financing costs,
amortization of goodwill and other intangible assets, portions
of our research and development costs, and some marketing
expenses may not be reimbursable or allowed in our negotiation
of fixed-price contracts. Further,

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as a U.S. Government contractor, we are subject
to an increased risk of investigations, criminal prosecution,
civil fraud, whistleblower lawsuits and other legal actions and
liabilities to which purely private sector companies are not,
the results of which could have a material adverse effect on our
operations.


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



| |                                                             
| | ------------------------------------------------------------
| | Government contracts are subject to
    competitive bidding.

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



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

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



| |                                                                                
| | -------------------------------------------------------------------------------
| | Our fixed-price and cost-plus contracts may
    commit us to unfavorable terms.

We provide our products and services primarily
through fixed-price, cost-plus and time and materials contracts.
For the year ended December 31, 2002, fixed-price contracts
provided 65% of our revenues, and cost-plus contracts, including
time and material contracts, provided 35%.

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

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

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On our time and materials contracts, we recover a
specific amount per hour worked, the cost of direct materials
and subcontracts, and a mark-up on direct materials and
subcontracts. Time and materials contracts may provide for
not-to-exceed price ceilings as well as the potential that we
must partially absorb cost overruns.

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



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Intense competition could limit our ability
    to win and retain government contracts.

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



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | the effectiveness of our research and development
    programs;                                                 
|
| |  | our ability to offer better program performance
    than our competitors at a lower cost to the U.S. Government;
|
| |  | the location of our ship repair facilities in
    relation to U.S. Navy homeports; and                          
|
| |  | the readiness of our facilities, equipment and
    personnel to undertake the programs for which we compete.    

Additionally, our U.S. Government programs must
compete with programs managed by other defense contractors for
limited funding. Our competitors continually engage in efforts
to expand their business relationship with the U.S. Government
and are likely to continue these efforts in the future. For
example, in the private-sector ship repair industry, as the U.S.
Navy moves toward greater use of multi-ship, multi-year
contracts, the larger size of the contracts to be awarded may
attract additional competitors to our market, including
companies that have traditionally focused on shipbuilding rather
than repair. The U.S. Government may choose to use other defense
contractors for its limited number of defense programs. In
addition, defense programs compete with non-defense spending of
the U.S. Government for funding. Budget decisions made by the
U.S. Government are outside of our control and can have
long-term consequences for our size and structure.

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



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot guarantee the success of our
    strategy to pursue multi-ship, multi-year contracts awarded by
    the U.S. Navy for work on Atlantic Fleet surface
    ships.

We expect the U.S. Navy to increase the use of
multi-ship, multi-year contracts for the repair and maintenance
of the Atlantic Fleet, and the aggressive pursuit of these
contracts is an important part of our business strategy. Our
ability to win these contracts will depend on a variety of
factors, including our cost structure, past performance under
these types of contracts on both the East and West Coasts and
facility capacity in Norfolk, Virginia. We currently have one
dry dock at our Norfolk facility and access to another dry dock
in Norfolk under a teaming agreement. The other party to the
teaming agreement has notified us of its intent to terminate the
agreement in January 2004. We have reached an agreement in
principle with the other party to

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restructure our relationship, and are presently
seeking the third-party approvals required in order to continue
our negotiations. If we are unable to continue to team with the
provider of this second dry dock, we will be required to acquire
or gain access to another dry dock in Norfolk in order to
compete for multi-ship, multi-year contracts for work on the
Atlantic Fleet.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | The maintenance and establishment of
    teaming agreements is important to our business.

In our Ship Repair and Maintenance segment, we
currently engage in teaming agreements that involve either
general arrangements with other ship repair companies to allow
us access to facilities and employees or specific teaming
agreements which allow us to access dry docks or other
facilities, or whereby we take subcontracting responsibility for
a specific aspect of a larger prime contract. We believe that
the ability to participate in many of the U.S. Navys
future contracts will depend on our ability to maintain and
enter into successful teaming agreements. We cannot guarantee
that our current teaming partners will not terminate existing
teaming arrangements or that they will renew these arrangements
when they expire. See, for example, the discussion in the
preceding paragraph regarding our teaming arrangement in
Norfolk. In our Defense Systems segment, we also make frequent
use of teaming agreements. For example, we recently entered into
a teaming agreement with Boeing and General Dynamics regarding
our role on the manned ground combat vehicle portion of the FCS
program. (See Future Combat Systems discussion under
Item 1, Description of Business, above.) In addition, we
cannot assure that you that we will be selected as a teaming
participant, or that we will be able to identify and
successfully work with other companies. Failure to maintain or
enter into future teaming agreements may have a material adverse
effect on our business and future prospects.



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating performance is heavily
    dependent upon the timing of manufacturing and delivery of
    products under our U.S. Government contracts.

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

As a result, our period-to-period performance may
fluctuate significantly, and you should not consider our
performance during any particular period as necessarily
indicative of longer-term results. See Managements
Discussion and Analysis of The Results of Operations and
Financial Condition  Overview, Item 7 below.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The operating performance of our Ship
    Repair and Maintenance business segment is heavily dependent on
    the deployment and maintenance schedules of the U.S. Navy, as
    well as the U.S. Government budgetary cycle.

The timing and extent of the maintenance and
repair of U.S. Navy vessels depends on the maintenance and
deployment schedules established by the U.S. Navy for each
vessel. While the U.S. Navy tries to evenly distribute repairs
throughout the year in a given port, this is not always
possible. Therefore, the level of activity in our repair and
maintenance facilities and the financial results of our Ship
Repair and Maintenance segment can vary significantly from
period to period. In addition, U.S. defense-related agencies,
including the U.S. Navy, have historically allocated the
majority of their budgets during their first and second fiscal
quarters, which correspond with our fourth and first fiscal
quarters. The timing of these allocations has caused and will
likely continue to cause fluctuations in our revenues,
profitability, and cash flows.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | A reduction in the U.S. defense budget
    could result in a decrease in our revenue.

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

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large program in which we participate could also
materially adversely affect our sales and earnings and thus our
ability to meet our financial obligations.




| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not successful in integrating the
    new and complex technologies to be used in our products, our
    business could be materially and adversely
    affected.

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

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



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



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our international operations and foreign
    joint ventures subject us to risks that could materially
    adversely affect our results of operations and financial
    condition.

We participate in an unconsolidated joint venture
in Turkey and in co-production programs in several other
countries. We recognized earnings from our joint ventures of
$13.9 million for the year ended December 31, 2002.
Our export sales, which include U.S. direct foreign sales, U.S.
Foreign Military Sales and our revenues from our Bofors Defence
subsidiary, totaled $347.6 million for the year ended
December 31, 2002 representing approximately 20% of our
total revenues for that period. Our strategy includes expansion
of our international operations and export sales. In connection
with these international operations and sales we are subject to
risks, including the following:



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

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

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| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not have the ability to make
    acquisitions, develop strategic alliances, expand or implement
    new joint ventures, or successfully implement and maintain
    co-production programs.

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

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



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Significant risks are inherent in the
    day-to-day operations of our ship repair and maintenance
    business.

The day-to-day activities of our ship repair and
maintenance business involves the repair, maintenance and
modernization of large steel structures, the operation of cranes
and other heavy machinery and other operating hazards. As a
result, our operations can cause personal injury or loss of
life, severe damage to and destruction of property and
equipment, and interruption of our business. The structural or
mechanical failure of a vessel after it leaves one of our
shipyards can result in similar injuries and damages and could
result in liabilities to us. We could be named as a defendant in
a lawsuit asserting large claims on the occurrence of any of
these events. Although we maintain insurance protection in
amounts we consider to be adequate, we cannot assure you that
this insurance will be sufficient in coverage or effective under
all circumstances or against all hazards to which we may be
subject. If we are not fully insured against a successful claim,
there could be a material adverse effect on our financial
condition and result of operations.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | We may experience labor disruptions
    associated with the expiration of our collective bargaining
    agreements.

As of December 31, 2002, we had
approximately 7,400 employees and 300 contract workers.
Approximately 2,000 of our employees are covered by collective
bargaining agreements with various unions. (See Item 1,
Description of Business, Employees for additional
detail regarding our unionized locations.) Our agreement with
the unions to which our workers in our Ship Repair and
Maintenance facility in Norfolk, Virginia belong covers
approximately 800 employees and expires in February 2004. Our
agreement with the unions to which our workers in San Francisco
belong covers approximately 150 employees and expires in June
2005. Although we believe that our relationships with these
unions are good, there can be no assurance that we will not
experience labor disruptions associated with the expiration or
renegotiation of collective bargaining agreements or otherwise.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to receive or retain the
    necessary licenses or authorizations required for us to sell our
    products overseas.

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

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our products or to receive authorization from the
Executive Branch for sales to foreign governments. Failure to
receive required licenses or authorization would hinder our
ability to sell our products outside the United States.




| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Our significant level of debt may adversely
    affect our financial and operating activity.

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

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



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



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on key management and personnel
    and may not be able to retain those employees or recruit
    additional qualified personnel.

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



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Environmental laws and regulations may
    subject us to significant liabilities.

Our operations are subject to U.S. federal, state
and local environmental laws and regulations, as well as
environmental laws and regulations in the various countries in
which we operate, relating to the discharge, storage, treatment,
handling, disposal and remediation of certain materials,
substances and wastes. New laws and regulations, stricter
enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new
clean-up requirements may require us to incur substantial costs
in the future. Although a significant portion of our ongoing
environmental costs are recoverable from other parties or
allowable as costs under the terms of many of our contracts,
there is no assurance that we will not incur material
unrecoverable or unallowable costs in the future. In addition,
there is no assurance that environmental costs we expect to be
reimbursed by other parties or allowed as charges in U.S.
Government contracts will be reimbursed or allowed. A decline in
such reimbursement or allowability could have a material adverse
effect on our financial condition and results of operations.

Stringent fines and penalties may be imposed for
non-compliance and many environmental laws impose joint and
several strict liability for remediation of spills
and releases of oil and hazardous substances, without regard to
negligence or fault on the part of the person being held
responsible. Financial responsibility for the

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clean-up or other remediation of contaminated
property or for natural resource damages can extend to
previously owned or used properties, waterways and properties
owned by unrelated companies or individuals, as well as
properties currently owned and used by us regardless of whether
the contamination is attributable to other potentially
responsible parties. Many of our facilities have been used for
ship repair and related activities for several decades. The
nature of ship repair operations requires the storage, use and
handling of hazardous materials. The extensive use and handling
of these materials has resulted in their release in our
shipyards and the adjacent waterways and may do so in the
future. Accordingly, we make capital expenditures and incur
operating expenses for clean-up, mitigation and other
environmental matters arising from the condition of our
shipyards and the adjacent waterways and from our daily
operations.


See Environmental Matters discussion
in Item 1, Description of Business, above, for a more
detailed description of certain environmental matters and our
related potential liability.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We may need to raise additional capital on
    terms unfavorable to our stockholders.

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

Acting
in a subcontractor role on FCS may reduce our control over and
financial results from the program.

On most of our programs with the Army, we have
historically participated in the role of the prime contractor,
meaning that we have overall contractual responsibility for the
final product or system sold to DoD, and subcontract to others
for various components and services which we incorporate in the
final product. For example, we are or have been the prime
contractor on the U.S. Armys Bradley, Crusader,
M109/FAASV, M113, M88 Hercules, and ACE programs. By contrast,
on the FCS program, including the NLOS-C system (both of which
are discussed above under Item 1, Description of Business,
Defense Systems Segment), we are expected to participate as a
subcontractor, at least during the development phases of the
program, which are expected to last several years. Historically,
we have sought the role of prime contractor on our military
programs because of both the heightened visibility and extensive
customer interface which prime contractors tend to possess. The
overall effect of participating in FCS as a subcontractor rather
than as a prime contractor is uncertain, but it may lessen our
ability to obtain adequate funding for elements of the program
in which we participate, and/or to influence the technological
direction, nature, scope, and ultimate production and fielding
of those elements in which we participate. Any such diminution
could reduce our revenues and profits from FCS participation,
and/or render us subject to greater competition from other
current or potential participants in the program.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Decline in the value of the securities held
    by our employee retirement plans would adversely affect our
    retiree benefit expense and funding levels.

Our employee retirement benefit plans hold a
significant amount of equity securities. Declines in the market
values of these securities would increase our retiree benefit
expense and, as a result, adversely affect our profitability. In
addition, a continued decline in such asset values could cause
our plans, which in the aggregate were adequately funded as of
December 31, 2002, to become underfunded.




ITEM 2.     Properties

The principal manufacturing and research and
development activities for our Defense Systems segment are
located in four main facilities: Fridley, Minnesota; York,
Pennsylvania; Louisville, Kentucky; and Santa Clara, California.
We currently own 326,023 square feet and have historically used
the attached 1,712,240 square foot

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Fridley facility under a facility-use agreement
with the U.S. Government. Our last such agreement expired on
February 28, 2003, and we are currently in negotiations
with the U.S. Government to amend and/or extend the agreement.
The York facility consists of 996,518 square feet and is owned
by United Defense. We lease our 633,609 square foot Louisville
facility pursuant to a lease expiring in June 2005. The main
Santa Clara facility occupies 124,940 square feet under a lease
that expires in October 2011. In addition, we own or lease
approximately 25 additional administrative offices,
manufacturing facilities, and warehouse locations throughout the
U.S. and in Sweden.


Our Ship Repair and Maintenance segment owns or
leases a total of seven ship repair facilities in the
continental United States and Hawaii. The two largest facilities
are full service shipyards located in Norfolk, Virginia and San
Diego, California. The San Diego shipyard includes 5 repair
piers with 2,800 feet of berthing space, two dry-docks, various
workshops, warehouses and offices located on 23 acres. All
waterfront property in San Diego is occupied under a long-term
ground lease that expires in 2034. The Norfolk shipyard is
located on approximately 109 acres and includes 4 piers with
3,000 feet of berthing space, one 52,000 ton dry-dock, and
numerous workshops, warehouses, and offices. We own the Norfolk
property. In addition, our Ship Repair and Maintenance segment
also leases five other shipyard facilities located in
California, Texas, Hawaii, and Florida.




ITEM 3.     Legal
Proceedings

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

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.






|        |                                                        
|------- | -------------------------------------------------------
|ITEM 4. | Submission of Matters to a Vote of Security
    Holders

None.

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|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our sole class of common equity is our $0.01 par
value common stock, which is traded on the New York Stock
Exchange (NYSE) under the symbol UDI.
Trading in our common stock commenced on the NYSE on
December 14, 2001. As of February 28, 2003, there were
53 shareholders of record with approximately 9,878 beneficial
shareholders of our common stock.

The table below shows, for the quarters
indicated, the reported high and low trading prices of our
common stock on NYSE.

|                   |                                              |      |   |       |  |  |   |       | 
|------------------ | -------------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                   |                                              | High |   | Low  
|                   |                                              |      |   |      
|Calendar Year 2001 |                                              |      |   |       |  |  |   |      
|                   | Fourth Quarter (beginning December 14, 2001) |      | $ | 21.94 |  |  | $ | 18.99 | 
|Calendar Year 2002 |                                              |      |   |       |  |  |   |      
|                   | First Quarter                                |      | $ | 28.47 |  |  | $ | 19.60 | 
|                   | Second Quarter                               |      |   | 29.85 |  |  |   | 19.70 | 
|                   | Third Quarter                                |      |   | 24.35 |  |  |   | 17.60 | 
|                   | Fourth Quarter                               |      |   | 24.35 |  |  |   | 18.65 | 
|Calendar Year 2003 |                                              |      |   |       |  |  |   |      
|                   | First Quarter (as of February 28, 2003)      |      | $ | 24.75 |  |  | $ | 21.05 | 

As part of the recapitalization transaction
described in Item 7 below, we paid two dividends in 2001.
The first dividend of $289.7 million at $7.11 per share was
paid on August 13, 2001. The second dividend of
$92.0 million, or $2.22 per share was paid on
November 26, 2001. We did not pay any dividends in 2002 and
do not anticipate paying any dividends in the foreseeable
future. In addition, our $800 million senior secured credit
agreement includes provisions restricting our ability to pay
dividends in the future.

We sold no unregistered securities during 2002.




ITEM 6.     Selected
Financial Data

The following tables set forth our selected
consolidated financial data for the periods indicated. We have
derived our consolidated statements of operations and our
balance sheet data for each of the five years ended December 31,
2002 from our audited consolidated financial statements. The
historical results presented are not necessarily indicative of
future results. You should read the information set forth below
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and their related
notes included elsewhere in this document.

On September 6, 2000, we acquired all of the
outstanding stock of Bofors Defence, and on July 2, 2002,
we acquired all of the outstanding stock of United States Marine
Repair. Accordingly, the financial statements reflect the
results of operations of the acquired entities since the
respective dates of acquisition. These acquisitions affect the
comparability of the financial data for the periods presented.

|                                          |  |                                       |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|----------------------------------------- |  | ------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                          |  |                                      
|                                          |  | Year ended December 31,              
|                                          |  |                                      
|                                          |  | 1998                                  |           | 1999 |  | 2000 |           | 2001 |  | 2002
|                                          |  |                                       |           |      |  |      |           |      |  |     
|                                          |  |                                      
|                                          |  | (In thousands, except per share data)
|Net sales                                 |  | $                                     | 1,217,555 |      |  | $    | 1,213,526 |      |  | $    | 1,183,886 |  |  | $ | 1,318,538 |  |  | $ | 1,725,346 | 
|(Loss) income before extraordinary item   |  |                                       | (122,598  | )    |  |      | 2,938     |      |  |      | 18,165    |  |  |   | 37,022    |  |  |   | 136,276   | 
|Net (loss) income                         |  |                                       | (122,598  | )    |  |      | 2,938     |      |  |      | 18,845    |  |  |   | 8,776     |  |  |   | 134,576   | 
|Total assets                              |  |                                       | 977,450   |      |  |      | 853,142   |      |  |      | 895,820   |  |  |   | 928,118   |  |  |   | 1,453,970 | 
|Long term debt, including current portion |  |                                       | 506,986   |      |  |      | 349,843   |      |  |      | 269,577   |  |  |   | 430,900   |  |  |   | 590,000   | 
|Cash dividends declared per common share  |  |                                       |          |      |  |      |          |      |  |      |          |  |  | $ | 9.33      |  |  |   |          | 

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|                                                                                |                                            |                                       |       |            |   |      |      |            |  |      |      |            |  |   |      |            |   |   |      |            |  
|------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------- | ----- | ---------- | - | ---- | ---- | ---------- |  | ---- | ---- | ---------- |  | - | ---- | ---------- | - | - | ---- | ---------- | -
|                                                                                |                                            |                                      
|                                                                                |                                            | Year ended December 31,              
|                                                                                |                                            |                                      
|                                                                                |                                            | 1998                                  |       | 1999       |   | 2000 |      | 2001       |  | 2002
|                                                                                |                                            |                                       |       |            |   |      |      |            |  |     
|                                                                                |                                            |                                      
|                                                                                |                                            | (In thousands, except per share data)
|Per Share Data:                                                                 |                                            |                                       |       |            |   |      |      |            |  |      |      |            |  |   |      |            |   |   |      |           
|Earnings per common share  basic
    (Loss) income before extraordinary Item   |                                            | $                                     | (3.08 | )          |   | $    | 0.07 |            |  | $    | 0.45 |            |  | $ | 0.90 |            |   | $ | 2.65 |           
|                                                                                | Extraordinary item                         |                                       |       |           |   |      |      |           |  |      |      | 0.01       |  |   |      | (0.69      | ) |   |      | (0.03      | )
|                                                                                |                                            |                                       |       |            |   |      |      |            |  |      |      |            |  |   |      |            |   |   |      |           
|                                                                                | Net (loss) income                          |                                       | $     | (3.08      | ) |      | $    | 0.07       |  |      | $    | 0.46       |  |   | $    | 0.21       |   |   | $    | 2.62       |  
|                                                                                |                                            |                                       |       |            |   |      |      |            |  |      |      |            |  |   |      |            |   |   |      |           
|                                                                                | Weighted average common shares outstanding |                                       |       | 39,815,942 |   |      |      | 40,593,348 |  |      |      | 40,584,049 |  |   |      | 41,264,914 |   |   |      | 51,348,889 |  
|Earnings per common share  diluted
    (Loss) income before extraordinary item |                                            | $                                     | (3.08 | )          |   | $    | 0.07 |            |  | $    | 0.43 |            |  | $ | 0.86 |            |   | $ | 2.58 |           
|                                                                                | Extraordinary item                         |                                       |       |           |   |      |      |           |  |      |      | 0.01       |  |   |      | (0.66      | ) |   |      | (0.03      | )
|                                                                                |                                            |                                       |       |            |   |      |      |            |  |      |      |            |  |   |      |            |   |   |      |           
|                                                                                | Net (loss) income                          |                                       | $     | (3.08      | ) |      | $    | 0.07       |  |      | $    | 0.44       |  |   | $    | 0.20       |   |   | $    | 2.55       |  
|                                                                                |                                            |                                       |       |            |   |      |      |            |  |      |      |            |  |   |      |            |   |   |      |           
|                                                                                | Weighted average common shares outstanding |                                       |       | 39,815,942 |   |      |      | 42,052,127 |  |      |      | 42,419,473 |  |   |      | 43,203,511 |   |   |      | 52,796,680 |  






|        |                                                                                                  
|------- | -------------------------------------------------------------------------------------------------
|ITEM 7. | Managements Discussion and Analysis
    of the Results of Operations and Financial
    Condition

The following discussion and analysis should be
read in conjunction with the financial statements and related
notes and the other financial information included elsewhere in
this report. This discussion contains forward-looking statements
about our business and operations. Our actual results could
differ materially from those anticipated in such forward-looking
statements.

Overview

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

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

We had a firm funded backlog, including new and
existing orders at USMR, of approximately $2 billion as of
December 31, 2002, a substantial majority of which was
derived from sole-source, prime contracts. Approximately 79% of
our sales for the year ended December 31, 2002 were to the
U.S. Government, primarily to agencies of the DoD (excluding
Foreign Military Sales), or through subcontracts with other
government contractors.

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

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acquisition. This is the case for the
September 2000 acquisition of Bofors Defense and the
July 2002 acquisition of United States Marine Repair, Inc.


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

Results of Operations



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Revenue.Revenue for
2002 was $1,725.3 million, an increase of $406.8 million or
30.9% from $1,318.5 million for 2001. This increase is
attributable to the inclusion of $255.4 million of United
States Marine Repair results in our Ship Repair and Maintenance
segment in 2002 which did not exist in 2001, and
$151.4 million in higher Defense Systems segment sales in
2002 including a $60.2 million increase in Bradley vehicles
and a $52.8 million increase in M88 tank recovery vehicles.

Gross Profit.Gross
profit increased $77.9 million, or 30%, to $336.7 million
for the year 2002 as a result of increased sales. The Defense
Systems segments gross profit was 20.2% for 2002 compared
with 19.6% for the year 2001. The Ship Repair and Maintenance
segment gross profit rate for the year 2002 was 15.4%.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses for 2002 were $142.8 million, a
$36.9 million, or 20.5% decrease from $179.7 million
for 2001. The decrease was due to lower amortization costs of
intangibles and no amortization of goodwill due to the
non-amortization provision of FAS 142, and the absence of
significant non-recurring charges resulting from the initial
public offering and recapitalization that were incurred in 2001.
These decreases were partially offset by the inclusion of
$20.7 million of United States Marine Repair selling,
general and administration costs for the last six months of 2002.

Research and
Development.Research and development
costs were $27.7 million for 2002, an increase of
$4.0 million, or 16.9%, from the prior year. This increase
resulted from significant spending to develop and build a
wheeled vehicle prototype to be proposed as the wheeled vehicle
platform for the Future Combat Systems program.

Earnings from Foreign
Affiliates.Earnings from foreign
affiliates in the Defense Systems segment for 2002 were
$13.9 million, net of amounts paid to our Turkish partner,
a $3.7 million increase from the prior year. This increase
was primarily due to increased earnings from the joint venture
in Turkey as production continues to ramp up to meet contract
schedules, which more than offset the fact that we stopped
recording our share of earnings from our joint venture in Saudi
Arabia in March 2002 which we agreed to divest.

Net Interest
Expense.Net interest expense for 2002
was $28.7 million, a $6.0 million increase from the
prior year. This increase was the result of an increase in debt
associated with the acquisition of United States Marine Repair
and lower interest income due to lower interest rates and lower
average cash balances in 2002.

Provision for Income
Taxes.The provision for income taxes
for 2002 was $15.2 million, an increase of
$9.3 million from the prior year. The increase was due to
higher taxable income, net of the impact of the reversal of the
valuation allowance against net deferred tax assets. In 2003,
taxes will be fully provided on income at rates approximating
statutory rates.

Extraordinary Item.We recorded a charge, net of taxes, of $1.7 million during
the year 2002 for the early extinguishment of debt as we made
$140.9 million of early debt repayments. This compared favorably
to the 2001 extraordinary items totaling $28.2 million
comprised of a tender premium of $18.1 million and
amortization of financing costs for $10.1 million for debt
prepayment.

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Net Income.As a
result of the foregoing, we had net income of $134.6 million for
the year ended 2002, a $125.8 million increase from the
prior year.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
    to Year Ended December 31, 2000

During 2000 and 2001 we had only one reportable
segment.

Revenue.Revenue for
2001 was $1,318.5 million, an increase of
$134.6 million or 11.4% from $1,183.9 million for
2000. The higher revenue was due to both having a full year of
the Bofors acquisition instead of just four months as was the
case in 2000, resulting in an increase of $69.9 million,
increased revenue from Crusader of $77.5 million and Naval
Ordnance programs including the first propulsor unit delivery
for the new Virginia class submarine of $55.2 million.
These increases were partially offset by a decline in shipment
of M88 tank recovery vehicles under a co-production
contract with Egypt.

Gross Profit.Gross
profit increased $18.9 million, or 7.9%, to
$258.9 million for the year 2001 as a result of increased
sales. Gross profit margin of 19.6% for 2001 was slightly less
than the 20.3% gross profit margin for 2000, primarily as a
result of positive contract profit adjustments in 2000.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased $6.0 million, or 3.5% to
$179.7 million for 2001. The increase was attributable to
the inclusion of Bofors Defence for the entire 2001 period
resulting in an increase of $11.8 million and expenses
incurred in connection with the August 2001 recapitalization.
These increases were partially offset by reduced amortization of
purchase price related to acquisitions, agents commissions
and bid and proposal costs.

Research and
Development.Research and development
costs were $23.7 million for 2001, an increase of
$7.9 million, or 50.2%, from the prior year. This increase
resulted from the inclusion of Bofors Defence for the entire
2001 period and increased spending associated with missile
launch systems, the Advanced Gun System for the DD(X) destroyer
program and on other technologies that we believe will enhance
our ability to compete for future programs.

Earnings from Foreign
Affiliates.Earnings from foreign
affiliates for 2001 were $10.2 million, an
$11.4 million increase from the prior year. This increase
was primarily due to an increase in our share of income
recognized by the joint venture in Saudi Arabia due to a change
in estimated contract costs and fees recorded by that joint
venture and increased earnings from the joint venture in Turkey
reflecting the resumption of production in 2001.

Net Interest
Expense.Net interest expense for 2001
was $22.7 million, a $2.4 million decline from the
prior year. This decrease was the result of lower interest rates
and more interest income on higher average cash balances in 2001.

Provision for Income
Taxes.The provision for income taxes
for 2001 was $5.9 million, a decrease of $0.1 million
from the prior year. The reduction in foreign sales corporation
taxes due to the application to foreign sales of the new
FSC Repeal and Extraterritorial Income Exclusion Act of
2000 more than offset an increase in state taxes in 2001.

Extraordinary Item.We recorded a charge of $28.2 million during 2001 comprised
of a tender premium of $18.1 million and amortization of
financing costs for $10.1 million for debt prepayment. In
2000, we incurred a $0.7 million extraordinary gain related
to the purchase of some of these subordinated notes for less
than their principal amount.

Net Income.As a
result of the foregoing, we had net income of $8.8 million
for the year ended 2001, a $10.1 million decline from the
prior year.

Liquidity, Capital Resources and Financial
Condition

Our primary source of liquidity is cash provided
by operations. We have generated annual positive cash flow from
operating activities since the formation of United Defense
Industries, Inc. in October 1997.

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Our liquidity requirements depend on a number of
factors, including the timing of production under U.S.
Government and foreign sales contracts. Payments on these
contracts are typically received based on performance milestones
or when a specified percentage of contract expenses are
incurred. These advance payments help reduce the need to finance
working capital. However, working capital needs fluctuate
between periods as a result of changes in program status and the
timing of payments by program. For example, under the recent
production contract related to the Bradley program, final
payment for each vehicle is not received until the U.S. Army
fields the vehicle, which may be significantly later than the
time at which we finish vehicle production.

Cash provided by operating activities for 2002
was $179.3 million, an increase of $89.0 million, or
98.5% from the prior period. Increased net income primarily
drove the improved level of cash provided during the period.
Higher cash provided by operating activities was also due to
increased milestone payments from the U.S. Government mainly for
Bradley and VLS programs and advance payments from foreign
customers. This favorable cash variance was partially offset by
growth in trade receivables, due primarily to the timing of
Bradley deliveries and associated payments from the U.S.
government.

Cash provided by operating activities was
$90.3 million for 2001, a decrease of $5.6 million
from the prior year. The primary reason for this decrease was a
significant build-up of inventories net of advance payments
associated with producing units for several foreign customers,
which were mostly shipped in 2002. The majority of cash provided
by operating activities for 2000 was generated by net income
plus depreciation and amortization of $113.8 million, but
it was adversely affected by increases in working capital and by
non-recurring costs incurred in connection with our unsuccessful
bid for the Interim Armored Vehicle program.

Cash used in investing activities was
$333.9 million in 2002, compared with $22.4 million of
cash used in investing activities in 2001. The increase in cash
used in 2002 was mainly due to the purchase of USMR and Cell ITS
for $306.9 million and $4.1 million, respectively.
Generally our capital expenditures are for replacement of
manufacturing and computer equipment and software. Bofors
Defence had a significant cash balance when we acquired it,
which resulted in positive cash flows from investing activities
in 2000. Due to the acquisition of USMR we anticipate an
increase in capital expenditures of approximately
$7-$10 million annually in the coming years.

With regard to financing activities, on
July 2, 2002, we amended our credit facility to borrow an
additional $300 million for the purchase of USMR and
subsequently repaid $140.9 million. In 2001, cash provided
was primarily the result of the August 2001 refinancing of
indebtedness of $635.3 million and of proceeds from the
sale of common stock of $180.6 million. These funds were
used to make repayments of debt of $474.0 million, dividend
distributions of $381.7 million, and to pay for refinancing
costs and common stock issuance costs totaling
$50.3 million, resulting in a net use of cash of
$88.9 million in 2001. The primary use of cash in 2000 was
for debt repayments.

On August 31, 2001, we refinanced all of our
existing indebtedness. In connection with the refinancing, we
entered into a new senior secured credit facility, consisting of
$600 million in term loans 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 USMR. Borrowings under the senior secured credit
facility are sensitive to changes in interest rates. As of
December 31, 2002, the interest rate on the
$95.1 million Term A borrowings and on the
$494.9 million Term B borrowings was 3.92%. Loans made
pursuant to the Term A and Term B loan facilities
require equal quarterly amortization payments. The payment
schedule as of December 31, 2002 is as follows (in
thousands):

|               |       |       |         |                        |  |             |       |             |  |               |        |         |  |   |         |         |  |   |        |        | 
|-------------- | ----- | ----- | ------- | ---------------------- |  | ----------- | ----- | ----------- |  | ------------- | ------ | ------- |  | - | ------- | ------- |  | - | ------ | ------ | 
|               |       |       |         |                       
|               |       |       |         | Payments Due by Period
|               |       |       |         |                       
|               |       |       |         | Less than              |  |            
|Long-Term Debt |       | Total |         | 1 year                 |  | 1 - 3 years |       | 4 - 5 years |  | After 5 years
|               |       |       |         |                        |  |             |       |             |  |              
|Term A         |       | $     | 95,116  |                        |  | $           | 6,341 |             |  | $             | 76,093 |         |  | $ | 12,682  |         |  | $ |       |       
|Term B         |       |       | 494,884 |                        |  |             | 6,670 |             |  |               | 80,035 |         |  |   | 309,469 |         |  |   | 98,710 |       
|               |       |       |         |                        |  |             |       |             |  |               |        |         |  |   |         |         |  |   |        |       
|               | Total |       | $       | 590,000                |  |             | $     | 13,011      |  |               | $      | 156,128 |  |   | $       | 322,151 |  |   | $      | 98,710 | 

Based on the current level of operations and
anticipated growth, we believe that cash from operations,
together with other available sources of liquidity, including
borrowings available under the revolving credit facility, will
be sufficient to fund anticipated capital expenditures and
required payments of principal and interest

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on debt through at least December 31, 2003.
The growth and acquisition strategy, however, may require
substantial additional capital.


U.S. Army Transformation

In 2002 our production sales to the U.S. Army
were $363.2 million, or 21% of our total revenues, and
consisted largely of the manufacturing, modification, and
upgrading of several of the Armys principal tracked combat
vehicles such as the Bradley, M109/FAASV artillery system, M88
recovery vehicle, and the M113. The nature of such Army sales
and their proportional importance to our overall business, as
exhibited in 2002, were representative of our business
experience in recent years. In 1999 the Army announced its
intention to transform its principal combat systems over the
next 20-30 years in a manner which would ultimately replace
its existing ground combat force, which is composed primarily of
tracked combat vehicles such as those noted above. The
Armys plan was first to supplement the existing force with
an Interim Armored Vehicle (IAV), intended to be a lighter, more
readily deployable type of vehicle, and then ultimately replace
the existing force with a set of combat systems known as the
Objective Force. The Army adopted the Future Combat Systems
(FCS) program as its means of developing and procuring the
Objective Force. (See Future Combat Systems discussion in
Item 1, Description of Business, above.)

We competed for the Armys IAV program, now
known as the Stryker, but the $4 billion procurement was
awarded to a competitor, and to date our participation in this
program has been limited to a subcontract to provide armor
components for certain Stryker models. However, due to our
demonstrated capabilities in ground combat systems, the Army has
selected us for a major role in the development of the manned
ground combat vehicle portion of FCS. If the FCS program
proceeds on schedule and our efforts in the program are
successful, FCS could provide us with a substantial volume of
Army business for many years to come.

In February 2003, the Administration announced
its proposed FY04 budget and related program and spending plans
through FY09. For the Army, such plans essentially envision the
discontinuance of further production or upgrades of existing
ground combat systems, the continuation of Stryker procurements,
and the pursuit of FCS development on a schedule which calls for
the fielding of an initial FCS capability in FY08. Whether the
FCS program will continue on its announced timetable, and
whether Stryker procurements will continue as proposed by the
Army, are uncertain, given the need for annual legislative
authorization for such programs, their ongoing review by the
current Administration, and the substantial technological
challenges inherent in their development. However, Public
Law 107-314, enacted in December 2002, mandates the
fielding of one of our most important FCS systems, the
NLOS-C cannon, by 2008. (See discussion of Objective Force
Indirect Fire, Non-Line-of-Sight Cannon in Item 1,
Description of Business, above.)

If the Armys plans remain in effect and
receive Congressional approval, we would most likely experience
a gap in ground combat systems production for the Army during
the middle of this decade, between the discontinuance of
production of existing systems and the ramp-up of production for
NLOS-C and other FCS systems. A prolonged suspension of
production could reduce our workforce and employee skill base
and necessitate the contraction of our manufacturing facilities.
Under such circumstances, in comparison to our results for the
period 2000-2002, the results of our operations would be
adversely affected.

Any such adverse consequences from a significant
decline or interruption in our Army production work could be
offset, in whole or in part, by potential sales resulting from
one or more of the following sources: (i) the
identification of enhancement opportunities for existing ground
combat systems, on the basis of any near-term military
experiences in Iraq or elsewhere, such as occurred with respect
to several of our major Army product lines following the 1991
Gulf War; (ii) service life extension programs to sustain
the viability and readiness of existing ground combat systems
until replacement FCS units are fielded, a transition period
which may last 20 years or more; (iii) changes in the
Stryker program, which might permit us to compete for further
subcontract or prime contract work on the program;
(iv) growth in our Army engineering business;
(v) growth in our Defense Systems segments naval
programs, such as the DD(X) Advanced Gun System; (vi) sales
to foreign customers; (vii) growth in our Ship Repair and
Maintenance business; and (viii) the addition of new or
augmented product or service lines through internal development
and/or acquisitions. We believe that the nature and likelihood
of such potential developments are inherently uncertain.

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Critical Accounting Policies

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. In particular, estimates are used for
contract costs and revenues used in the earnings recognition
process, accruals related to environmental and other
liabilities, allowance for doubtful accounts, and pension and
other retirement costs. Actual results could differ from those
estimates.

Revenue and Cost
Recognition.We recognize sales on
fixed-price production contracts when the risks and rewards of
ownership have been transferred to the customer. For our DoD
production contracts, those criteria are typically met when the
manufacture of the product is completed and the customer has
certified it as meeting the contract specifications and as
having passed quality control tests. However, under recent
Bradley production contracts, sales are not recognized until the
vehicles are fielded to individual U.S. Army units because it is
at that point that the risks and rewards of ownership are
transferred. Fielding a vehicle refers to the final deprocessing
activity such as checking for proper running condition,
installing on board equipment and getting the certified customer
acceptance at their site of operation. This contractual
provision extends the period of time during which these vehicles
are carried as inventory and may result in an uneven
distribution of revenue from these contracts between periods.

In December 2002, we provided the U.S. Army
customer access to 38 Bradley A3 vehicles prior to the
completion of the deprocessing effort that triggers customer
acceptance. These vehicles were scheduled by contract to be
fielded in the first quarter of 2003, at which time the customer
would have been given access. Although access was provided in
December, we completed the final deprocessing steps in January
of 2003 at which time the customer took acceptance and we
recorded the $60.2 million sale for these vehicles.

For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. We tend to deliver products to our foreign customers
in lots, which also results in an inventory build-up pending
delivery.

We recognize sales under fixed-price ship repair
and maintenance contracts using a 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
compared with estimated total direct labor inputs and total
costs. Sales under cost-plus 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 use the long-term contract method of
accounting for our fixed-price contracts and therefore record
gross margin on each unit produced at the time a sale is
recognized, based on an estimate of the margin that will be
realized over the life of the related contract. We currently
evaluate estimates of gross margin periodically during the year
and use the cumulative catch-up method to recognize changes in
estimates of sales and gross margins during the period in which
those changes are determined. We charge any anticipated losses
on a contract to operations as soon as those losses are
determined.

The principal components of cost of sales for our
production and ship repair and maintenance contracts are
materials, subcontractor costs, labor and overhead. The
principal components of cost of sales for engineering and
development contracts are compensation costs for the engineers
and designers and related overhead necessary to support those
personnel. All of these costs are charged to inventory as
incurred except for Ship Repair and Maintenance costs, which are
expensed as incurred. We use the last-in, first-out, or LIFO,
method of accounting for the majority of our inventory, which
generally results in higher cost of sales in periods when
current costs of the inventory are higher than comparable costs
in prior periods and a periodic charge to earnings to reflect
changes in the costs of components of inventory. We expense
selling, general, administrative, and research and development
costs in the period incurred. The major components of these
costs include compensation, overhead and amortization of
intangibles.

Investments in Affiliated
Companies.Our investment in our 51%
owned foreign joint venture in Turkey, FNSS, is accounted for by
using the equity method because we do not control the joint
venture due to our

27



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partners veto rights over major operating
decisions. This same accounting treatment was used for our joint
venture in Saudi Arabia, UDS, prior to our decision to divest
our interest in the company.


Derivatives and Hedging
Activities.Effective January 1,
2001, we adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended.
As a result of the adoption of SFAS 133, we recognize all
derivative financial instruments, such as foreign exchange
contracts and interest rate swaps, in the consolidated financial
statements at fair value regardless of the purpose or intent for
holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically in the
results of operations or in stockholders equity as a
component of other comprehensive income, depending on whether
the derivative financial instrument qualifies for hedge
accounting and, if so, whether it qualifies as a fair value
hedge or cash flow hedge. Generally, changes in fair values of
the derivatives accounted for as fair value hedges are recorded
in the results of operations along with the portions of the
changes in the fair values of the hedged items that relate to
the hedged risks. Changes in fair values of derivatives
accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in other comprehensive income.
Ineffectiveness related to cash flow hedges is recorded in the
results of operations. Changes in fair values of derivatives not
qualifying as hedges are reported in the results of operations

Changes in Accounting Principle.In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and
indefinite-live intangible assets are no longer amortized but
are subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be
amortized over their useful lives. On January 1, 2002, we
began to apply the new rules on accounting for goodwill and
other intangible assets and ceased the amortization of goodwill.
We have completed the transitional and first annual required
impairment tests of goodwill and determined that there is no
impairment of goodwill.

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(FAS 144), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets.
FAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. We
adopted FAS 144 as of January 1, 2002 and it did not
have a significant impact on our financial position or results
of operations.

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

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

In June 2002, the FASB issued Statement
No. 146 (FAS 146), Accounting for Costs
Associated with Exit or Disposal Activities. FAS 146
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs in a
Restructuring). FAS 146 specifies that a liability
for a cost associated with an exit or disposal activity is
incurred when the definition of a liability in Concepts
Statement 6, Elements of Financial Statements,
is met. The provisions of FAS 146 are effective for exit or
disposal activities that are initiated after December 31,
2002. We are currently

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evaluating the impact of adoption of this
statement, but do not believe it will have a significant impact
on our financial statements.


On December 31, 2002, the FASB issued
Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Statement 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition to Statement 123s fair
value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects
of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require
companies to account for employee stock options using the fair
value method, the disclosure provisions of Statement 148 are
applicable to all companies with stock-based employee
compensation, regardless of whether they account for that
compensation using the fair value method of Statement 123 or the
intrinsic value method of Opinion 25.

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






|         |                                                              
|-------- | -------------------------------------------------------------
|ITEM 7A. | Quantitative and Qualitative Disclosure
    about Market Risk

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



| |                               
| | ------------------------------
| | Forward Currency Exchange Risk

We conduct some of our operations outside the
U.S. in functional currencies other than the U.S. dollar. To
mitigate the risk associated with fluctuating currencies on
short-term and long-term foreign currency-denominated
transactions, we enter into foreign currency forward exchange
contracts. We do not enter into foreign currency forward
exchange contracts for trading purposes. The following table
provides information with respect to significant contracts at
December 31, 2002. The table presents the U.S. dollar
equivalent notional amounts and weighted average contractual
exchange rates by expected maturity dates. These notional
amounts generally are used to calculate the contractual payments
to be exchanged under the contract.

|                                      |                                   |                                  |   |           |  |       |   |        |  |  |   |           |  |  |   |        | 
|------------------------------------- | --------------------------------- | -------------------------------- | - | --------- |  | ----- | - | ------ |  |  | - | --------- |  |  | - | ------ | 
|                                      |                                   |                                  |   |           |  |      
|                                      |                                   | Expected Maturity Date           |   |           |  |      
|                                      |                                   |                                  |   |           |  | Fair 
|                                      |                                   | 2003                             |   | 2004      |  | Total |   | Value 
|                                      |                                   |                                  |   |           |  |       |   |       
|                                      |                                   |                                 
|                                      |                                   | (U.S. $ equivalent in thousands)
|Receive Swedish krona/pay euros       |                                   |                                  |   |           |  |       |   |        |  |  |   |           |  |  |   |       
|                                      | Contract amount                   |                                  | $ | 3,260     |  |       | $ | 3,260  |  |  | $ | 6,520     |  |  | $ | 6,318  | 
|                                      | Average contractual exchange rate |                                  |   | 9.54      |  |       |   | 9.54   |  |  |   | 9.54      |  |  |   |        | 
|Receive U.S. dollars/pay Turkish lira |                                   |                                  |   |           |  |       |   |        |  |  |   |           |  |  |   |       
|                                      | Contract amount                   |                                  | $ | 15,868    |  |       | $ |       |  |  | $ | 15,868    |  |  | $ | 16,564 | 
|                                      | Average contractual exchange rate |                                  |   | 1,733,000 |  |       |   |       |  |  |   | 1,733,000 |  |  |   |        | 
|Receive U.S. dollars/pay euros        |                                   |                                  |   |           |  |       |   |        |  |  |   |           |  |  |   |       
|                                      | Contract amount                   |                                  | $ |          |  |       | $ | 22,700 |  |  | $ | 22,700    |  |  | $ | 24,562 | 
|                                      | Average contractual exchange rate |                                  |   |          |  |       |   | 1.05   |  |  |   | 1.05      |  |  |   |        | 



| |                   
| | ------------------
| | Interest Rate Risk

Borrowings under our senior secured credit
facility are sensitive to changes in interest rates. As of
December 31, 2002 the weighted average interest rate on the
$95.1 million Term A borrowings and on the

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$494.9 million Term B borrowings was 3.92%.
Loans made pursuant to the Term A loan facility require equal
quarterly amortization payments of $6.3 million beginning
on December 31, 2003, with a final payment due on
August 13, 2007. Loans made pursuant to the Term B
facility require quarterly amortization payments of
$6.7 million beginning on December 31, 2003 until
June 30, 2007, and $49.4 million each quarter
thereafter with a final payment due on August 13, 2009. The
weighted average interest rate on all of our borrowings
outstanding under the senior secured credit facility as of
December 31, 2002 was 3.92% per annum.


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

In conjunction with the purchase of USMR during
2002, we assumed the obligations related to two interest rate
swap agreements that had been established by USMR prior to the
date of acquisition. USMR entered into these agreements to
mitigate risks associated with variable interest rate borrowings
under its prior senior secured credit facility. The notional
amounts of these interest rate swap agreements are
$40 million and $20 million with maturity dates of
March 10, 2003 and January 29, 2004, respectively. The
agreements entitle us to pay respective base interest rate
amounts of 6.08% and 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 8. | Consolidated Financial Statements and
    Supplementary Data

The following consolidated financial statements
of United Defense Industries, Inc. are provided in response to
the requirements of Item 8:

UNITED DEFENSE INDUSTRIES, INC.

|                                                                                                                                  |  |  |     | 
|--------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Auditors (Ernst & Young
    LLP)                                                                            |  |  | F-1 | 
|Independent Auditors Report (SERBEST
    MUHASEBECILIK MALI MUSAVIRLIK ANONIM SIRKETI, Member of Andersen
    Worldwide)         |  |  | F-2 | 
|Independent Auditors Report (Arthur
    Andersen & Co)                                                                           |  |  | F-3 | 
|Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                                                  |  |  | F-4 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2000, 2001 and 2002                                    |  |  | F-5 | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the Years ended
    December 31, 2000, 2001 and 2002 |  |  | F-6 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2000, 2001 and 2002                                    |  |  | F-7 | 
|Notes to Consolidated Financial Statements                                                                                        |  |  | F-8 | 

30



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REPORT OF INDEPENDENT AUDITORS

Board of Directors

UNITED DEFENSE INDUSTRIES, INC.


We have audited the accompanying consolidated
balance sheets of United Defense Industries, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule in
Item 15. These financial statements and the schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and the schedule based on our audits. The 2001
financial statements of the Turkish Joint Venture and the Saudi
Arabian Joint Venture (entities in which the Company has 51%
interests) and, as to the Saudi Arabian Joint Venture, are
presented in accordance with accounting principles generally
accepted in Saudi Arabia, have been audited by other auditors
who have ceased operations and whose reports dated
January 24, 2002 and February 17, 2002, respectively,
have been furnished to us; insofar as our opinion on the 2001
consolidated financial statements relates to data included for
the Turkish Joint Venture and the Saudi Arabian Joint Venture
used by the Companys management for equity accounting
purposes (before conversion to accounting principles generally
accepted in the United States as to the Saudi Arabian Joint
Venture), it is based solely on their reports.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation (including the conversion of
the financial statements of the Saudi Arabian Joint Venture to
accounting principles generally accepted in the United States).
We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and, for
2001, the reports of other auditors, the financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of United Defense Industries,
Inc. and subsidiaries at December 31, 2002 and 2001, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion,
the financial statement schedule of United Defense Industries,
Inc. and subsidiaries referred to above, when considered in
relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.

As discussed in Note 2 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill and intangible assets.

/s/ Ernst & Young LLP

January 21, 2003

McLean, Virginia


F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors of

FNSS SAVUNMA SISTEMLERI ANONIM SIRKETI:


We have audited the balance sheets of FNSS
Savunma Sistemleri Anonim Sirketi (a Turkish
corporation  the Company) as of December 31,
2001 and 2000, and the related statements of operations,
shareholders equity and cash flows for the years then
ended (not included herein). These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above (not included herein) present fairly, in all material
respects, the financial position of FNSS Savunma Sistemleri
Anonim Sirketi as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States.



| |                                                         
| | --------------------------------------------------------
| | /s/ A.A. AKTIF ANALIZ                                   
| | SERBEST MUHASEBECILIK MALI MÜSAVIRLIK ANONIM
    SIRKETI
| | Member of Andersen Worldwide                            

Ankara, Turkey

January 24, 2002


Legend for Audit Opinion

This is a copy of the audit report previously
issued by SERBEST MUHASEBECILIK MALI MÜSAVIRLIK ANONIM
SIRKETI (Member of Andersen Worldwide) in connection with United
Defense Industries, Inc.s filing of its Annual Report on
Form 10-K for the year ended December 31, 2001. This
audit report has not been reissued by SERBEST MUHASEBECILIK MALI
MÜSAVIRLIK ANONIM SIRKETI (Member of Andersen Worldwide) in
connection with this Annual Report on Form 10-K. See
Exhibit 23.2 for further discussion.

F-2



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##### Table of Contents



To: The Partners of

UNITED DEFENSE
SYSTEMS


We have audited the balance sheet of UNITED
DEFENSE SYSTEMS (a Saudi limited liability Company) as of
December 31, 2001 and the related statements of income,
changes in partners equity and cash flows for the year
then ended, and the notes from 1 to 12 which are an integral
part of these financial statements (not included herein). These
financial statements are the responsibility of the
Companys management and have been prepared by them in
accordance with Article (175) of the Companies Regulations.
Our responsibility is to express our opinion on these financial
statements based on our audit and the information and
explanations we obtained which we considered necessary for the
purposes of our audit.

We conducted our audit in accordance with
generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statements presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred
to above (not included herein):



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Present fairly, in all material respects, the
    financial position of United Defense Systems as of
    December 31, 2001 and the results of its operations and its
    cash flows for the year then ended based on the presentation and
    disclosure of the information included in the financial
    statements and in conformity with generally accepted accounting
    principles in Saudi Arabia suitable to the Companys
    operations as summarized in Note 2.
|
| | 2. | Comply with the financial statement preparation
    and presentation requirement of the Commercial Code and the
    Companys by-laws and are computerized in accordance with
    the related commercial books regulations and are maintained in
    Arabic in the Kingdom of Saudi Arabia.                                                                                                                                                                               

/s/ ARTHUR ANDERSEN & CO.

5 Dhu Al-Qaadah 1422H (February 17,
2002)

Riyadh, Saudi Arabia


Legend for Audit Opinion

This is a copy of the audit report previously
issued by Arthur Andersen & Co. in connection with United
Defense Industries, Inc.s filing of its Annual Report on
Form 10-K for the year ended December 31, 2001. This
audit report has not been reissued by Arthur Andersen & Co.
in connection with this Annual Report on Form 10-K. See
Exhibit 23.3 for further discussion.

F-3



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |          |           |  
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | ------------ | --------- | - | ------- | -------- | --------- | -
|                                                |                                                                                                                                                                               | December 31,                                |         | December 31,
|                                                |                                                                                                                                                                               | 2001                                        |         | 2002        
|                                                |                                                                                                                                                                               |                                             |         |             
|                                                |                                                                                                                                                                               |                                            
|                                                |                                                                                                                                                                               | (In thousands)                             
|ASSETS                                         
|Current assets:                                 |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                | Cash and cash equivalents                                                                                                                                                     |                                             | $       | 90,535       |           |   | $       | 106,802  |          
|                                                | Trade receivables, net                                                                                                                                                        |                                             |         | 78,387       |           |   |         | 192,166  |          
|                                                | Long-term contract inventories                                                                                                                                                |                                             |         | 378,844      |           |   |         | 399,189  |          
|                                                | Deferred tax asset                                                                                                                                                            |                                             |         |             |           |   |         | 25,436   |          
|                                                | Other current assets                                                                                                                                                          |                                             |         | 14,406       |           |   |         | 15,458   |          
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                |                                                                                                                                                                               | Total current assets                        |         |              | 562,172   |   |         |          | 739,051   |  
|Property, plant and equipment, net              |                                                                                                                                                                               |                                             | 90,352  |              |           |   | 170,378 |         
|Goodwill, net                                   |                                                                                                                                                                               |                                             | 97,582  |              |           |   | 341,962 |         
|Intangible assets, net                          |                                                                                                                                                                               |                                             | 8,327   |              |           |   | 32,624  |         
|Prepaid pension and postretirement benefit cost |                                                                                                                                                                               |                                             | 127,828 |              |           |   | 120,987 |         
|Restricted cash                                 |                                                                                                                                                                               |                                             | 14,950  |              |           |   | 10,120  |         
|Other assets                                    |                                                                                                                                                                               |                                             | 26,907  |              |           |   | 38,848  |         
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                |                                                                                                                                                                               | Total assets                                |         | $            | 928,118   |   |         | $        | 1,453,970 |  
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|LIABILITIES AND STOCKHOLDERS
    DEFICIT      
|                                                | Current portion of long-term debt                                                                                                                                             |                                             | $       | 8,307        |           |   | $       | 13,011   |          
|                                                | Accounts payable, trade and other                                                                                                                                             |                                             |         | 88,273       |           |   |         | 121,801  |          
|                                                | Advanced payments                                                                                                                                                             |                                             |         | 394,771      |           |   |         | 491,217  |          
|                                                | Accrued and other liabilities                                                                                                                                                 |                                             |         | 120,724      |           |   |         | 139,954  |          
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                |                                                                                                                                                                               | Total current liabilities                   |         |              | 612,075   |   |         |          | 765,983   |  
|Long-term liabilities:                          |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                | Long-term debt, net of current portion                                                                                                                                        |                                             |         | 422,593      |           |   |         | 576,989  |          
|                                                | Accrued pension and postretirement benefit cost                                                                                                                               |                                             |         | 22,487       |           |   |         | 51,964   |          
|                                                | Deferred tax liability                                                                                                                                                        |                                             |         |             |           |   |         | 14,229   |          
|                                                | Other liabilities                                                                                                                                                             |                                             |         | 37,329       |           |   |         | 74,510   |          
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                |                                                                                                                                                                               | Total liabilities                           |         |              | 1,094,484 |   |         |          | 1,483,675 |  
|Commitments and contingencies                   |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|Stockholders deficit:                          |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                | Common stock $.01 par value, 150,000,000 shares
    authorized; 50,915,689 and 51,695,114 issued and outstanding at
    December 31, 2001 and December 31, 2002, respectively |                                             |         | 509          |           |   |         | 517      |          
|                                                | Additional paid-in-capital                                                                                                                                                    |                                             |         | 167,457      |           |   |         | 177,740  |          
|                                                | Deferred compensation                                                                                                                                                         |                                             |         | (648         | )         |   |         | (547     | )        
|                                                | Retained deficit                                                                                                                                                              |                                             |         | (329,528     | )         |   |         | (194,952 | )        
|                                                | Accumulated other comprehensive loss                                                                                                                                          |                                             |         | (4,156       | )         |   |         | (12,463  | )        
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                |                                                                                                                                                                               | Total stockholders deficit                 |         |              | (166,366  | ) |         |          | (29,705   | )
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         
|                                                |                                                                                                                                                                               | Total liabilities and stockholders deficit |         | $            | 928,118   |   |         | $        | 1,453,970 |  
|                                                |                                                                                                                                                                               |                                             |         |              |           |   |         |         

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |           |           |  
|-------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ------ | --------- | --------- | ---- | ------- | --------- | --------- | - | ------- | --------- | --------- | -
|                                                                                 |                                                           |                                      
|                                                                                 |                                                           | Year ended December 31,              
|                                                                                 |                                                           |                                      
|                                                                                 |                                                           | 2000                                  |        | 2001      |           | 2002
|                                                                                 |                                                           |                                       |        |           |           |     
|                                                                                 |                                                           |                                      
|                                                                                 |                                                           | (In thousands, except per share data)
|Revenue:                                                                         |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 | Sales                                                     |                                       | $      | 1,183,886 |           |      | $       | 1,318,538 |           |   | $       | 1,725,346 |          
|Costs and expenses:                                                              |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 | Cost of sales                                             |                                       |        | 943,892   |           |      |         | 1,059,687 |           |   |         | 1,388,616 |          
|                                                                                 | Selling, general and administrative expenses              |                                       |        | 173,694   |           |      |         | 179,714   |           |   |         | 142,806   |          
|                                                                                 | Research and development                                  |                                       |        | 15,760    |           |      |         | 23,666    |           |   |         | 27,673    |          
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 |                                                           | Total expenses                        |        |           | 1,133,346 |      |         |           | 1,263,067 |   |         |           | 1,559,095 |  
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|Income from operations                                                           |                                                           |                                       | 50,540 |           |           |      | 55,471  |           |           |   | 166,251 |          
|                                                                                 | Earnings related to investments in foreign
    affiliates |                                       |        | (1,262    | )         |      |         | 10,156    |           |   |         | 13,874    |          
|                                                                                 | Interest income                                           |                                       |        | 4,152     |           |      |         | 5,781     |           |   |         | 4,218     |          
|                                                                                 | Interest expense                                          |                                       |        | (29,265   | )         |      |         | (28,486   | )         |   |         | (32,908   | )        
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 |                                                           | Total other expense                   |        |           | (26,375   | )    |         |           | (12,549   | ) |         |           | (14,816   | )
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|Income before income taxes and extraordinary item                                |                                                           |                                       | 24,165 |           |           |      | 42,922  |           |           |   | 151,435 |          
|Provision for income taxes                                                       |                                                           |                                       | 6,000  |           |           |      | 5,900   |           |           |   | 15,159  |          
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|Income before extraordinary item                                                 |                                                           |                                       | 18,165 |           |           |      | 37,022  |           |           |   | 136,276 |          
|Extraordinary item  net gain (loss)
    from extinguishment of debt, net of tax |                                                           |                                       | 680    |           |           |      | (28,246 | )         |           |   | (1,700  | )        
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 |                                                           | Net income                            |        | $         | 18,845    |      |         | $         | 8,776     |   |         | $         | 134,576   |  
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|Earnings per common share-basic:                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 | Income before extraordinary item                          |                                       | $      | 0.45      |           |      | $       | 0.90      |           |   | $       | 2.65      |          
|                                                                                 | Extraordinary item                                        |                                       | $      | 0.01      |           |      | $       | (0.69     | )         |   | $       | (0.03     | )        
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 |                                                           | Net income                            |        | $         | 0.46      |      |         | $         | 0.21      |   |         | $         | 2.62      |  
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|Earnings per common share-diluted:                                               |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 | Income before extraordinary item                          |                                       | $      | 0.43      |           |      | $       | 0.86      |           |   | $       | 2.58      |          
|                                                                                 | Extraordinary item                                        |                                       | $      | 0.01      |           |      | $       | (0.66     | )         |   | $       | (0.03     | )        
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          
|                                                                                 |                                                           | Net income                            |        | $         | 0.44      |      |         | $         | 0.20      |   |         | $         | 2.55      |  
|                                                                                 |                                                           |                                       |        |           |           |      |         |           |           |   |         |          

See accompanying notes to consolidated financial
statements

F-5



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY (DEFICIT)

|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | -------------- | --- | ---------- |  | ------------ | -------- | ------------- |  | -------- | ---- | ------------- |  | ----- | ------ | - |  | - | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      | Accumulated   |  |      
|                                                                                  |  |                |     | Additional |  |              |          |               |  |          |      | Other         |  |      
|                                                                                  |  | Common         |     | Paid-In    |  | Deferred     |          | Stockholders |  | Retained |      | Comprehensive |  |      
|                                                                                  |  | Stock          |     | Capital    |  | Compensation |          | Loans         |  | Deficit  |      | (Loss)/Gain   |  | Total
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |      
|                                                                                  |  |               
|                                                                                  |  | (In thousands)
|Balance, December 31, 1999                                                        |  | $              | 406 |            |  | $            | 180,019  |               |  | $        |     |               |  | $     | (1,339 | ) |  | $ | (155,919 | ) |  | $ |        |   |  | $ | 23,167   |  
|Issuance of Common Stock                                                          |  |                |    |            |  |              | 45       |               |  |          |     |               |  |       | 50     |   |  |   |         |   |  |   |        |   |  |   | 95       |  
|Repurchase of Common Stock                                                        |  |                |    |            |  |              | (259     | )             |  |          |     |               |  |       | 53     |   |  |   |         |   |  |   |        |   |  |   | (206     | )
|Net income for the year ended December 31,
    2000                               |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   | 18,845   |   |  |   |        |   |  |   | 18,845   |  
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  
|Balance, December 31, 2000                                                        |  |                | 406 |            |  |              | 179,805  |               |  |          |     |               |  |       | (1,236 | ) |  |   | (137,074 | ) |  |   |        |   |  |   | 41,901   |  
|Issuance of stock options                                                         |  |                |    |            |  |              | 810      |               |  |          | (810 | )             |  |       |       |   |  |   |         |   |  |   |        |   |  |   |         |  
|Amortization of deferred stock compensation                                       |  |                |    |            |  |              |         |               |  |          | 162  |               |  |       |       |   |  |   |         |   |  |   |        |   |  |   | 162      |  
|Exercise of stock options                                                         |  |                | 10  |            |  |              | 4,842    |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   |        |   |  |   | 4,852    |  
|Payment of stockholders loans                                                    |  |                |    |            |  |              |         |               |  |          |     |               |  |       | 1,236  |   |  |   |         |   |  |   |        |   |  |   | 1,236    |  
|Cash dividend ($9.33 per share)                                                   |  |                |    |            |  |              | (180,502 | )             |  |          |     |               |  |       |       |   |  |   | (201,230 | ) |  |   |        |   |  |   | (381,732 | )
|Sale of common stock (net of $13,156 issuance
    cost)                           |  |                | 93  |            |  |              | 162,502  |               |  |          |     |               |  |       |        |   |  |   |         |   |  |   |        |   |  |   | 162,595  |  
|Net foreign currency translation                                                  |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   | (1,910  | ) |  |   | (1,910   | )
|Cumulative effect of change in accounting
    principle-foreign currency hedges   |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   | (951    | ) |  |   | (951     | )
|Change in fair value of foreign currency hedges                                   |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   | (1,295  | ) |  |   | (1,295   | )
|Net income for the year ended December 31,
    2001                               |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   | 8,776    |   |  |   |        |   |  |   | 8,776    |  
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  
|Total comprehensive income                                                        |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   | 4,620    |  
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  
|Balance, December 31, 2001                                                        |  |                | 509 |            |  |              | 167,457  |               |  |          | (648 | )             |  |       |       |   |  |   | (329,528 | ) |  |   | (4,156  | ) |  |   | (166,366 | )
|Amortization of deferred stock compensation                                       |  |                |    |            |  |              |         |               |  |          | 101  |               |  |       |       |   |  |   |         |   |  |   |        |   |  |   | 101      |  
|Exercise of stock options                                                         |  |                | 8   |            |  |              | 3,515    |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   |        |   |  |   | 3,523    |  
|Tax benefit from stock options                                                    |  |                |     |            |  |              | 6,768    |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   | 6,768    |  
|Net foreign currency translation                                                  |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   | 4,400   |   |  |   | 4,400    |  
|Change in fair value of foreign currency and
    interest rate hedges, net of tax |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   | (2,165  | ) |  |   | (2,165   | )
|Minimum pension liability, net of tax                                             |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   |         |   |  |   | (10,542 | ) |  |   | (10,542  | )
|Net income for the year ended December 31,
    2002                               |  |                |    |            |  |              |         |               |  |          |     |               |  |       |       |   |  |   | 134,576  |   |  |   |        |   |  |   | 134,576  |  
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  
|Total comprehensive income                                                        |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   | 126,269  |  
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  
|Balance, December 31, 2002                                                        |  | $              | 517 |            |  | $            | 177,740  |               |  | $        | (547 | )             |  | $     |       |   |  | $ | (194,952 | ) |  | $ | (12,463 | ) |  | $ | (29,705  | )
|                                                                                  |  |                |     |            |  |              |          |               |  |          |      |               |  |       |        |   |  |   |          |   |  |   |         |   |  |   |          |  

See accompanying notes to consolidated financial
statements

F-6



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |          |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------------------- | ------- | ------- | ------ | ---- | ------- | -------- | ------ | - | -------- | -------- | ------ | -
|                                                                                  |                                                                           |                                                      
|                                                                                  |                                                                           | Year ended December 31,                              
|                                                                                  |                                                                           |                                                      
|                                                                                  |                                                                           | 2000                                                  |         | 2001    |        | 2002
|                                                                                  |                                                                           |                                                       |         |         |        |     
|                                                                                  |                                                                           |                                                      
|                                                                                  |                                                                           | (In thousands)                                       
|Operating activities                                                              |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Net income                                                                        |                                                                           | $                                                     | 18,845  |         |        | $    | 8,776   |          |        | $ | 134,576  |         
|Adjustments to reconcile net income to cash
    provided by operating activities: |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|                                                                                  |                                                                           | Depreciation                                          |         |         | 24,442 |      |         |          | 22,663 |   |          |          | 25,346 |  
|                                                                                  |                                                                           | Amortization of software                              |         |         | 6,487  |      |         |          | 6,112  |   |          |          | 5,375  |  
|                                                                                  |                                                                           | Amortization of goodwill and other intangibles        |         |         | 61,935 |      |         |          | 40,483 |   |          |          | 10,533 |  
|                                                                                  |                                                                           | Amortization of financing costs                       |         |         | 2,759  |      |         |          | 3,938  |   |          |          | 3,414  |  
|                                                                                  |                                                                           | Net (gain) loss from early extinguishment of
    debt |         |         | (680   | )    |         |          | 28,246 |   |          |          | 2,833  |  
|                                                                                  |                                                                           | Deferred tax provision (benefit)                      |         |         |       |      |         |          |       |   |          |          | (1,239 | )
|Changes in assets and liabilities:                                                |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|                                                                                  | Trade receivables                                                         |                                                       |         | (35,954 | )      |      |         | 31,318   |        |   |          | (53,164  | )     
|                                                                                  | Inventories                                                               |                                                       |         | 11,608  |        |      |         | (119,606 | )      |   |          | (4,711   | )     
|                                                                                  | Other assets                                                              |                                                       |         | 5,931   |        |      |         | (4,927   | )      |   |          | (3,716   | )     
|                                                                                  | Prepaid pension and postretirement benefit cost                           |                                                       |         | (3,217  | )      |      |         | (4,728   | )      |   |          | 6,841    |       
|                                                                                  | Accounts payable, trade and other                                         |                                                       |         | 9,525   |        |      |         | 2,156    |        |   |          | 20,335   |       
|                                                                                  | Advanced payments                                                         |                                                       |         | (9,522  | )      |      |         | 52,377   |        |   |          | 58,867   |       
|                                                                                  | Accrued and other liabilities                                             |                                                       |         | 2,075   |        |      |         | 29,541   |        |   |          | (10,469  | )     
|                                                                                  | Accrued pension and postretirement benefit cost                           |                                                       |         | 1,672   |        |      |         | (6,028   | )      |   |          | (15,522  | )     
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Cash provided by operating activities                                             |                                                                           |                                                       | 95,906  |         |        |      | 90,321  |          |        |   | 179,299  |         
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Investing activities                                                              |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|                                                                                  | Capital expenditures                                                      |                                                       |         | (19,721 | )      |      |         | (22,375  | )      |   |          | (22,772  | )     
|                                                                                  | Purchase of Barnes & Reinecke, net of
    $1.2 million cash acquired      |                                                       |         | (1,634  | )      |      |         |         |        |   |          |         |       
|                                                                                  | Purchase of Bofors Weapon Systems, net of
    $45.6 million cash acquired |                                                       |         | 23,663  |        |      |         |         |        |   |          |         |       
|                                                                                  | Purchase of Cell ITS, net of $0.2 million
    cash acquired               |                                                       |         |        |        |      |         |         |        |   |          | (4,135   | )     
|                                                                                  | Purchase of USMR, net of $7.3 million cash
    acquired                   |                                                       |         |        |        |      |         |         |        |   |          | (306,949 | )     
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Cash provided by (used in) investing activities                                   |                                                                           |                                                       | 2,308   |         |        |      | (22,375 | )        |        |   | (333,856 | )       
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Financing activities                                                              |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|                                                                                  | Payments on long-term debt                                                |                                                       |         | (79,071 | )      |      |         | (473,972 | )      |   |          | (140,900 | )     
|                                                                                  | Proceeds from senior secured facility                                     |                                                       |         |        |        |      |         | 635,295  |        |   |          | 300,000  |       
|                                                                                  | Payment of premium on retirement of subordinated
    debt                 |                                                       |         |        |        |      |         | (18,074  | )      |   |          |         |       
|                                                                                  | Proceeds from sale of common stock                                        |                                                       |         | 95      |        |      |         | 180,603  |        |   |          | 3,523    |       
|                                                                                  | Issuance costs for sale of common stock                                   |                                                       |         |        |        |      |         | (13,156  | )      |   |          |         |       
|                                                                                  | Payment of stockholders loans                                            |                                                       |         |        |        |      |         | 1,236    |        |   |          |         |       
|                                                                                  | Dividend payments                                                         |                                                       |         |        |        |      |         | (381,732 | )      |   |          |         |       
|                                                                                  | Payments for financing and transaction cost                               |                                                       |         |        |        |      |         | (19,058  | )      |   |          | (5,470   | )     
|                                                                                  | Repurchase of common stock                                                |                                                       |         | (206    | )      |      |         |         |        |   |          |         |       
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Cash provided by (used in) financing activities                                   |                                                                           |                                                       | (79,182 | )       |        |      | (88,858 | )        |        |   | 157,153  |         
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Effect of exchange rate changes on cash                                           |                                                                           |                                                       |        |         |        |      | (1,910  | )        |        |   | 13,671   |         
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Increase (decrease) in cash and cash
    equivalents                              |                                                                           |                                                       | 19,032  |         |        |      | (22,822 | )        |        |   | 16,267   |         
|Cash and cash equivalents, beginning of year                                      |                                                                           |                                                       | 94,325  |         |        |      | 113,357 |          |        |   | 90,535   |         
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         
|Cash and cash equivalents, end of period                                          |                                                                           | $                                                     | 113,357 |         |        | $    | 90,535  |          |        | $ | 106,802  |         
|                                                                                  |                                                                           |                                                       |         |         |        |      |         |          |        |   |          |         

See accompanying notes to consolidated financial
statements

F-7



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

United Defense Industries, Inc. is a global
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 and
allied militaries around the world, and through United States
Marine Repair, Inc. (USMR), is the leading provider
of non-nuclear ship repair, modernization and conversion
services to the U.S. Navy and related agencies. We believe our
operating results are driven principally by the business
activities related to our major military programs. Currently we
are the sole-source, prime contractor to the U.S. Department of
Defense for many of these programs. With the acquisition of USMR
on July 2, 2002, we now operate in two business segments:
Defense Systems and Ship Repair and Maintenance. The Defense
Systems program portfolio consists of a balanced mix of weapon
systems development, production, upgrade and life cycle support
programs. The Ship Repair and Maintenance business portfolio
consists of ship repair, maintenance, and modernization service
programs.

Our headquarters is located in Arlington,
Virginia. Our operations are primarily situated in the United
States with the exception of our Bofors subsidiary which is
located in Sweden and our joint ventures located in Saudi Arabia
(which we are in the process of divesting) and Turkey.

In August 2001, we completed a recapitalization
that included a refinancing of all our existing indebtedness. In
connection with refinancing, we entered into a new senior
secured credit facility consisting of $600 million in term
loans and a $200 million revolving credit facility. We used
a portion of the proceeds from the term loans to pay total
dividends of $381.7 million to the holders of our common
stock. In addition, a portion of the proceeds from the term
loans was used to complete a tender offer for the remaining
$182.8 million outstanding principal amount of the 8.75% senior
subordinated notes due 2007. The extinguishment of the existing
debt resulted in a net loss of $22.6 million, reported as an
extraordinary item, which consisted of an $18.1 million
tender premium paid to the debt holders and a charge of
$4.5 million in unamortized finance costs.

On December 14, 2001 we completed an initial
public offering of 9,250,000 shares of our common stock, par
value $0.01 at $19 per share. Immediately prior to the offering,
we effected a 2.25 to 1 stock dividend on our common stock,
which has been retroactively applied to all periods presented.
We used the proceeds of the offering to reduce the principal
amount outstanding under the senior secured credit facility by
$163.4 million. The debt repayment resulted in a charge of
$5.6 million in unamortized finance costs reported as an
extraordinary item.

All references in the notes to the consolidated
financial statements to the terms we and
our refer to United Defense Industries, Inc and its
subsidiaries.

The financial statements include our accounts and
the accounts of our subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform with the current year presentation.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. In particular, estimates are used for
contract costs and revenues used in the earnings recognition
process, accruals related to environmental and other
liabilities, allowance for doubtful accounts, and pension and
other retirement costs. Actual results could differ from those
estimates.

F-8



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of investments
with initial maturities of three months or less.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment are recorded at
cost. Depreciation is provided principally on the
sum-of-the-years digits and straight-line methods over estimated
useful lives of the assets (computer equipment and
software  three years; land improvements 
twenty years; buildings  twenty to thirty-five years;
dry docks and piers  fifteen to thirty years; and
machinery and equipment  two to twelve years).

Maintenance and repairs are expensed as incurred.
Expenditures that extend the useful life of property, plant and
equipment or increase productivity are capitalized and
depreciated.



| |                  
| | -----------------
| | Long-lived Assets

We evaluate our long-lived assets to be held and
used, including intangible assets subject to amortization, to
determine whether any events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. We base our evaluation on such impairment
indicators as the nature of the assets, the future economic
benefit of the assets, any historical or future profitability
measurements, the likelihood of sale or other significant
disposition before the end of its previously estimated useful
life, as well as other external market conditions or factors
that may be present. If such impairment indicators are present
or other factors exist that indicate that the carrying amount of
the asset may not be recoverable, we would use an estimate of
the undiscounted value of expected future cash flows to
determine whether the asset is recoverable and measure the
amount of any impairment as the difference between the carrying
amount of the asset and its estimated fair value. The fair value
would be estimated using valuation techniques such as market
prices for similar assets or discounted future cash flows.



| |                                       
| | --------------------------------------
| | Business Combinations and
    Goodwill

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

On January 1, 2002, we began to apply the
new rules on accounting for goodwill and other intangible assets
and ceased the amortization of goodwill (both existing goodwill
and goodwill resulting from our USMR acquisition). The following
information reconciles reported net income and earnings per
share to adjusted net income and earnings per share, excluding
the goodwill amortization previously recognized.

F-9



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |      | 
|----------------------------------------- | ----------------------------------------- | ---------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | ---- | 
|                                          |                                           |                             
|                                          |                                           | December 31                 
|                                          |                                           |                             
|                                          |                                           | 2000                         |        | 2001 |  | 2002
|                                          |                                           |                              |        |      |  |     
|                                          |                                           |                             
|                                          |                                           | (In thousands, except shares
|                                          |                                           | and per share data)         
|Reported income before extraordinary item |                                           | $                            | 18,165 |      |  | $    | 37,022 |      |  | $ | 136,276 |     
|Add back goodwill amortization            |                                           |                              | 6,320  |      |  |      | 10,305 |      |  |   |        |     
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|Adjusted income before extraordinary item |                                           | $                            | 24,485 |      |  | $    | 47,327 |      |  | $ | 136,276 |     
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|Reported net income                       |                                           | $                            | 18,845 |      |  | $    | 8,776  |      |  | $ | 134,576 |     
|Add back goodwill amortization            |                                           |                              | 6,320  |      |  |      | 10,305 |      |  |   |        |     
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|Adjusted net income                       |                                           | $                            | 25,165 |      |  | $    | 19,081 |      |  | $ | 134,576 |     
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|Earnings per common share  basic:        |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Reported income before extraordinary item |                              | $      | 0.45 |  |      | $      | 0.90 |  |   | $       | 2.65 | 
|                                          | Add back goodwill amortization            |                              | $      | 0.15 |  |      | $      | 0.25 |  |   | $       |     | 
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Adjusted income before extraordinary item |                              | $      | 0.60 |  |      | $      | 1.15 |  |   | $       | 2.65 | 
|Earnings per common share  diluted:      |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Reported income before extraordinary item |                              | $      | 0.43 |  |      | $      | 0.86 |  |   | $       | 2.58 | 
|                                          | Add back goodwill amortization            |                              | $      | 0.15 |  |      | $      | 0.24 |  |   | $       |     | 
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Adjusted income before extraordinary item |                              | $      | 0.58 |  |      | $      | 1.10 |  |   | $       | 2.58 | 
|Earnings per common share  basic:        |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Reported net income                       |                              | $      | 0.46 |  |      | $      | 0.21 |  |   | $       | 2.62 | 
|                                          | Add back goodwill amortization            |                              | $      | 0.16 |  |      | $      | 0.25 |  |   | $       |     | 
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Adjusted net income                       |                              | $      | 0.62 |  |      | $      | 0.46 |  |   | $       | 2.62 | 
|Earnings per common share  diluted:      |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Reported net income                       |                              | $      | 0.44 |  |      | $      | 0.20 |  |   | $       | 2.55 | 
|                                          | Add back goodwill amortization            |                              | $      | 0.15 |  |      | $      | 0.24 |  |   | $       |     | 
|                                          |                                           |                              |        |      |  |      |        |      |  |   |         |     
|                                          | Adjusted net income                       |                              | $      | 0.59 |  |      | $      | 0.44 |  |   | $       | 2.55 | 

We have completed the required transitional and
annual impairment tests of goodwill and determined that there is
no impairment of goodwill.



| |                                               
| | ----------------------------------------------
| | Equity Investments in Affiliated
    Companies

Our investments in our 51% owned foreign joint
ventures in Turkey, FNSS Savunma Sistemleri A.S., and Saudi
Arabia, United Defense Systems Ltd. (UDS), are
accounted for using the equity method because we do not control
them due to our partners veto rights over most operating
decisions, although we do have the ability to exercise influence
over their operating and financial policies. Our share of the
earnings from these investments, net of amounts paid to
partners, was $(1.3) million, $10.2 million and
$13.9 million for the years ended December 31, 2000,
2001 and 2002, respectively. In view of the declining scale and
prospects of UDS, we entered into an agreement in March 2002
with our Saudi Arabian joint venture partner to sell our 51%
interest for approximately $408,000. Finalization of the sale is
expected to occur by April 2003 subject to approvals from the
Saudi government. Beginning March 1, 2002 we no longer
record our share of earnings from this joint venture because,
per the terms of the sale agreement, we are no longer entitled
to such earnings as of that date.

F-10



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table, which summarizes financial
information for these joint ventures, reports results from the
joint venture in Turkey for the full years and Saudi Arabia only
through February of 2002:

|                      |  |                |         |      |  |   |         | 
|--------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                      |  |               
|                      |  | December 31   
|                      |  |               
|                      |  | 2001           |         | 2002
|                      |  |                |         |     
|                      |  |               
|                      |  | (In thousands)
|Current assets        |  | $              | 193,809 |      |  | $ | 230,640 | 
|Non-current assets    |  |                | 31,591  |      |  |   | 34,538  | 
|Current liabilities   |  |                | 186,986 |      |  |   | 216,596 | 
|Long-term liabilities |  |                | 30,482  |      |  |   | 3,850   | 

|              |  |             |        |      |  |      |        |  |  |   |         | 
|------------- |  | ----------- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|              |  |            
|              |  | December 31
|              |  |            
|              |  | 2000        |        | 2001 |  | 2002
|              |  |             |        |      |  |     
|Sales         |  | $           | 76,735 |      |  | $    | 71,337 |  |  | $ | 198,123 | 
|Cost of sales |  |             | 61,053 |      |  |      | 38,822 |  |  |   | 116,000 | 
|Net income    |  |             | (2,486 | )    |  |      | 19,129 |  |  |   | 37,106  | 



| |                
| | ---------------
| | Restricted Cash

Restricted cash consists mainly of cash held in
escrow to support letters of credit as required under the Bofors
purchase agreement. The restriction will expire upon release of
the former owners of Bofors as guarantors under the letters of
credit.



| |                         
| | ------------------------
| | Deferred Financing Costs

The costs associated with obtaining financing
have been deferred and are amortized over the terms of the
underlying loan agreements using a method that approximates the
effective interest method. Deferred financing fee expense is
classified in interest expense and totaled $2.8 million,
$3.9 million, and $3.4 million for the years ended
December 31, 2000, 2001 and 2002, respectively.
Additionally, we recognized charges related to the unamortized
deferred financing costs associated with debt that was prepaid
prior to its scheduled maturity. These charges, reported as
extraordinary items, totaled $0.7 million,
$10.2 million, and $1.7 million (net of taxes of
$1.1 million in 2002) in the years ended December 31,
2000, 2001 and 2002, respectively.



| |                  
| | -----------------
| | Advanced Payments

Advanced payments by customers for deposits on
orders not yet billed and progress payments on
contracts-in-progress are recorded as current liabilities. The
payments are recorded as revenue when certain criteria are met
as described in the Revenue and Profit Recognition for
Contracts-in-Progress accounting policy.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The financial position and operating results of
our foreign operations are consolidated using the local
currencies of the countries in which they are located as the
functional currency. The balance sheet accounts are translated
at exchange rates in effect at the end of the period, and income
statement accounts are translated at average exchange rates
during the period. The resulting translation gains and losses
are included as a separate component of stockholders
equity. Foreign currency transaction gains and losses are
included in our income statement in the period in which they
occur.



| |            
| | -----------
| | Inventories

The majority of our inventories are related to
contracts in process and are recorded at cost determined on a
last-in, first-out (LIFO) basis. Inventory costs
include manufacturing overhead. The current replacement cost

F-11



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of LIFO inventories exceeded their recorded
values by approximately $12.6 million at December 31,
2000, $16.1 million at December 31, 2001 and
$17.2 million at December 31, 2002.



| |                                                             
| | ------------------------------------------------------------
| | Revenue and Profit Recognition for
    Contracts-in-Progress

We use different techniques for estimating and
recording revenues depending on the type and characteristics of
the contract. Sales are recognized on most fixed-price
production contracts when the risks and rewards of ownership
have been transferred to the customer. For our DoD production
contracts, those criteria are typically met when the manufacture
of the product is completed and the customer has certified it as
meeting the contract specifications and as having passed quality
control tests. For our foreign production contracts, sales are
generally recorded upon shipment of products to the customer,
which corresponds to when the risks and rewards of ownership
transfer. Gross margin on each unit delivered or accepted is
recognized, based on an estimate of the margin that will be
realized over the life of the related contract. We evaluate
estimates of gross margin on production contracts and recognize
changes in estimates of gross margins during the period in which
those changes are determined. Sales under fixed-price ship
repair and maintenance contracts are recognized using the
percentage of completion method. Under this percentage of
completion method, contract costs are expensed as incurred and
sales are recognized simultaneously based on the ratio of direct
labor inputs and other costs incurred to date compared to
estimated total direct labor inputs and total costs. Sales under
cost reimbursement contracts for research, engineering,
prototypes, ship repair and maintenance and certain other
contracts are recorded as costs are incurred and include
estimated fees in the proportion that costs incurred to date
bear to total estimated costs. We charge any anticipated losses
on a contract to operations as soon as those losses are
determined.

At December 31, 2001 and 2002, included in
trade receivables are $8.6 million and $38.3 million
related to contractual revenue that had not been billed to
customers. These amounts are generally billable within the
following year. Receivables include U.S. Government holdbacks
for in-process ship repair and maintenance contracts of
$3.9 million at December 31, 2002. The allowance for
doubtful accounts was $2.0 million at December 31,
2001 and $2.3 million at December 31, 2002.



| |                         
| | ------------------------
| | Stock-Based Compensation

At December 31, 2002, we had a stock-based
employee compensation plan, which is described more fully in
Note 11. We account for the plan under the recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, we record compensation
expense over the vesting period in our consolidated statements
of operations if the option price is less than fair value of the
common stock at the date an option is granted. The compensation
recorded in the financial statements reflects the amortization
based on vesting of stock options. The following table
illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                                                                                                    |  |                                       |        |      |  |      |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                                                                                    |  |                                      
|                                                                                                                                                    |  | Year Ended December 31               
|                                                                                                                                                    |  |                                      
|                                                                                                                                                    |  | 2000                                  |        | 2001 |  | 2002
|                                                                                                                                                    |  |                                       |        |      |  |     
|                                                                                                                                                    |  |                                      
|                                                                                                                                                    |  | (In thousands, except per share data)
|Net income, as reported                                                                                                                             |  | $                                     | 18,845 |      |  | $    | 8,776  |   |  | $ | 134,576 |  
|Add back: Compensation expense recorded, net of
    related tax effects                                                                             |  |                                       |       |      |  |      | 162    |   |  |   | 61      |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |                                       | (1,245 | )    |  |      | (1,438 | ) |  |   | (878    | )
|                                                                                                                                                    |  |                                       |        |      |  |      |        |   |  |   |         |  
|Pro forma net income                                                                                                                                |  | $                                     | 17,600 |      |  | $    | 7,500  |   |  | $ | 133,759 |  
|                                                                                                                                                    |  |                                       |        |      |  |      |        |   |  |   |         |  

F-12



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                    |                       |                                       |   |      |  |      |   |      |  |  |   |      | 
|------------------- | --------------------- | ------------------------------------- | - | ---- |  | ---- | - | ---- |  |  | - | ---- | 
|                    |                       |                                      
|                    |                       | Year Ended December 31               
|                    |                       |                                      
|                    |                       | 2000                                  |   | 2001 |  | 2002
|                    |                       |                                       |   |      |  |     
|                    |                       |                                      
|                    |                       | (In thousands, except per share data)
|Earnings per share: |                       |                                       |   |      |  |      |   |      |  |  |   |     
|                    | Basic  as reported   |                                       | $ | 0.46 |  |      | $ | 0.21 |  |  | $ | 2.62 | 
|                    |                       |                                       |   |      |  |      |   |      |  |  |   |     
|                    | Basic  pro forma     |                                       | $ | 0.43 |  |      | $ | 0.18 |  |  | $ | 2.60 | 
|                    |                       |                                       |   |      |  |      |   |      |  |  |   |     
|                    | Diluted  as reported |                                       | $ | 0.44 |  |      | $ | 0.20 |  |  | $ | 2.55 | 
|                    |                       |                                       |   |      |  |      |   |      |  |  |   |     
|                    | Diluted  pro forma   |                                       | $ | 0.41 |  |      | $ | 0.17 |  |  | $ | 2.53 | 
|                    |                       |                                       |   |      |  |      |   |      |  |  |   |     

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 years
due to, among other things, the vesting period of the stock
options and additional stock options that may be granted in
future years.

The fair value of each option grant is estimated
on the date of grant using the minimum value model for options
granted in 2000 and the Black-Scholes model for options granted
in 2001 with the following assumptions: dividend yield of 0%;
risk-free interest rates of 5.5% and 6.25%, respectively;
expected life of the option term of 7 years for 2000 and
2001; and volatility, where applicable, of 0.357.

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



| |             
| | ------------
| | 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.



| |                                       
| | --------------------------------------
| | Derivatives and Hedging
    Activities

Effective January 1, 2001, we adopted SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. As a result, we recognize
all derivative financial instruments, such as foreign exchange
contracts, in the consolidated financial statements at fair
value regardless of the purpose or intent for holding the
instrument. Changes in the fair value of derivative financial
instruments are either recognized periodically in the results of
operations or in stockholders equity as a component of
other comprehensive income, depending on whether the derivative
financial instrument qualifies for hedge accounting and, if so,
whether it qualifies as a fair value hedge or cash flow hedge.
Generally, changes in fair values of the derivatives accounted
for as fair value hedges are recorded in the results of
operations along with the portions of the changes in the fair
values of the hedged items that relate to the hedged risks.
Changes in fair values of derivatives accounted for as cash flow
hedges, to the extent they are effective as hedges, are recorded
in other comprehensive income. Changes in fair values of
derivatives not qualifying as hedges are reported in the results
of operations.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

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

F-13



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

losses. Under APB 30, gains and losses on early
extinguishment of debt would only be classified as extraordinary
if the extinguishment is considered unusual and infrequent.

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

In June 2002, the FASB issued Statement No. 146
(FAS 146), Accounting for Costs Associated with Exit or
Disposal Activities. FAS 146 addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs in a Restructuring). FAS 146
specifies that a liability for a cost associated with an exit or
disposal activity is incurred when the definition of a liability
in Concepts Statement 6, Elements of Financial
Statements, is met. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated
after December 31, 2002. We are currently evaluating the
impact of adoption of this statement, but do not believe it will
have a significant impact on our financial statements.

On December 31, 2002, the Financial
Accounting Standards Board issued FASB Statement No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. Statement 148 amends FASB
Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to Statement 123s fair value method of accounting for
stock-based employee compensation Statement 148 also amends the
disclosure provisions of Statement 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects
of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require
companies to account for employee stock options using the fair
value method, the disclosure provisions of Statement 148 are
applicable to all companies with stock-based employee
compensation, regardless of whether they account for that
compensation using the fair value method of Statement 123 or the
intrinsic value method of Opinion 25. We have disclosed the
impact of Statement 148 in the Stock-Based
Compensation section of our significant accounting
policies.

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

3.     Acquisitions

We acquired Bofors Weapons Systems, a Swedish
Company, in September 2000 from Celsius AB to provide a base for
the expansion of United Defenses business within the
European Union Subsequent to the acquisition the name was
changed to Bofors Defence (Bofors). Bofors is active
in four major business areas: Intelligent Ammunition, Launching
Systems, Technology Studies, and System Design and Integration.
Bofors key competencies are in the area of Precision
Strike and Intelligent Systems.

On March 26, 2002, through our Bofors
subsidiary, we finalized the acquisition of 100% of the
outstanding stock of Cell ITS AB, a company incorporated under
the laws of Sweden and wholly owned by Cell Network

F-14



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

AB. Cell ITS specializes in interactive training
and simulation. As consideration for the purchase, we paid the
former owner, Cell Network AB, 45 million Swedish krona
(SEK) (approximately $4.3 million), of which
20 million SEK was held in escrow as a lien for the
fulfillment of certain receivables. The transaction was
accounted for as a purchase Accordingly, the financial
statements reflect the results of operations of Cell ITS from
the date of acquisition.

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

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

|                                                                 |  |                 |         | 
|---------------------------------------------------------------- |  | --------------- | ------- | 
|                                                                 |  | At July 2, 2002
|                                                                 |  |                
|                                                                 |  | (In thousands) 
|Current Assets                                                   |  | $               | 65,169  | 
|Property, plant and equipment                                    |  |                 | 86,911  | 
|Intangible asset: contract rights and customer
    relationships |  |                 | 29,527  | 
|Intangible asset: non-compete                                    |  |                 | 2,000   | 
|Goodwill                                                         |  |                 | 240,338 | 
|Other assets                                                     |  |                 | 5,354   | 
|                                                                 |  |                 |         | 
|Total assets                                                     |  |                 | 429,299 | 
|Current liabilities                                              |  |                 | 72,650  | 
|Long-term liabilities                                            |  |                 | 42,415  | 
|                                                                 |  |                 |         | 
|Total liabilities                                                |  |                 | 115,065 | 
|                                                                 |  |                 |         | 
|Net assets acquired                                              |  | $               | 314,234 | 
|                                                                 |  |                 |         | 

The stepped-up value over the historical net book
value of property and equipment was derived from an increase
related to land and improvements of $4.9 million and an increase
related to dry docks and piers of $15.9 million which are
being depreciated on a straight-line basis over the remaining
life of the assets, which averages approximately 18 years.
The identifiable intangible assets acquired include contract
rights and customer relationships ($29.5 million) and a
non-compete agreement ($2 million). These intangible assets
will be amortized over a period of 4 years, which
represents their estimated economic useful life. The contract
rights will be amortized based on when projected sales are
expected to occur and the non-compete agreement will be
amortized on a straight-line basis. None of the stepped-up basis
of tangible or intangible assets is deductible for tax purposes.

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                 |                                     |                       |           |      |  |   |           |      | 
|-------------------------------- | ----------------------------------- | --------------------- | --------- | ---- |  | - | --------- | ---- | 
|                                 |                                     |                      
|                                 |                                     | December 31,         
|                                 |                                     |                      
|                                 |                                     | 2001                  |           | 2002
|                                 |                                     |                       |           |     
|                                 |                                     |                      
|                                 |                                     | (In thousands, except
|                                 |                                     | per share data)      
|Sales                            |                                     | $                     | 1,709,275 |      |  | $ | 1,976,589 |     
|Cost of sales                    |                                     |                       | 1,387,487 |      |  |   | 1,604,266 |     
|Income before extraordinary item |                                     |                       | 41,095    |      |  |   | 139,028   |     
|                                 | Earnings per common share  basic   |                       | $         | 1.00 |  |   | $         | 2.71 | 
|                                 | Earnings per common share  diluted |                       | $         | 0.95 |  |   | $         | 2.63 | 
|Net Income                       |                                     | $                     | 12,849    |      |  | $ | 137,328   |     
|                                 | Earnings per common share  basic   |                       | $         | 0.31 |  |   | $         | 2.67 | 
|                                 | Earnings per common share  diluted |                       | $         | 0.30 |  |   | $         | 2.60 | 

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

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

4.     Property,
Plant and Equipment

Property, plant and equipment consist of the
following:

|                                   |  |                |          |      |  |   |          |  
|---------------------------------- |  | -------------- | -------- | ---- |  | - | -------- | -
|                                   |  |               
|                                   |  | December 31,  
|                                   |  |               
|                                   |  | 2001           |          | 2002
|                                   |  |                |          |     
|                                   |  |               
|                                   |  | (In thousands)
|Buildings                          |  | $              | 43,130   |      |  | $ | 62,672   |  
|Machinery and equipment            |  |                | 172,401  |      |  |   | 185,125  |  
|Dry docks and piers                |  |                |         |      |  |   | 54,079   |  
|Land and improvements              |  |                | 8,822    |      |  |   | 21,613   |  
|Software                           |  |                | 43,823   |      |  |   | 45,234   |  
|Construction in progress           |  |                | 9,256    |      |  |   | 9,290    |  
|                                   |  |                |          |      |  |   |          |  
|                                   |  |                | 277,432  |      |  |   | 378,013  |  
|Less: accumulated depreciation     |  |                | (187,080 | )    |  |   | (207,635 | )
|                                   |  |                |          |      |  |   |          |  
|Property, plant and equipment, net |  | $              | 90,352   |      |  | $ | 170,378  |  
|                                   |  |                |          |      |  |   |          |  

F-16



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Intangible
Assets

Intangible assets consist of the following:

|                                           |                                |                |         |          |   |   |        |         |  
|------------------------------------------ | ------------------------------ | -------------- | ------- | -------- | - | - | ------ | ------- | -
|                                           |                                |               
|                                           |                                | December 31,  
|                                           |                                |               
|                                           |                                | 2001           |         | 2002    
|                                           |                                |                |         |         
|                                           |                                |               
|                                           |                                | (In thousands)
|Contract rights and customer relationships |                                | $              | 172,736 |          |   | $ | 29,527 |        
|Non-compete agreements                     |                                |                | 27,000  |          |   |   | 29,000 |        
|Other                                      |                                |                | 690     |          |   |   | 3,850  |        
|                                           |                                |                |         |          |   |   |        |        
|                                           | Subtotal                       |                |         | 200,426  |   |   |        | 62,377  |  
|                                           | Less: accumulated amortization |                |         | (192,099 | ) |   |        | (29,753 | )
|                                           |                                |                |         |          |   |   |        |        
|Intangible assets, net                     |                                | $              | 8,327   |          |   | $ | 32,624 |        
|                                           |                                |                |         |          |   |   |        |        

The contract rights and customer relationships
are being amortized based on when projected sales are expected
to occur and the non-compete agreement is amortized on a
straight-line basis. Intangible assets are written off when they
are fully amortized. In 2002, we wrote off $172,736 of fully
amortized contract rights, previously referred to as firm
business and ongoing programs.

Amortization expense is estimated as follows:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | (In thousands)
|           |  |               
|2003       |  | $              | 12,452 | 
|2004       |  |                | 8,578  | 
|2005       |  |                | 6,470  | 
|2006       |  |                | 3,367  | 
|2007       |  |                | 351    | 
|Thereafter |  |                | 1,406  | 
|           |  |                |        | 
|           |  | $              | 32,624 | 
|           |  |                |        | 

6.     Accrued and
Other Liabilities

Accrued and other liabilities consist of the
following:

|                             |  |                |         |      |  |   |        | 
|---------------------------- |  | -------------- | ------- | ---- |  | - | ------ | 
|                             |  |               
|                             |  | December 31   
|                             |  |               
|                             |  | 2001           |         | 2002
|                             |  |                |         |     
|                             |  |               
|                             |  | (In thousands)
|Accrued payroll and benefits |  | $              | 79,866  |      |  | $ | 80,557 | 
|Contract related reserves    |  |                | 18,409  |      |  |   | 15,982 | 
|Other accrued liabilities    |  |                | 22,449  |      |  |   | 43,415 | 
|                             |  |                |         |      |  |   |        | 
|                             |  | $              | 120,724 |      |  | $ | 39,954 | 
|                             |  |                |         |      |  |   |        | 

7.     Pensions and
Other Postretirement Benefits

The majority of our domestic non-ship repair
employees are covered by retirement plans. Plans covering
salaried employees provide pension benefits based on years of
service and compensation. Plans covering hourly employees
generally provide benefits of stated amounts for each year of
service. Our funding policy is to make contributions based on
the projected unit credit method and to limit contributions to
amounts that are currently

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

deductible for tax purposes. In addition, we have
two defined benefit deferred compensation plans providing for
payments upon retirement, death, or disability that cover
certain salaried employees at our Norfolk shipyard.

With the exception of Bofors, most of our
non-ship repair employees are covered by postretirement health
care and life insurance benefit programs. Employees generally
become eligible to receive benefits under these plans after they
retire, to the extent that they meet minimum retirement age and
service requirements. The cost of providing most of these
benefits is shared with retirees. We have reserved the right to
change or eliminate these benefit plans.

Bofors has a statutory pension obligation of
$16.5 million and $12.8 million, which is included in
accrued pension and postretirement benefit cost on the
consolidated balance sheets at December 31, 2001 and
December 31, 2002, respectively. Bofors pension obligation
is administered by an agent of the Swedish government using
methods and assumptions different from those used to determine
domestic amounts. Accordingly, the following tables do not
include this liability.

The change in benefit obligation and plan assets
of the plans and prepaid or accrued pension and postretirement
costs recognized in the balance sheets at December 31, 2001
and 2002 are as follows:

|                                               |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|---------------------------------------------- |  | ---------------- | ------- | ----------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                               |  |                  |         |                        
|                                               |  | Pension Benefits |         | Postretirement Benefits
|                                               |  |                  |         |                        
|                                               |  | 2001             |         | 2002                    |  | 2001 |         | 2002
|                                               |  |                  |         |                         |  |      |         |     
|                                               |  |                 
|                                               |  | (In thousands)  
|Change in benefit obligation                   |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|Benefit obligation at beginning of year        |  | $                | 471,634 |                         |  | $    | 540,720 |      |  | $ | 49,230  |   |  | $ | 47,211 |  
|Acquisition of USMR                            |  |                  |        |                         |  |      | 44,127  |      |  |   |        |   |  |   | 2,530  |  
|Service cost                                   |  |                  | 15,256  |                         |  |      | 16,647  |      |  |   | 1,208   |   |  |   | 1,199  |  
|Interest cost                                  |  |                  | 35,325  |                         |  |      | 38,584  |      |  |   | 3,070   |   |  |   | 3,091  |  
|Net benefits paid, including settlements       |  |                  | (20,249 | )                       |  |      | (26,906 | )    |  |   | (2,949  | ) |  |   | (4,389 | )
|Participant contributions                      |  |                  |        |                         |  |      |        |      |  |   |        |   |  |   | 129    |  
|Actuarial (gain) loss                          |  |                  | 36,249  |                         |  |      | 44,157  |      |  |   | (3,348  | ) |  |   | (529   | )
|Plan amendments                                |  |                  | 2,505   |                         |  |      | 1,198   |      |  |   |        |   |  |   | 1,330  |  
|                                               |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|Benefit obligation at end of year              |  | $                | 540,720 |                         |  | $    | 658,527 |      |  | $ | 47,211  |   |  | $ | 50,572 |  
|Change in plan assets                          |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|Fair value of plan assets at beginning of year |  | $                | 595,579 |                         |  | $    | 608,701 |      |  | $ | 61,816  |   |  | $ | 66,008 |  
|Acquisition of USMR                            |  |                  |        |                         |  |      | 23,961  |      |  |   |        |   |  |   |       |  
|Actual return on plan assets                   |  |                  | 31,945  |                         |  |      | (30,629 | )    |  |   | 4,310   |   |  |   | (3,267 | )
|Employer contributions                         |  |                  | 1,426   |                         |  |      | 3,679   |      |  |   | 2,831   |   |  |   | 1,847  |  
|Employee contributions                         |  |                  |        |                         |  |      |        |      |  |   |        |   |  |   | 129    |  
|Net benefits paid, including settlements       |  |                  | (20,249 | )                       |  |      | (26,906 | )    |  |   | (2,949  | ) |  |   | (4,389 | )
|                                               |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|Fair value of plan assets at end of year       |  | $                | 608,701 |                         |  | $    | 578,806 |      |  | $ | 66,008  |   |  | $ | 60,328 |  
|                                               |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|Funded status                                  |  | $                | 67,981  |                         |  | $    | (79,721 | )    |  | $ | 18,797  |   |  | $ | 9,756  |  
|Unrecognized actuarial (gain) loss             |  |                  | 29,710  |                         |  |      | 157,387 |      |  |   | (10,204 | ) |  |   | (1,063 | )
|Unrecognized prior service cost                |  |                  | 15,522  |                         |  |      | 14,991  |      |  |   |        |   |  |   | 1,194  |  
|                                               |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  
|Net amount recognized                          |  | $                | 113,213 |                         |  | $    | 92,657  |      |  | $ | 8,593   |   |  | $ | 9,887  |  
|                                               |  |                  |         |                         |  |      |         |      |  |   |         |   |  |   |        |  

F-18



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                     |                                        |                                                 |         |                         |         |      |        |        |         |   |       |   |       |   |       |   |        |  
|-------------------------------------------------------------------- | -------------------------------------- | ----------------------------------------------- | ------- | ----------------------- | ------- | ---- | ------ | ------ | ------- | - | ----- | - | ----- | - | ----- | - | ------ | -
|                                                                     |                                        |                                                 |         |                        
|                                                                     |                                        | Pension Benefits                                |         | Postretirement Benefits
|                                                                     |                                        |                                                 |         |                        
|                                                                     |                                        | 2001                                            |         | 2002                    |         | 2001 |        | 2002  
|                                                                     |                                        |                                                 |         |                         |         |      |        |       
|                                                                     |                                        |                                                
|                                                                     |                                        | (In thousands)                                 
|Amounts recognized in the consolidated balance
    sheet consist of: |                                        |                                                 |         |                         |         |      |        |        |         |   |       |   |       |   |       |  
|                                                                     |                                        | Prepaid pension and postretirement benefit cost |         | $                       | 119,235 |      |        | $      | 108,660 |   |       | $ | 8,593 |   |       | $ | 12,327 |  
|                                                                     |                                        | Accrued pension and postretirement benefit cost |         |                         | (6,022  | )    |        |        | (36,733 | ) |       |   |      |   |       |   | (2,440 | )
|                                                                     |                                        | Intangible asset                                |         |                         |        |      |        |        | 3,160   |   |       |   |      |   |       |   |       |  
|                                                                     | Accumulated other comprehensive income |                                                 |         |                        |         |      |        | 17,570 |         |   |       |  |       |   |       |  |       
|                                                                     |                                        |                                                 |         |                         |         |      |        |        |         |   |       |   |       |   |       |  
|Net amount recognized                                                |                                        | $                                               | 113,213 |                         |         | $    | 92,657 |        |         | $ | 8,593 |   |       | $ | 9,887 |  
|                                                                     |                                        |                                                 |         |                         |         |      |        |        |         |   |       |   |       |   |       |  

The following table summarizes the assumptions
used in the determination of net pension and postretirement
benefit costs and benefit obligations for the years ended
December 31, 2000, 2001 and 2002:

|                               |  |                         |      |      |  |      |      |   |  |  |      |  
|------------------------------ |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                               |  |                        
|                               |  | Year ended December 31,
|                               |  |                        
|                               |  | 2000                    |      | 2001 |  | 2002
|                               |  |                         |      |      |  |     
|Weighted-average assumptions   |  |                         |      |      |  |      |      |   |  |  |      |  
|Discount rate                  |  |                         | 7.50 | %    |  |      | 7.00 | % |  |  | 6.50 | %
|Expected return on plan assets |  |                         | 9.00 | %    |  |      | 9.00 | % |  |  | 9.00 | %
|Rate of compensation increase  |  |                         | 5.00 | %    |  |      | 4.50 | % |  |  | 4.50 | %

The following tables show the components of the
net periodic benefit cost:

|                                       |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                       |  |                        
|                                       |  | Year ended December 31,
|                                       |  |                        
|                                       |  | 2000                    |         | 2001 |  | 2002
|                                       |  |                         |         |      |  |     
|                                       |  |                        
|                                       |  | (In thousands)         
|Pension Benefits                       |  |                         |         |      |  |      |         |   |  |   |         |  
|Service cost                           |  | $                       | 14,256  |      |  | $    | 15,256  |   |  | $ | 16,647  |  
|Interest cost                          |  |                         | 32,847  |      |  |      | 35,325  |   |  |   | 38,584  |  
|Expected return on plan assets         |  |                         | (47,904 | )    |  |      | (50,807 | ) |  |   | (55,016 | )
|Net amortization and recognized losses |  |                         | 1,993   |      |  |      | 1,830   |   |  |   | 1,279   |  
|                                       |  |                         |         |      |  |      |         |   |  |   |         |  
|Net periodic benefit cost (income)     |  | $                       | 1,192   |      |  | $    | 1,604   |   |  | $ | 1,494   |  
|                                       |  |                         |         |      |  |      |         |   |  |   |         |  

|                                       |  |                         |        |      |  |      |        |   |  |   |        |  
|-------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                       |  |                        
|                                       |  | Year ended December 31,
|                                       |  |                        
|                                       |  | 2000                    |        | 2001 |  | 2002
|                                       |  |                         |        |      |  |     
|                                       |  |                        
|                                       |  | (In thousands)         
|Postretirement benefits                |  |                         |        |      |  |      |        |   |  |   |        |  
|Service cost                           |  | $                       | 1,260  |      |  | $    | 1,208  |   |  | $ | 1,199  |  
|Interest cost                          |  |                         | 3,565  |      |  |      | 3,070  |   |  |   | 3,092  |  
|Expected return on plan assets         |  |                         | (4,938 | )    |  |      | (5,332 | ) |  |   | (5,813 | )
|Net amortization and recognized losses |  |                         | (35    | )    |  |      | (540   | ) |  |   | (455   | )
|                                       |  |                         |        |      |  |      |        |   |  |   |        |  
|Net periodic benefit cost(income)      |  | $                       | (148   | )    |  | $    | (1,594 | ) |  | $ | (1,977 | )
|                                       |  |                         |        |      |  |      |        |   |  |   |        |  

The projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets for the
pension plan with accumulated benefit obligations in excess of
plan assets were $11.3 million, $8.3 million and

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UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$2.0 million, respectively, at
December 31, 2001 and $102.3 million,
$101.1 million and $66.8 million, respectively at
December 31, 2002.

The accumulated postretirement benefit obligation
and fair value of plan assets for the postretirement benefit
plan with accumulated postretirement benefit obligations in
excess of plan assets were $2.4 million and $0,
respectively, at December 31, 2002. There were no
underfunded postretirement benefit plans at December 31,
2001.

For measurement purposes, a 9% annual rate of
increase in the per capita cost of covered health care benefits
is assumed for 2002. The rate was assumed to decrease to 5% in
2006 and remain at that level thereafter. Assumed health care
cost trend rates have an effect on the amounts reported for the
postretirement health care plan. A one-percentage-point change
in assumed health care cost trend rates would have the following
effects:

|                                                            |  |                |     |             |  |   |      |  
|----------------------------------------------------------- |  | -------------- | --- | ----------- |  | - | ---- | -
|                                                            |  | 1% Increase    |     | 1% Decrease
|                                                            |  |                |     |            
|                                                            |  |               
|                                                            |  | (In thousands)
|Effect on total of service and interest cost
    components |  | $              | 37  |             |  | $ | (34  | )
|Effect on the postretirement benefit obligation             |  | $              | 437 |             |  | $ | (389 | )

8.     Long-term
Debt

Borrowings under long-term debt arrangements are
as follows:

|                                 |  |                |         |      |  |   |         | 
|-------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2001           |         | 2002
|                                 |  |                |         |     
|                                 |  |               
|                                 |  | (In thousands)
|Senior secured credit facilities |  | $              | 430,900 |      |  | $ | 590,000 | 
|Less: current portion            |  |                | 8,307   |      |  |   | 13,011  | 
|                                 |  |                |         |      |  |   |         | 
|                                 |  | $              | 422,593 |      |  | $ | 576,989 | 
|                                 |  |                |         |      |  |   |         | 

$725 Million
Senior Secured Credit Facility through August 2001

In October 1997, we entered into a senior secured
credit facility that included $495 million of term loan
facilities and a $230 million revolving credit facility.
Outstanding borrowings on the term loan were $86.8 million
at December 31, 2000. As described below, this credit
facility was replaced with a new $800 million senior
secured credit facility in August 2001.

$200 Million
Senior Subordinated Notes through August 2001

In October 1997, we issued $200 million of
unsecured senior subordinated notes. During 2000, we purchased
approximately $17 million of our senior subordinated notes
in the open market.

As described below, in August 2001, a portion of
the proceeds from a new $800 million senior secured credit
facility was used to complete a tender offer for the outstanding
senior subordinated notes. The extinguishment of the debt
resulted in a net loss of $22.6 million, reported as an
extraordinary item, which consisted of an $18.1 million
tender premium paid to the debt holders and a $4.5 million
write-off of related unamortized financing costs.

$800 Million
Senior Secured Credit Facility

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 USMR (see
note 3). We incurred $5.5 million in additional
financing

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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fees that have been deferred and amortized over
the remaining term of the credit facility using the effective
interest method.

Outstanding borrowings on the term loan
facilities were $430.9 million and $590 million at
December 31, 2001 and 2002, respectively. The facilities
bear interest at variable rates with a weighted average rate of
3.92% at December 31, 2002. These loans are due through
2009 and provide for quarterly principal and interest payments.

The revolving credit facility provides for loans
and letters of credit and matures in 2007. We had outstanding
letters of credit under the facility of approximately
$157.6 million at December 31, 2002, and there was
$42.4 million available under the revolving credit facility
at December 31, 2002. We are obligated to pay a fee of
0.50% on the unused revolving credit facility.

Amounts outstanding under the senior secured
credit facility are secured by a lien on all our assets and the
assets of our domestic subsidiaries.

The senior secured credit facility contains
customary covenants restricting the incurrence of debt,
encumbrances on and sales of assets, limitations on mergers and
certain acquisitions, limitations on changes in control, certain
restrictions on payment of dividends, provision for the
maintenance of certain financial ratios, and various other
financial covenants and restrictions. There were no events of
default as of December 31, 2002.

The terms of the agreement allowed us to pay
approximately $381.7 million in dividends to holders of
common stock in 2001. In addition to dividends and the tender
for the senior subordinated notes, we paid from the debt
proceeds $19.2 million of financing costs which were
deferred and $18.6 million of performance bonuses,
consulting and management fees which were included in costs and
expenses for the year ended December 31, 2001.

Pursuant to the terms of agreement entered into
under the senior secured credit facility, our applicable margin
for the term loans may be reduced if our secured leverage ratio
(as defined in the Agreement) decreases. Our results during the
years ended December 31, 2001 and 2002 exceeded the
required level ratio targets resulting in a reduction of the
margin in the interest rates and reduced pricing for letters of
credit, effective as of January 1, 2002 and 2003.

We made total debt repayments under the credit
facility of $79.1 million, $474.0 million and
$140.9 million during 2000, 2001 and 2002, respectively.
Cash paid for interest was $26.5 million,
$24.5 million and $27.6 million for the years ended
December 31, 2000, 2001 and 2002, respectively.



| |                  
| | -----------------
| | Annual Maturities

Annual maturities of long-term debt as of
December 31, 2002 are as follows:

|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | (in thousands)
|           |  |               
|2003       |  |                | 13,011  | 
|2004       |  |                | 52,043  | 
|2005       |  |                | 52,043  | 
|2006       |  |                | 52,043  | 
|2007       |  |                | 124,731 | 
|Thereafter |  |                | 296,129 | 
|           |  |                |         | 
|           |  | $              | 590,000 | 

9.     Comprehensive
Income (Loss)

Comprehensive income was $18.8 million,
$4.6 million and $126.3 million for the years ended
December 31, 2000, 2001 and 2002, respectively.
Comprehensive income consists primarily of net income of

F-21



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$18.8 million, $8.8 million and
$134.6 million for the years ended December 31, 2000,
2001 and 2002, respectively, foreign currency translation
adjustments, fair value adjustments for foreign currency hedges
and interest rate swaps designated as cash flow hedges, and
minimum pension liability, net of tax. The following table
summarizes the activities in Accumulated Other Comprehensive
Loss as of December 31, 2002:

|                                                                                |  |                |        |                   |  |           |        |               |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | -------------- | ------ | ----------------- |  | --------- | ------ | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                                |  |                |        |                   |  |           |        | Total        
|                                                                                |  |                |        | Fair Value of     |  |           |        | Accumulated  
|                                                                                |  | Net Foreign    |        | Foreign Currency  |  | Minimum   |        | Other        
|                                                                                |  | Currency       |        | and Interest Rate |  | Pension   |        | Comprehensive
|                                                                                |  | Translation    |        | Hedges            |  | Liability |        | (Loss) Gain  
|                                                                                |  |                |        |                   |  |           |        |              
|                                                                                |  |               
|                                                                                |  | (In thousands)
|Balance, December 31, 2000                                                      |  | $              |       |                   |  | $         |       |               |  | $ |        |   |  | $ |        |  
|Net foreign currency translation                                                |  |                | (1,910 | )                 |  |           |       |               |  |   |        |   |  |   | (1,910  | )
|Cumulative effect of change in accounting
    principle-foreign currency hedges |  |                |       |                   |  |           | (951   | )             |  |   |        |   |  |   | (951    | )
|Change in fair value of foreign currency hedges                                 |  |                |       |                   |  |           | (1,295 | )             |  |   |        |   |  |   | (1,295  | )
|                                                                                |  |                |        |                   |  |           |        |               |  |   |         |   |  |   |         |  
|Balance, December 31, 2001                                                      |  |                | (1,910 | )                 |  |           | (2,246 | )             |  |   |        |   |  |   | (4,156  | )
|Net foreign currency translation                                                |  |                | 4,400  |                   |  |           |       |               |  |   |        |   |  |   | 4,400   |  
|Change in fair value of foreign currency and
    interest rate hedges           |  |                |       |                   |  |           | (5,106 | )             |  |   |        |   |  |   | (5,106  | )
|Minimum pension liability                                                       |  |                |       |                   |  |           |       |               |  |   | (17,570 | ) |  |   | (17,570 | )
|Tax effect                                                                      |  |                |       |                   |  |           | 2,941  |               |  |   | 7,028   |   |  |   | 9,969   |  
|                                                                                |  |                |        |                   |  |           |        |               |  |   |         |   |  |   |         |  
|Balance, December 31, 2002                                                      |  | $              | 2,490  |                   |  | $         | (4,411 | )             |  | $ | (10,542 | ) |  | $ | (12,463 | )

10.     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 since continued to receive Army funding to
accomplish an orderly closeout of Crusader activities and to
transition key Crusader technologies to the NLOS-C program. To
date, the Crusader termination has resulted in a reduction to
our workforce of approximately 180 employees. In 2002, we
incurred and invoiced the U.S. Government for $22.0 million
of termination costs, the majority of which was collected in
2002 and the balance received in January 2003. In order to
complete the Crusader termination process, we will need to
negotiate a final settlement with the Army, and expect to submit
our settlement proposal in August 2003.



| |                 
| | ----------------
| | Operating Leases

We lease office space, plants and facilities, and
various types of manufacturing, data processing and
transportation equipment. Rent expense for the years ended
December 31, 2000, 2001, and 2002 was $14.2 million,
$13.5 million and $18.2 million, respectively. Some of
our leases contain escalation clauses that increase rents based
on future increases in the Consumer Price Index. Minimum future
rentals under noncancellable leases are estimated to be
$17.8 million in 2003, $11.9 million in 2004,
$8.8 million in 2005, $7.5 million in 2006,
$7.2 million in 2007 and $45.2 million thereafter.

F-22



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | 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, on
August 8, 2002 we were served with a grand jury subpoena
issued by the United States District Court for the Eastern
District of Virginia. The subpoena seeks information relating to
a 2000 contract between us and the Italian government for the
upgrading of certain amphibious assault vehicles. We believe
that the grand jury investigation is directed toward
ascertaining whether any violation of the Foreign Corrupt
Practices Act occurred in connection with the Italian contract.
While management is not aware of any such violation, it is too
early for us to determine whether the ultimate outcome of the
investigation would have a material adverse impact on our
results of operation or financial position.

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



| |                      
| | ---------------------
| | Environmental Matters

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

As with compliance costs, a significant portion
of our expenditures for remediation of existing contamination at
our facilities consists of Allowable Costs. As of
December 31, 2002, we had accrued approximately
$27 million to cover any investigation and/or remediation
costs that may not be Allowable Costs under U.S. Government
contracts. The amount accrued is based on reasonable estimates,
although there is a possibility that amounts in excess of
amounts accrued may be incurred. The amount accrued is stated on
an undiscounted basis. The most significant of the estimated
liabilities are related to ongoing remediation efforts. Pursuant
to a demand from the California Water Quality Control Board, we
are completing a study of sedimentary contamination in San Diego
Bay for the purpose of establishing clean-up criteria for future
remediation work. Once definitive clean-up criteria are
established we expect that we will be required to begin
remediation procedures with respect to the contamination. We
anticipate that the total costs associated with the remediation
phase will range from $6 to $9 million, of which
$8.5 million has been accrued, although it is conceivable
that costs could be as high as $40 million if the most
stringent clean-up standard were to be adopted.

Since approximately 1941, we (and, prior to our
formation, our predecessors) have operated the Fridley,
Minnesota facility. The majority of the Fridley facility is
owned by the U.S. Navy (the Navy property), but
operated by us under a contract with and on behalf of the Navy.
(We own the remainder of the facility.) Since 1991, the Navy has
expended approximately $27 million in remediation costs,
including site investigation, on the Navy property, and the Navy
anticipates spending a further $9 million on such matters
at the site. From time to time the Navy has engaged us in
discussions as to whether we should pay a portion of such
expenses, and recently 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 sustain at

F-23



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Fridley would constitute Allowable Costs.
However, there is substantial uncertainty regarding the ultimate
terms on which the matter might be resolved (whether by
settlement, legal proceedings, or otherwise).



|    |                     
|--- | --------------------
|11. | Stockholders Equity



| |                     
| | --------------------
| | Common Stock Options

During 1998, we adopted the 1998 Stock Option
Plan (the Option Plan) under which 5,496,000 shares
of common stock were reserved for issuance at December 31,
2002. The options generally vest over a period of 10 years;
however, vesting may be accelerated over 5 years if certain
targets related to earnings and cash flow are met. On
April 1, 2002, we amended the Option Plan to increase the
number of shares of common stock available to 7,375,000 and
provide for the granting of restricted stock under the Option
Plan.

|                                       |  |                         |           |          |  |      |      |          |  |      |            |          |  |   |      |  |  |  |           |   |  |   |      | 
|-------------------------------------- |  | ----------------------- | --------- | -------- |  | ---- | ---- | -------- |  | ---- | ---------- | -------- |  | - | ---- |  |  |  | --------- | - |  | - | ---- | 
|                                       |  |                        
|                                       |  | Year ended December 31,
|                                       |  |                        
|                                       |  |                         |           | Weighted |  |      |      | Weighted |  |      |            | Weighted
|                                       |  |                         |           | average  |  |      |      | average  |  |      |            | average 
|                                       |  |                         |           | exercise |  |      |      | exercise |  |      |            | exercise
|                                       |  | 2000                    |           | price    |  | 2001 |      | price    |  | 2002 |            | price   
|                                       |  |                         |           |          |  |      |      |          |  |      |            |         
|Options outstanding, beginning of year |  |                         | 3,280,275 |          |  | $    | 4.52 |          |  |      | 3,231,900  |          |  | $ | 4.61 |  |  |  | 2,216,566 |   |  | $ | 4.80 | 
|Options granted                        |  |                         | 51,750    |          |  |      | 9.66 |          |  |      | 168,428    |          |  |   | 5.94 |  |  |  |          |   |  |   |      | 
|Options cancelled                      |  |                         | (90,000   | )        |  |      | 4.44 |          |  |      | (100,574   | )        |  |   | 4.44 |  |  |  | (19,350   | ) |  |   | 4.44 | 
|Options exercised                      |  |                         | (10,125   | )        |  |      | 4.44 |          |  |      | (1,083,188 | )        |  |   | 4.48 |  |  |  | (779,425  | ) |  |   | 4.59 | 
|                                       |  |                         |           |          |  |      |      |          |  |      |            |          |  |   |      |  |  |  |           |   |  |   |      | 
|Options outstanding end of year        |  |                         | 3,231,900 |          |  |      | 4.61 |          |  |      | 2,216,566  |          |  |   | 4.80 |  |  |  | 1,417,791 |   |  |   | 4.92 | 
|                                       |  |                         |           |          |  |      |      |          |  |      |            |          |  |   |      |  |  |  |           |   |  |   |      | 
|Options exercisable end of year        |  |                         | 1,535,018 |          |  |      | 4.58 |          |  |      | 1,684,988  |          |  |   | 4.75 |  |  |  | 910,280   |   |  |   | 4.99 | 
|                                       |  |                         |           |          |  |      |      |          |  |      |            |          |  |   |      |  |  |  |           |   |  |   |      | 

The following table summarizes options data as of
December 31, 2002:

|                         |       |                     |           |                     |  |             |       |              |  |          |     |     |  |  |         |         |  |   |       |      | 
|------------------------ | ----- | ------------------- | --------- | ------------------- |  | ----------- | ----- | ------------ |  | -------- | --- | --- |  |  | ------- | ------- |  | - | ----- | ---- | 
|                         |       |                     |           |                    
|                         |       | Options Outstanding |           | Options Exercisable
|                         |       |                     |           |                    
|                         |       |                     |           | Weighted            |  |            
|                         |       | Number              |           | Weighted            |  | average     |       | Number       |  | Weighted
|                         |       | as of               |           | average             |  | remaining   |       | as of        |  | average 
|                         |       | December 31,        |           | exercise            |  | contractual |       | December 31, |  | exercise
|Range of exercise prices |       | 2002                |           | price               |  | life        |       | 2002         |  | price   
|                         |       |                     |           |                     |  |             |       |              |  |         
|$4.44                    |       |                     | 1,296,863 |                     |  | $           | 4.44  |              |  |          | 5.9 |     |  |  | 818,354 |         |  | $ | 4.44  |     
|$7.11  $8.89            |       |                     | 69,500    |                     |  |             | 8.55  |              |  |          | 7.3 |     |  |  | 50,399  |         |  |   | 8.39  |     
|$11.11                   |       |                     | 45,000    |                     |  |             | 11.11 |              |  |          | 7.9 |     |  |  | 35,099  |         |  |   | 11.11 |     
|$15.56                   |       |                     | 6,428     |                     |  |             | 15.56 |              |  |          | 8.4 |     |  |  | 6,428   |         |  |   | 15.56 |     
|                         |       |                     |           |                     |  |             |       |              |  |          |     |     |  |  |         |         |  |   |       |     
|                         | Total |                     |           | 1,417,791           |  |             |       | 4.92         |  |          |     | 6.0 |  |  |         | 910,280 |  |   |       | 4.99 | 
|                         |       |                     |           |                     |  |             |       |              |  |          |     |     |  |  |         |         |  |   |       |     

Options were granted at $8.89 and $11.11 during
the year ended December 31, 2000 and had an estimated weighted
average fair value on the date of grant of $3.09. Options were
granted at $4.44, $7.11, $8.89, $11.11, and $15.56 during the
year ended December 31, 2001 and had an estimated weighted
average fair value on the date of grant of $5.38. There were no
options granted during the year ended December 31, 2002. In
January of 2003, we granted new stock options to purchase
2,200,500 shares at an exercise price of $23.15. We recorded
compensation cost of $0.2 million and $0.1 million on
December 31, 2001 and 2002.

F-24



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |             
|--- | ------------
|12. | Income Taxes

Our provision for income taxes consists of the
following components:

|                 |  |      |       |      |  |      |       |  |  |   |        | 
|---------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ------ | 
|                 |  | 2000 |       | 2001 |  | 2002
|                 |  |      |       |      |  |     
|Federal: current |  | $    | 3,766 |      |  | $    | 570   |  |  | $ |       | 
|deferred         |  |      |      |      |  |      |      |  |  |   | 6,333  | 
|Foreign: current |  |      | 1,400 |      |  |      | 2,222 |  |  |   | 2,533  | 
|deferred         |  |      |      |      |  |      |      |  |  |   |       | 
|State: current   |  |      | 834   |      |  |      | 3,108 |  |  |   | 5,384  | 
|deferred         |  |      |      |      |  |      |      |  |  |   | 909    | 
|                 |  |      |       |      |  |      |       |  |  |   |        | 
|Total: current   |  | $    | 6,000 |      |  | $    | 5,900 |  |  | $ | 7,917  | 
|deferred         |  |      |      |      |  |      |      |  |  | $ | 7,242  | 
|                 |  |      |       |      |  |      |       |  |  |   |        | 
|                 |  | $    | 6,000 |      |  | $    | 5,900 |  |  | $ | 15,159 | 

Our current tax liability for all periods
consists of the current tax liabilities of our wholly owned
foreign sales corporation, alternative minimum tax liability,
current state tax liabilities in jurisdictions that impose
minimum taxes or restrict use of net operating loss
carryforwards, the tax expense of our wholly owned foreign
subsidiaries and foreign withholding taxes on dividends and
royalties. Deferred tax expense includes taxes payable to taxing
jurisdictions in future periods as well as the reversal of the
deferred tax asset valuation allowance more fully described
below.

Our effective tax rate differed from the
statutory federal income tax rate because of the following
differences:

|                                                                        |  |      |        |      |  |      |        |   |  |  |        |  
|----------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                                        |  | 2000 |        | 2001 |  | 2002
|                                                                        |  |      |        |      |  |     
|Statutory federal tax rate                                              |  |      | 35.0%  |      |  |      | 35.0%  |   |  |  | 35.0%  |  
|Effect of taxes on joint venture/foreign earnings                       |  |      | 4.2%   |      |  |      | 5.2%   |   |  |  | 0.6%   |  
|Foreign Sales Corporation/extraterritorial income
    exclusion benefit |  |      | (5.2%  | )    |  |      | (5.1%  | ) |  |  | (1.5%  | )
|Disallowed expenses and other                                           |  |      | 12.0%  |      |  |      | (25.6% | ) |  |  | 4.3%   |  
|Change in valuation allowance                                           |  |      | (24.6% | )    |  |      | (3.0%  | ) |  |  | (33.3% | )
|State income taxes                                                      |  |      | 3.4%   |      |  |      | 7.2%   |   |  |  | 4.9%   |  
|                                                                        |  |      |        |      |  |      |        |   |  |  |        |  
|Effective tax rate                                                      |  |      | 24.8%  |      |  |      | 13.7%  |   |  |  | 10.0%  |  
|                                                                        |  |      |        |      |  |      |        |   |  |  |        |  

The components of the net deferred tax asset are
as follows:

|                                        |  |                |        |      |  |   |        | 
|--------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                        |  |               
|                                        |  | December 31,  
|                                        |  |               
|                                        |  | 2001           |        | 2002
|                                        |  |                |        |     
|                                        |  |               
|                                        |  | (In thousands)
|Deferred tax assets:                    |  |                |        |      |  |   |        | 
|Alternative Minimum Tax Credits         |  | $              | 2,514  |      |  | $ | 2,514  | 
|Accrued expenses                        |  |                | 13,347 |      |  |   | 22,631 | 
|Net operating loss carryforwards        |  |                | 64,111 |      |  |   | 33,305 | 
|Depreciation                            |  |                | 6,916  |      |  |   | 2,456  | 
|Pension liabilities                     |  |                |       |      |  |   | 8,240  | 
|Currency hedges and interest rate swaps |  |                |       |      |  |   | 2,941  | 
|                                        |  |                |        |      |  |   |        | 
|                                        |  |                | 86,888 |      |  |   | 72,087 | 

F-25



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                |  |                |         |      |  |   |         |  
|----------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                |  |               
|                                                |  | December 31,  
|                                                |  |               
|                                                |  | 2001           |         | 2002
|                                                |  |                |         |     
|                                                |  |               
|                                                |  | (In thousands)
|Deferred tax liabilities:                       |  |                |         |      |  |   |         |  
|Purchased fixed assets and intangibles          |  |                |        |      |  |   | (18,311 | )
|Intangibles, accrued compensation, and benefits |  |                | (17,438 | )    |  |   | (18,985 | )
|Equity in affiliates foreign earnings          |  |                | (4,062  | )    |  |   | (7,249  | )
|Tax LIFO provision                              |  |                | (4,541  | )    |  |   | (5,496  | )
|Engineering Expenses                            |  |                | (8,209  | )    |  |   | (10,430 | )
|Other tax deductible items                      |  |                | (76     | )    |  |   | (409    | )
|                                                |  |                |         |      |  |   |         |  
|                                                |  |                | (34,326 | )    |  |   | (60,880 | )
|                                                |  |                |         |      |  |   |         |  
|Net deferred tax asset                          |  |                | 52,562  |      |  |   | 11,207  |  
|Valuation allowance                             |  |                | (52,562 | )    |  |   |        |  
|                                                |  |                |         |      |  |   |         |  
|Net deferred taxes on balance sheet             |  | $              |        |      |  | $ | 11,207  |  
|                                                |  |                |         |      |  |   |         |  

The net deferred tax asset of $11.2 million
represents net current deferred tax assets of $25.4 million
and net non-current deferred tax liabilities of
$14.2 million. The net deferred tax asset at
December 31, 2001 was offset by a valuation allowance. In
assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
the temporary differences become deductible and any limitations
applied to the use of carryforward tax attributes. In 2002 we
concluded that it was more likely than not that sufficient
future taxable income would be generated to fully realize the
deferred tax assets. Accordingly we reversed the offsetting
valuation allowance in its entirety.

We have approximately $83 million in
estimated net operating loss carryforwards, which expire at
varying dates through 2017. The future period utilization of
these losses may be limited in the event of certain changes in
our ownership.

We paid $6.2 million and $4.4 million
for income taxes, net of refunds, in 2001 and 2002, respectively.



|    |                                    
|--- | -----------------------------------
|13. | Fair Value of Financial Instruments

The carrying amount of our financial instruments
included in current assets and current liabilities approximates
their fair value due to their short-term nature. The fair market
value of our long-term debt was estimated to be
$430.9 million and $590.0 million at December 31,
2001 and 2002, respectively, for the senior secured credit
facility.

The fair values of the senior credit facility
represent our best estimates based on other financial
instruments with similar characteristics. Since the facility has
variable rate debt, its fair value approximates its carrying
amount.



|    |                                          
|--- | -----------------------------------------
|14. | Significant Customer and Export
    Sales

Sales to various agencies of the U.S. Government
aggregated $832.9 million, $1,013.2 million and
$1,361.5 million during the years ended December 31, 2000,
2001 and 2002, respectively.

At December 31, 2001 and 2002, trade
accounts receivable from the U.S. Government totaled
$36.5 million and $123.4 million, respectively.

F-26



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Export sales, including sales to foreign
governments transacted through the U.S. Government, were
$297.6 million, $182.4 million and $240.3 million
during the years ended December 31, 2000, 2001 and 2002,
respectively. In addition there were sales to foreign
governments transacted by our foreign subsidiary of
$53.4 million, $123.0 million and $107.2 million
during the years ended December 31, 2000, 2001 and 2002,
respectively.



|    |                           
|--- | --------------------------
|15. | 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 will remain in effect so long as Carlyle owns
greater than 20% of our voting stock.

In accordance with the management agreement
between United Defense Industries and Carlyle, we incurred an
annual fee of $2 million for various management services
provided by Carlyle. Three of our directors and an employee of
Carlyle providing us advisory services were paid an aggregate
sum of $576,104 in 2002.

We recognized $6.0 million and
$7.1 million of royalties, license fees and technical
service fees at December 31, 2001 and 2002, respectively,
from our Turkish joint venture.



|    |                             
|--- | ----------------------------
|16. | Other Employee Benefit Plans

Substantially all of our domestic employees are
eligible to participate in defined contribution savings plans
designed to comply with the requirements of the Employee
Retirement Income Security Act of 1974 (ERISA) and
Section 401(k) of the Internal Revenue Code. Charges
against income for matching contributions to the plans were
$7.9 million in the year ended December 31, 2000 and
$8.8 million in each of the years ended December 31,
2001 and 2002, respectively.

USMR maintains defined contribution savings and
profit-sharing plans covering employees of its various locations
who are eligible to participate in its plans upon meeting
eligibility requirements. Costs charged to expense for these
plans were $1.1 million for the period July 2, 2002
through December 31, 2002. During 2002, USMR also
maintained a defined contribution deferred compensation plan
covering certain executives. Total costs charged to expense were
$0.3 million for the period July 2, 2002 through
December 31, 2002. USMR made contributions to
union-sponsored trust funds, which provide health, welfare,
pension and other fringe benefits to employees covered by
collective bargaining agreements. Company contributions totaled
$1.2 million for the period July 2, 2002 through
December 31, 2002.



|    |                   
|--- | ------------------
|17. | 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.

F-27



---



##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |       |      | 
|-------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------- | ------ | ---- | ---- | ---- | ------- | ----- | ---- | - | ------- | ----- | ---- | 
|                                                                                 |                                                                                  |                                      
|                                                                                 |                                                                                  | Year ended December 31,              
|                                                                                 |                                                                                  |                                      
|                                                                                 |                                                                                  | 2000                                  |        | 2001 |      | 2002
|                                                                                 |                                                                                  |                                       |        |      |      |     
|                                                                                 |                                                                                  |                                      
|                                                                                 |                                                                                  | (In thousands, except per share data)
|Net income:                                                                      |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Income before extraordinary item                                                 |                                                                                  | $                                     | 18,165 |      |      | $    | 37,022  |       |      | $ | 136,276 |      
|Extraordinary item  net gain
    (loss) from extinguishment of debt, net of tax |                                                                                  |                                       | 680    |      |      |      | (28,246 | )     |      |   | (1,700  | )    
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Net income for basic and diluted computations                                    |                                                                                  | $                                     | 18,845 |      |      | $    | 8,776   |       |      | $ | 134,576 |      
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Average common shares outstanding:                                               |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Average number of common shares outstanding for
    basic computations           |                                                                                  |                                       | 40,584 |      |      |      | 41,265  |       |      |   | 51,349  |      
|Dilutive stock options-based on the treasury
    stock method                    |                                                                                  |                                       | 1,835  |      |      |      | 1,939   |       |      |   | 1,448   |      
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Average number of common shares outstanding for
    diluted computations         |                                                                                  |                                       | 42,419 |      |      |      | 43,204  |       |      |   | 52,797  |      
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Earnings per share:                                                              |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Earnings per share  basic:                                                      |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|                                                                                 | Income before extraordinary item                                                 |                                       | $      | 0.45 |      |      | $       | 0.90  |      |   | $       | 2.65  |     
|                                                                                 | Extraordinary item  net gain
    (loss) from extinguishment of debt, net of tax |                                       |        | 0.01 |      |      |         | (0.69 | )    |   |         | (0.03 | )   
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|                                                                                 | Net income                                                                       |                                       | $      | 0.46 |      |      | $       | 0.21  |      |   | $       | 2.62  |     
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|Earnings per share  diluted:                                                    |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|                                                                                 | Income before extraordinary item                                                 |                                       | $      | 0.43 |      |      | $       | 0.86  |      |   | $       | 2.58  |     
|                                                                                 | Extraordinary item  net gain
    (loss) from extinguishment of debt, net of tax |                                       |        | .01  |      |      |         | (0.66 | )    |   |         | (0.03 | )   
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      
|                                                                                 |                                                                                  | Net income                            |        | $    | 0.44 |      |         | $     | 0.20 |   |         | $     | 2.55 | 
|                                                                                 |                                                                                  |                                       |        |      |      |      |         |       |      |   |         |      

18.     Information
on Business Segments

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

Summary financial data for each of our business
segments for the three years ended December 30, 2000, 2001
and 2002 follow:

|                            |  |                |           |      |  |      |           |  |  |   |           | 
|--------------------------- |  | -------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                            |  |               
|                            |  | December 31,  
|                            |  |               
|                            |  | 2000           |           | 2001 |  | 2002
|                            |  |                |           |      |  |     
|                            |  |               
|                            |  | (In thousands)
|Sales:                      |  |                |           |      |  |      |           |  |  |   |           | 
|Defense Systems             |  | $              | 1,183,886 |      |  | $    | 1,318,538 |  |  | $ | 1,469,961 | 
|Ship Repair and Maintenance |  |                |          |      |  |      |          |  |  |   | 255,385   | 
|                            |  |                |           |      |  |      |           |  |  |   |           | 
|Total sales                 |  |                | 1,183,886 |      |  |      | 1,318,538 |  |  |   | 1,725,346 | 

F-28



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  
|---------------------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                 |  |               
|                                                                 |  | December 31,  
|                                                                 |  |               
|                                                                 |  | 2000           |         | 2001 |  | 2002
|                                                                 |  |                |         |      |  |     
|                                                                 |  |               
|                                                                 |  | (In thousands)
|Earnings related to investments in foreign
    affiliates:       |  |                |         |      |  |      |         |   |  |   |         |  
|Defense Systems                                                  |  |                | (1,262  | )    |  |      | 10,156  |   |  |   | 13,874  |  
|Ship Repair and Maintenance                                      |  |                |        |      |  |      |        |   |  |   |        |  
|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  
|Total earnings related to investments in foreign
    affiliates: |  |                | (1,262  | )    |  |      | 10,156  |   |  |   | 13,874  |  
|Depreciation and amortization:                                   |  |                |         |      |  |      |         |   |  |   |         |  
|Defense Systems                                                  |  |                | 93,984  |      |  |      | 70,037  |   |  |   | 31,331  |  
|Ship Repair and Maintenance                                      |  |                |        |      |  |      |        |   |  |   | 9,787   |  
|Corporate                                                        |  |                | (1,120  | )    |  |      | (779    | ) |  |   | 136     |  
|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  
|Total depreciation and amortization                              |  |                | 92,864  |      |  |      | 69,258  |   |  |   | 41,254  |  
|Capital spending:                                                |  |                |         |      |  |      |         |   |  |   |         |  
|Defense Systems                                                  |  |                | 19,415  |      |  |      | 22,222  |   |  |   | 17,341  |  
|Ship Repair and Maintenance                                      |  |                |        |      |  |      |        |   |  |   | 5,385   |  
|Corporate                                                        |  |                | 306     |      |  |      | 153     |   |  |   | 46      |  
|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  
|Total capital spending                                           |  |                | 19,721  |      |  |      | 22,375  |   |  |   | 22,772  |  
|Income before interest and taxes:                                |  |                |         |      |  |      |         |   |  |   |         |  
|Defense Systems                                                  |  |                | 67,157  |      |  |      | 104,637 |   |  |   | 182,026 |  
|Ship Repair and Maintenance                                      |  |                |        |      |  |      |        |   |  |   | 18,501  |  
|Corporate                                                        |  |                | (17,879 | )    |  |      | (39,010 | ) |  |   | (20,402 | )
|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  
|Total income before interest and taxes                           |  |                | 49,278  |      |  |      | 65,627  |   |  |   | 180,125 |  
|Interest, net                                                    |  |                | (25,113 | )    |  |      | (22,705 | ) |  |   | (28,690 | )
|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  
|Income before income taxes and extraordinary item                |  | $              | 24,165  |      |  | $    | 42,922  |   |  | $ | 151,435 |  
|                                                                 |  |                |         |      |  |      |         |   |  |   |         |  

|                            |  |            |         |            |  |   |           | 
|--------------------------- |  | ---------- | ------- | ---------- |  | - | --------- | 
|Total assets: (a)           |  | 12/31/2001 |         | 12/31/2002
|                            |  |            |         |           
|Defense Systems             |  | $          | 821,088 |            |  | $ | 884,261   | 
|Ship Repair and Maintenance |  |            |        |            |  |   | 421,300   | 
|Corporate and eliminations  |  |            | 107,030 |            |  |   | 148,409   | 
|                            |  |            |         |            |  |   |           | 
|Total assets                |  | $          | 928,118 |            |  | $ | 1,453,970 | 
|                            |  |            |         |            |  |   |           | 



---



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



|    |                                     
|--- | ------------------------------------
|19. | Quarterly Financial Data (Unaudited)

The following table of quarterly financial data
has been prepared from our financial records, without audit, and
reflects all adjustments which are, in our opinion, necessary
for a fair presentation of the results of operations for the
interim periods presented.

On July 2, 2002, we acquired all of the
outstanding stock of United States Marine Repair. Accordingly,
the financial statements reflect the results of operations of
the acquired entity since the date of acquisition. This
acquisition affects the comparability of the financial data for
the interim periods presented.

F-29



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##### Table of Contents



UNITED DEFENSE INDUSTRIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                    |                                  |                                      |       |              |  |              |       |              |  |   |       |       |   |   |       |      | 
|------------------------------------------------------------------- | -------------------------------- | ------------------------------------ | ----- | ------------ |  | ------------ | ----- | ------------ |  | - | ----- | ----- | - | - | ----- | ---- | 
|                                                                    |                                  |                                     
|                                                                    |                                  | 2001                                
|                                                                    |                                  |                                     
|                                                                    |                                  | Three months                         |       | Three months |  | Three months |       | Three months
|                                                                    |                                  | ended                                |       | ended        |  | ended        |       | ended       
|                                                                    |                                  | March 31                             |       | June 30      |  | Sept 30      |       | Dec 31      
|                                                                    |                                  |                                      |       |              |  |              |       |             
|                                                                    |                                  |                                     
|                                                                    |                                  | (In millions, except per share data)
|Sales                                                               |                                  | $                                    | 292.1 |              |  | $            | 346.7 |              |  | $ | 275.1 |       |   | $ | 404.6 |     
|Gross Profit                                                        |                                  |                                      | 60.9  |              |  |              | 64.5  |              |  |   | 59.6  |       |   |   | 73.8  |     
|Income before extraordinary item                                    |                                  |                                      | 5.1   |              |  |              | 15.7  |              |  |   | 4.5   |       |   |   | 11.7  |     
|Extraordinary item  net loss from
    early extinguishment of debt |                                  |                                      |      |              |  |              |      |              |  |   | (22.6 | )     |   |   | (5.6  | )   
|Net income (loss)                                                   |                                  |                                      | 5.1   |              |  |              | 15.7  |              |  |   | (18.1 | )     |   |   | 6.1   |     
|Per Share Data:                                                     |                                  |                                      |       |              |  |              |       |              |  |   |       |       |   |   |       |     
|Earnings per common share  basic                                   |                                  |                                      |       |              |  |              |       |              |  |   |       |       |   |   |       |     
|                                                                    | Income before extraordinary item |                                      | $     | 0.13         |  |              | $     | 0.39         |  |   | $     | 0.11  |   |   | $     | 0.28 | 
|                                                                    | Net income (loss)                |                                      |       | 0.13         |  |              |       | 0.39         |  |   |       | (0.44 | ) |   |       | 0.14 | 
|Earnings per common share  diluted                                 |                                  |                                      |       |              |  |              |       |              |  |   |       |       |   |   |       |     
|                                                                    | Income before extraordinary item |                                      | $     | 0.12         |  |              | $     | 0.37         |  |   | $     | 0.11  |   |   | $     | 0.27 | 
|                                                                    | Net income (loss)                |                                      |       | 0.12         |  |              |       | 0.37         |  |   |       | (0.44 | ) |   |       | 0.14 | 

|                                                                                       |                                  |                                      |       |              |  |              |       |              |  |   |       |      |  |   |       |      | 
|-------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------------ | ----- | ------------ |  | ------------ | ----- | ------------ |  | - | ----- | ---- |  | - | ----- | ---- | 
|                                                                                       |                                  |                                     
|                                                                                       |                                  | 2002                                
|                                                                                       |                                  |                                     
|                                                                                       |                                  | Three months                         |       | Three months |  | Three months |       | Three months
|                                                                                       |                                  | ended                                |       | ended        |  | ended        |       | ended       
|                                                                                       |                                  | March 31                             |       | June 30      |  | Sept 30      |       | Dec 31      
|                                                                                       |                                  |                                      |       |              |  |              |       |             
|                                                                                       |                                  |                                     
|                                                                                       |                                  | (In millions, except per share data)
|Sales                                                                                  |                                  | $                                    | 356.4 |              |  | $            | 318.0 |              |  | $ | 529.7 |      |  | $ | 521.2 |     
|Gross Profit                                                                           |                                  |                                      | 59.8  |              |  |              | 69.9  |              |  |   | 102.7 |      |  |   | 104.3 |     
|Income before extraordinary item                                                       |                                  |                                      | 19.3  |              |  |              | 27.3  |              |  |   | 46.7  |      |  |   | 43.0  |     
|Extraordinary item  net
    (loss) gain from early extinguishment of debt, net of tax |                                  |                                      | (0.3  | )            |  |              |      |              |  |   | (1.6  | )    |  |   | 0.2   |     
|Net income                                                                             |                                  |                                      | 19.0  |              |  |              | 27.3  |              |  |   | 45.1  |      |  |   | 43.2  |     
|Per Share Data:                                                                        |                                  |                                      |       |              |  |              |       |              |  |   |       |      |  |   |       |     
|Earnings per common share  basic                                                      |                                  |                                      |       |              |  |              |       |              |  |   |       |      |  |   |       |     
|                                                                                       | Income before extraordinary item |                                      | $     | 0.38         |  |              | $     | 0.53         |  |   | $     | 0.91 |  |   | $     | 0.83 | 
|                                                                                       | Net income                       |                                      |       | 0.37         |  |              |       | 0.53         |  |   |       | 0.88 |  |   |       | 0.84 | 
|Earnings per common share  diluted                                                    |                                  |                                      |       |              |  |              |       |              |  |   |       |      |  |   |       |     
|                                                                                       | Income before extraordinary item |                                      | $     | 0.37         |  |              | $     | 0.52         |  |   | $     | 0.88 |  |   | $     | 0.81 | 
|                                                                                       | Net income                       |                                      |       | 0.36         |  |              |       | 0.52         |  |   |       | 0.85 |  |   |       | 0.82 | 

On January 1, 2002, we began to apply the
new rules on accounting for goodwill and other intangible assets
and ceased the amortization of goodwill (both existing goodwill
and goodwill resulting from our USMR acquisition).

F-30



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##### Table of Contents





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.



|         |                                     
|-------- | ------------------------------------
|ITEM 10. | Directors and Executive
    Officers

The information with respect to directors and
executive officers required by this Item 10 is incorporated
in this report by reference to the information set forth under
the caption Election of Directors and
Executive Officers in our definitive Proxy Statement
for our 2003 Annual Meeting of Stockholders, which will be filed
with the Commission no later than April 30, 2003.



|         |                       
|-------- | ----------------------
|ITEM 11. | Executive Compensation

The information required by this Item 11 is
incorporated in this report by reference to the information set
forth under the captions Executive Compensation and
Employment Agreements in our definitive Proxy
Statement for our 2003 Annual Meeting of Stockholders which will
be filed with the Commission no later than April 30, 2003.
The sections entitled Compensation Committee Report on
Executive Compensation and Performance Graph
in the Proxy Statement are not incorporated herein by reference.
Information relating to certain filings on Forms 3, 4 and 5 is
contained in the Proxy Statement under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|ITEM 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item 12 is
incorporated in this report by reference to the information set
forth under the caption Security Ownership of Certain
Beneficial Owners and Management in our definitive Proxy
Statement for our 2003 Annual Meeting of Stockholders which will
be filed with the Commission no later than April 30, 2003.



|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | Certain Relationships and Related
    Transactions

The information required by this Item 13 is
incorporated in this report by reference to the information set
forth under the caption Certain Relationships and Related
Transactions in our definitive Proxy Statement for our
2003 Annual Meeting of Stockholders which will be filed with the
Commission no later than April 30, 2003.



|         |                        
|-------- | -----------------------
|ITEM 14. | Controls and Procedures

We maintain disclosure controls and procedures
designed to ensure that information required to be disclosed in
our Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Also, we have investments
in certain unconsolidated entities. As we do not control or
manage these entities, the disclosure controls and procedures
with respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated
subsidiaries.

Within 90 days prior to the date of this
report, we carried out an evaluation, under the supervision and
with the participation of our management, including the Chief
Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.

There have been no significant changes in our
internal controls or in other factors that could significantly
affect the internal controls subsequent to the date we completed
the evaluation.

31



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##### Table of Contents






ITEM
15.     Exhibits, Financial
Statement Schedules and Reports on Form 8-K

(a) The following documents are included as
part of this Annual Report on Form 10-K:

1. The index of financial statements has
been included with Item 8.

2. Financial statement schedules:

Schedule II:

|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |        |        | 
|----------------------------- | -------------------------------------------- | -------------- | - | ---------- | ------ | ---------- | - | ----------- | ----- | ---------- | - | ----- | ------ |  | - | ----- | ------ |  | - | ------ | ------ | 
|                              |                                              |                |   |            |        |            |   |            
|                              |                                              |                |   | Additions  |        |            |   |            
|                              |                                              |                |   |            |        |            |   |            
|                              |                                              | Balance at     |   | Charged to |        | Charged to |   |             |       | Balance at
|                              |                                              | Beginning      |   | costs &    |        | other      |   | Deductions/ |       | End of    
|Description                   |                                              | of Period      |   | expenses   |        | accounts   |   | Payments    |       | Period    
|                              |                                              |                |   |            |        |            |   |             |       |           
|                              |                                              |               
|                              |                                              | (in thousands)
|Year Ended December 31, 2000: |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              | Reserve for remediation and compliance costs |                | $ | 13,100     |        |            | $ | 1,155       |       |            | $ |      |        |  | $ |      |        |  | $ | 14,255 |       
|                              | Restructuring reserve                        |                |   | 1,600      |        |            |   |            |       |            |   |      |        |  |   | 500   |        |  |   | 1,100  |       
|                              | Litigation reserve                           |                |   | 5,100      |        |            |   | 3,000       |       |            |   |      |        |  |   | 1,854 |        |  |   | 6,246  |       
|                              | Allowance for Doubtful Accounts              |                |   | 827        |        |            |   | 274         |       |            |   |      |        |  |   | 38    |        |  |   | 1,063  |       
|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              |                                              | Total          |   | $          | 20,627 |            |   | $           | 4,429 |            |   | $     |       |  |   | $     | 2,392  |  |   | $      | 22,664 | 
|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|Year Ended December 31, 2001: |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              | Reserve for remediation and compliance costs |                | $ | 14,255     |        |            | $ |            |       |            | $ |      |        |  | $ |      |        |  | $ | 14,255 |       
|                              | Restructuring reserve                        |                |   | 1,100      |        |            |   | 8,268       |       |            |   |      |        |  |   | 1,100 |        |  |   | 8,268  |       
|                              | Litigation reserve                           |                |   | 6,246      |        |            |   |            |       |            |   |      |        |  |   | 1,724 |        |  |   | 4,522  |       
|                              | Allowance for Doubtful Accounts              |                |   | 1,063      |        |            |   | 1,039       |       |            |   | 51    |        |  |   | 114   |        |  |   | 2,039  |       
|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              |                                              | Total          |   | $          | 22,664 |            |   | $           | 9,307 |            |   | $     | 51     |  |   | $     | 2,938  |  |   | $      | 29,084 | 
|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|Year Ended December 31, 2002: |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              | Reserve for remediation and compliance costs |                | $ | 14,255     |        |            | $ | 3,727       |       |            |   | 9,500 |        |  |   |      |        |  | $ | 27,482 |       
|                              | Restructuring reserve                        |                |   | 8,268      |        |            |   | 3,549       |       |            |   | 1,300 |        |  |   | 8,031 |        |  |   | 5,086  |       
|                              | Litigation reserve                           |                |   | 4,522      |        |            |   | 540         |       |            |   |      |        |  |   | 1,869 |        |  |   | 3,193  |       
|                              | Allowance for Doubtful Accounts              |                |   | 2,039      |        |            |   | 459         |       |            |   | 629   |        |  |   | 795   |        |  |   | 2,332  |       
|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       
|                              |                                              | Total          |   | $          | 29,084 |            |   | $           | 8,275 |            |   | $     | 11,429 |  |   | $     | 10,695 |  |   | $      | 38,093 | 
|                              |                                              |                |   |            |        |            |   |             |       |            |   |       |        |  |   |       |        |  |   |       

All other schedules have been omitted because
they are inapplicable, not required, or the information is
included elsewhere in the consolidated financial statements or
notes thereto.

3. The index of exhibits is set forth below.

(b) Reports on Form 8-K filed in the
fourth quarter of 2002.

None.

32



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##### Table of Contents



|        |          |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | -------- | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |                       
|No.     |          | Description of Exhibit
|        |          |                       
|        | 2.1(8)   |                        |  | Agreement and Plan of Merger by and among United
    Defense Industries, Inc., UDII Torch Acquisition Corporation,
    United States Marine Repair, Inc., and TC Group L.L.C. as
    representative dated May 27, 2002.                                                                                                                                                                                                                                                               
|        | 3.1(1)   |                        |  | Second Amended and Restated Certificate of
    Incorporation of United Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                       
|        | 3.2(1)   |                        |  | Second Amended and Restated Bylaws of United
    Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 4.1(1)   |                        |  | Form of stock certificate of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.1(1)  |                        |  | Sub-Lease Agreement among the
    Louisville/Jefferson County Development Authority, Inc. and
    United Defense, L.P., as amended by that certain First Amendment
    to Sublease of Real and Personal Property Agreement among the
    Louisville/Jefferson County Development Authority, Inc. and
    United Defense, L.P., as supplemented by Modifications
    Nos. 1-12.                                                                                                        
|        | 10.2(1)  |                        |  | Facilities contract number N00024-93-E-8521,
    dated November 16, 1992 among United Defense, L.P.,
    Armament Systems Divisions and the U.S. Government Naval Sea
    Systems Command for the use of the government owned facility
    located at 4800 East River Road, Minneapolis, MN 55421.                                                                                                                                                                                    
|        | 10.3(2)  |                        |  | Management Agreement dated October 6, 1997
    among United Defense Industries, Inc., United Defense, L.P. and
    TC Group Management, L.L.C.                                                                                                                                                                                                                                                                                                                                        
|        | 10.4(3)  |                        |  | Professional Service Agreement with
    J.H. Binford Peay, III.                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.5(3)  |                        |  | Professional Service Agreement with John M.
    Shalikashvili.                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.6(4)  |                        |  | Professional Service Agreement with
    Robert M. Kimmitt.                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.7(5)  |                        |  | Employment Agreement with Thomas W. Rabaut,
    dated as of May 21, 1999.                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.8(1)  |                        |  | First Amendment to Employment Agreement with
    Thomas W. Rabaut, dated as of July 18, 2001.                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.9(5)  |                        |  | Employment Agreement with David V. Kolovat,
    dated as May 21, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.10(7) |                        |  | First Amendment to Employment Agreement with
    David V. Kolovat, dated as of July 18, 2001.                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.11(5) |                        |  | Employment Agreement with Francis Raborn, dated
    as of May 21, 1999.                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.12(1) |                        |  | First Amendment to Employment Agreement with
    Francis Raborn, dated July 18, 2001.                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.13(5) |                        |  | Employment Agreement with Dennis A.
    Wagner, III, dated as of May 21, 1999.                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.14(7) |                        |  | First Amendment to Employment Agreement with
    Dennis A. Wagner, III, dated July 18, 2001.                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.15(1) |                        |  | Credit Agreement dated as of August 13, 2001
    among Iron Horse Investors, L.L.C., United Defense Industries,
    Inc., various lending institutions party thereto, Deutsche Banc
    Alex. Brown Inc. and Lehman Brothers Inc., as co-lead arrangers,
    Citicorp USA, Inc., The Bank of Nova Scotia and Credit Lyonnais
    New York Branch as Documentation Agents, Bankers Trust Company
    as Administrative Agent and Lehman Commercial Paper Inc. as
    Syndication Agent.
|        | 10.16(2) |                        |  | United Defense 1998 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.17(2) |                        |  | Form of Option Contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.18(9) |                        |  | Amendment No. 1 to United Defense Stock
    Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.19(9) |                        |  | Amendment No. 2 to United Defense Stock
    Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.20(1) |                        |  | Registration Rights Agreement by and between Iron
    Horse Investors, L.L.C. and United Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.21(1) |                        |  | Management Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.22(1) |                        |  | UDLP Employees Pension Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.23(1) |                        |  | UDLP Excess Pension Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.24(1) |                        |  | Form of Retention Bonus Plan Award Letter.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.25(1) |                        |  | Severance Pay Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.26(1) |                        |  | Amendment and Waiver to Credit Agreement dated as
    of October 15, 2001.                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.27(1) |                        |  | Amendment to Credit Agreement dated as of
    October 26, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 21.1(6)  |                        |  | Subsidiaries of United Defense Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 23.1(10) |                        |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                         

33



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##### Table of Contents



|        |          |                        |  |                                                                                                                                                    
|------- | -------- | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |                       
|No.     |          | Description of Exhibit
|        |          |                       
|        | 23.2(10) |                        |  | Notice Regarding Lack of Consent of Independent
    Auditor SERBEST MUHASEBECILIK MALI MUSAVIRLIK ANONIM SIRKETI,
    Member of Andersen Worldwide.
|        | 23.3(10) |                        |  | Notice Regarding Lack of Consent of Independent
    Auditor Arthur Andersen & Co.                                                                  



---



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (333-71986) filed with
    the Securities and Exchange Commission on October 22, 2001.
|   
|(2) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 (333-60207) filed with
    the Securities and Exchange Commission on July 30, 1998.   
|   
|(3) | Incorporated by reference to the Companys
    Report on Form 10-Q for the quarter ended June 30,
    1998.                                                             
|   
|(4) | Incorporated by reference to the Companys
    Report on Form 10-K for the year ended December 31,
    1998.                                                            
|   
|(5) | Incorporated by reference to the Companys
    Report on Form 10-Q for the quarter ended June 30,
    1999.                                                             
|   
|(6) | Incorporated by reference to the Companys
    Report on Form 10-K for the year ended December 31,
    2000.                                                            
|   
|(7) | Incorporated by reference to the Companys
    Report on Form 10-K for the year ended December 31,
    2001.                                                            
|   
|(8) | Incorporated by reference to the Companys
    Report on Form 8-K filed June 4, 2002.                                                                                   
|   
|(9) | Incorporated by reference to the Companys
    Report on Form 10-Q for the year ended September 30,
    2002.                                                           



|     |                
|---- | ---------------
|(10) | Filed herewith.

34



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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                                     
| | Chief Financial Officer and Principal
    Financial
| | and Accounting Officer of the
    Registrant       

Pursuant to the requirements of the Securities
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the
dates indicated.

|                                                 |  |                                                          |  |                |  | 
|------------------------------------------------ |  | -------------------------------------------------------- |  | -------------- |  | 
|                                                 |  |                                                          |  |               
|Name                                             |  | Title                                                    |  | Date          
|                                                 |  |                                                          |  |               
|                                                
|/s/ THOMAS W. RABAUTThomas W. Rabaut             |  | President, Chief Executive Officer
    and Director      |  | March 14, 2003
|                                                
|/s/ FRANCIS RABORNFrancis Raborn                 |  | Vice President, Chief Financial Officer and
    Director |  | March 14, 2003
|                                                
|/s/ WILLIAM E. CONWAY, JR.William E. Conway, Jr. |  | Chairman of the Board                                    |  | March 14, 2003
|                                                
|/s/ FRANK C. CARLUCCIFrank C. Carlucci           |  | Director                                                 |  | March 14, 2003
|                                                
|/s/ PETER J. CLAREPeter J. Clare                 |  | Director                                                 |  | March 14, 2003
|                                                
|/s/ ALLAN M. HOLTAllan M. Holt                   |  | Director                                                 |  | March 14, 2003
|                                                
|/s/ ROBERT M. KIMMITTRobert M. Kimmitt           |  | Director                                                 |  | March 14, 2003
|                                                
|/s/ JOHN M. SHALIKASHVILIJohn M. Shalikashvili   |  | Director                                                 |  | March 14, 2003
|                                                
|/s/ J.H. BINFORD PEAY, IIIJ.H. Binford Peay, III |  | Director                                                 |  | March 14, 2003

35



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##### Table of Contents






CERTIFICATIONS

I, Thomas W. Rabaut, certify that:

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

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

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

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



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

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



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

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |            |                     
| | ---------- | --------------------
| | Signature: | /s/ THOMAS W. RABAUT

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Name:  Thomas W. Rabaut                         
| | Title:    President, Chief
    Executive Officer
| | and
    Principal Executive Officer of          
| | the
    Registrant                              

Date: March 14, 2003

36



---



##### Table of Contents






CERTIFICATIONS

I, Francis Raborn, certify that:

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

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

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

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



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

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



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

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |            |                   
| | ---------- | ------------------
| | Signature: | /s/ FRANCIS RABORN

| |                                             
| | --------------------------------------------
| |                                             
| | Name:  Francis Raborn                       
| | Title:   Vice President, Chief
    Financial
| | Officer
    and Principal Financial and     
| | Accounting
    Officer of the Registrant    

Date: March 14, 2003

37