
<PAGE>   1



                                GENERAL DYNAMICS

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
              OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

                 Dollars in millions, except per share amounts


BUSINESS ENVIRONMENT

The Company's primary business has historically been supplying weapons systems
to the U.S. Government.  In 1990, U.S. defense budgets, which had been
declining since 1985, began falling sharply in response to the end of the Cold
War. Management realized early on that the budget declines were structural in
that, for the foreseeable future, there would be fewer new weapons systems
required which would result in excess capacity in the industry. Accordingly,
Management believed there would be a necessary contraction and consolidation of
the U.S. defense industry. To date, Management's analysis of these developments
has proven to be true as evidenced by declines, in real terms, in the defense
budget and by the number of industry combinations in recent years.
      As an early response to this changing business environment and the
Company's then weakened financial position, Management initiated in 1991 a
program to improve business performance, restore financial strength,
substantially refocus corporate strategy and, through incentives, reorient the
corporate culture towards shareholder value. This program required the
Company's major businesses to be number one or number two in their markets and
have "critical mass" -- the appropriate size to retain key capabilities and
ensure economies of scale. Management sought to have its businesses meet these
criteria either within the Company or as part of other companies through
mergers, joint ventures, acquisitions, or sales of businesses if necessary.
Management also decided to sell peripheral businesses whenever appropriately
valued transactions could be negotiated.
      To accomplish this program, the Company strengthened certain of its
defense-related businesses through their sale to other companies, the most
recent being the pending sale of its Space Launch Systems business to Martin
Marietta Corporation. In addition, the Company's continuing operations are
demonstrating improved profitability, productivity and cash flows. These steps
restored the Company's financial strength permitting the repayment of
approximately $600 in debt, a recapitalization effected by the purchase of $960
of the Company's common stock through a tender offer, and the tax-advantaged
distribution to shareholders of $1,531 pursuant to the Company's formal plan of
contraction.  Even after these actions, the Company had a cash and marketable
securities balance of $585 at 31 December 1993.
      The Company's principal continuing operations -- Nuclear Submarines and
Armored Vehicles -- have been identified as critical to the U.S.  Defense
Industrial Base by the Department of Defense (DoD). Programs are being
implemented by the DoD to help preserve their key capabilities, although at
significantly reduced procurement rates. Accordingly, in the absence of
significant changes in world political and economic conditions, the Company is
seeking to supplement volumes in both businesses. Additional volume could come
from expanded involvement in overhaul, upgrade and modification work.
Management is also seeking to broaden its domestic base of armored vehicle and
related electronic systems integration programs, as well as to further expand
the export of these goods and services.
      Going forward, Management is continuing to focus on shareholder value and
is aggressively re-engineering the cost structures of all operations to enhance
their competitive positions by creating highly efficient businesses capable of
operating profitably at significantly lower volumes. In addition, the Company
continues to explore ways to utilize its financial capacity to strengthen
continuing operations through both internal and external investments.
Accordingly, Management is considering the benefits of corporate business
combinations and financial restructuring options to further enhance the value
of the Company.

BUSINESS SEGMENT INFORMATION

As a result of the pending sale, the Company's Space Launch Systems business
segment has been classified as a discontinued operation. In addition, certain
businesses previously classified as discontinued operations for which
satisfactory sales terms could not be reached have been reclassified to
continuing operations and now comprise the Other business segment. In addition,
the Single Channel Ground and Airborne Radio System (SINCGARS) program has been
reclassified to continuing operations and included in the Armored Vehicles
business segment due to Management's reassessment of the program's business
opportunities. Data for 1992 and 1991 has been restated accordingly.
      The Company's business segments are defined as follows:

NUCLEAR SUBMARINES: Design, engineering, construction, overhaul and support of
nuclear submarines.

ARMORED VEHICLES: Design, engineering, manufacturing, upgrade and support of
armored vehicles; and design, engineering, manufacturing and support of
SINCGARS.

OTHER: Coal mining; ship management; and ship financing.





                                                                 -- 12 --
<PAGE>   2
                                GENERAL DYNAMICS

<TABLE>
<CAPTION>
                                    NET SALES                   OPERATING EARNINGS          SALES TO U.S. GOVERNMENT
                              ----------------------          ----------------------         -----------------------
                              1993     1992     1991          1993     1992     1991         1993     1992     1991 
- --------------------------------------------------------------------------------------------------------------------
<S>                          <C>     <C>      <C>            <C>     <C>        <C>       <C>     <C>      <C>
Nuclear Submarines           $1,711   $1,730   $1,824        $124     $  94     $ 84        $1,684   $1,693   $1,802
Armored Vehicles              1,286    1,261    1,129         174       122       96         1,266    1,234    1,088
Other                           190      234      208          11        39       31            53       55       51
- --------------------------------------------------------------------------------------------------------------------
                             $3,187   $3,225   $3,161        $309     $ 255     $211        $3,003   $2,982   $2,941
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                                             DEPRECIATION, DEPLETION
                                IDENTIFIABLE ASSETS            CAPITAL EXPENDITURES             AND AMORTIZATION
                              ----------------------          ----------------------         -----------------------
                              1993     1992     1991          1993     1992     1991          1993    1992     1991 
- --------------------------------------------------------------------------------------------------------------------
<S>                          <C>     <C>      <C>            <C>     <C>        <C>          <C>             <C>
Nuclear Submarines           $  387   $  404   $  524         $ 4       $ 5      $14           $24      $27     $ 30
Armored Vehicles                296      329      335           5         4        3            11       15       14
Other                           372      386      406           4         8        2             6        6        9
Corporate*                    1,580    2,411    2,912           1         4        7            15        9       85
- --------------------------------------------------------------------------------------------------------------------
                             $2,635   $3,530   $4,177         $14       $21      $26           $56      $57     $138
====================================================================================================================
</TABLE>
*   Identifiable assets include cash and equivalents and marketable securities
    totaling $585, $943 and $812 in 1993, 1992 and 1991, respectively.
    In addition, identifiable assets include net assets of discontinued
    operations of $303, $777 and $1,695 in 1993, 1992 and 1991, respectively.

RESULTS OF OPERATIONS

The following table sets forth the increase (decrease) in net sales and
operating earnings for the years ended 31 December 1993 and 1992:

<TABLE>
<CAPTION>
                                         1993                        1992
                                 INCREASE (DECREASE)           INCREASE (DECREASE)
                                      OVER 1992                     OVER 1991                                      
                                 -------------------           -------------------
                                  NET      OPERATING            NET      OPERATING  
                                 SALES      EARNINGS           SALES      EARNINGS  
- -----------------------------------------------------------------------------------
<S>                              <C>        <C>                 <C>          <C>
Nuclear Submarines               $ (19)     $ 30                $ (94)       $10
Armored Vehicles                    25        52                  132         26
Other                              (44)      (28)                  26          8
- -----------------------------------------------------------------------------------
                                 $ (38)     $ 54                $  64        $44
===================================================================================
</TABLE>

      NUCLEAR SUBMARINES Operating earnings increased $30 during 1993 due to
increased earnings on all three construction programs. The Company increased
the earnings rate on the SSN 688 program in both the second and fourth quarters
of 1993, as well as on the Trident program in the first, second and fourth
quarters due to continuing cost reductions. Previously, the Company began
earnings recognition on the SSN 688 program during the third quarter of 1992
due to cost reduction efforts and the reinstatement of the second Seawolf. In
addition, the Company began recognizing earnings on the Seawolf program in the
fourth quarter of 1993 due to the progress on the lead ship, which is now over
50% complete, and the support for the Company's shipyard provided in the DoD
"Bottom-Up Review."
      Although total construction activity did not decrease significantly
during 1993, the level of activity on the individual programs did change.
Construction activity on the SSN 688 and Trident programs decreased
approximately $110 and $70, respectively, reflecting the wind down of these
programs. Meanwhile, construction activity on the Seawolf program increased
approximately $170 reflecting the buildup of the program.  During 1993, the
Company delivered two SSN 688s and one Trident, reducing backlog to two and
four ships, respectively, all of which are currently under construction.
Delivery of the final SSN 688 is scheduled for 1995, while the final Trident is
scheduled for delivery in 1997.  The Company is also constructing the first two
Seawolfs, with the lead ship scheduled to be completed in 1996. Based on the
Company's existing backlog and absent an increase in the DoD's current
procurement rate, the Company will not be able to sustain its current level of
construction revenues.
      During 1992, the U.S. Congress authorized, and the President approved,
funding for construction of the second Seawolf, as well as $540 to help
maintain the "submarine industrial base." In addition, the Company is
encouraged by the DoD "Bottom-Up Review" which recommended construction of a
third Seawolf and the new attack submarine (NSSN), as well as designated



                                   -- 13 --
<PAGE>   3
                               GENERAL DYNAMICS

the Company's Electric Boat Division as the shipyard to preserve the submarine
industrial base. However, unless the Company is awarded a third Seawolf
construction contract and other related government business, the current
backlog is insufficient to sustain operation of the Company's facilities until
construction begins on the NSSN, which is not expected until the end of this
decade.  
      Net sales decreased $94 during 1992 due to decreased construction
activity on the Trident and SSN 688 programs, partially offset by increased
Seawolf construction activity. Operating earnings increased $10 during 1992 due
primarily to the earnings recognized on the SSN 688 program.

      ARMORED VEHICLES Net sales and operating earnings increased $25 and $52,
respectively, during 1993 due primarily to nonrecurring revenue of
approximately $40 recognized during the first and fourth quarters of 1993
related to the close-out of the Egyptian Tank Plant (ETP) and other
non-production contracts which were completed in 1993. Under the ETP contract,
the Company provided certain services to the Government of Egypt in the
construction and preparation of a facility to assemble tank kits manufactured
by the Company.
      Higher production levels in 1993 on the Egyptian Coproduction and the
"Fox" Nuclear, Biological and Chemical Reconnaissance vehicle programs were
offset by lower M1 tank production. Under the Egyptian Coproduction program,
the Company is manufacturing M1A1 tank kits to be assembled by the Government
of Egypt in the facility previously discussed. 114 M1A1 kits were delivered to
Egypt in 1993 compared to 77 in 1992, bringing to-date deliveries to 210 from a
total order of 499. Deliveries of M1A1 kits to Egypt are expected to remain at
similar levels through 1996. Deliveries of Fox vehicles were completed during
the fourth quarter of 1993.
      During the second quarter of 1993, domestic M1A1 tank production was
completed and M1A2 deliveries began to Saudi Arabia. The M1A2, the latest
version of the M1 main battle tank, incorporates battlefield management systems
aimed at providing improved fightability, as well as improved survivability of
the tank's four crew members. Of the 315 M1A2 tanks currently under contract
with Saudi Arabia, 167 were delivered in 1993 while the remaining 148 will be
delivered in 1994. The original order from Saudi Arabia included an additional
150 tanks, however, production of these tanks has been deferred indefinitely.
In May 1993, the U.S. Government signed a letter of offer and agreement with
the Kuwait Government for the procurement of 218 M1A2 tanks. Delivery of these
tanks is expected to take place during 1994 and 1995. The U.S. Congress 
authorized and appropriated Fiscal Year 1992 funds to begin an M1 to M1A2
conversion program.  Activity on this program is expected to begin in 1994.
Based on the Company's existing orders and absent an increase in the DoD's
current procurement rate, the Company will not be able to sustain its current
level of M1 revenues if additional foreign orders are not received.
      Due to the favorable impact on the armored vehicle business base of
international M1A2 sales, the Company increased the M1 program earnings rate
during the third quarter of 1992. This earnings rate increase contributed to
the increase in operating earnings during 1993 and 1992.
      The Company is currently participating in its first competitive bid under
the SINCGARS program.  The Company was selected as the second-source producer
in 1988. The Company recorded losses on the original award and related options,
however, the current competition provides an opportunity for profitable
business. In addition, if the Company were successful in the competition,
SINCGARS net sales could become a significant part of the total net sales of
the segment. A decision on the competitive bid is expected during the first
half of 1994.
      Net sales and operating earnings increased $132 and $26, respectively,
during 1992 due primarily to transitioning production from M1A1 to M1A2 tanks
and increased production on the Fox vehicle.

      OTHER Net sales and operating earnings decreased $44 and $28,
respectively, during 1993 due primarily to the expiration of long-term coal
contracts at the end of 1992. As a result, an increasing percentage of coal was
sold in the spot market, wherein prevailing prices are lower than those under
the expired contracts. Current conditions in the spot market are not expected
to change in 1994. Net sales and operating earnings increased $26 and $8,
respectively, during 1992 due to the reopening of a suspended mine, the
acquisition of a new mine and increased productivity.
      The Company provides ship management services for the U.S. Navy's
Maritime Prepositioning Ships (MPS) and the Maritime Administration's Ready
Reserve Force. The MPS are under five year contracts which are renewable
through the year 2011. Due to DoD budget pressures, two other MPS operators
have agreed to earnings rate reductions in their current contracts. The U.S.
Navy is currently discussing with the Company similar rate reductions as part
of the contract renewals due in 1995 and 1996. The Company is confident an
equitable resolution will be reached.

      GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased during





                                   -- 14 --
<PAGE>   4
                               GENERAL DYNAMICS

1993 due primarily to the provision for state and local income taxes. State and
local income taxes, which are allocable to U.S. Government contracts, were
significantly higher in 1993 as a result of the gain on the disposal of the
Tactical Military Aircraft business. In addition, the disposal of businesses
resulted in an increase in the allocation of Corporate Office costs to the
remaining businesses. Accordingly, the Company announced a reorganization of
its Corporate Office in March 1993 with the objective of reducing Corporate
Office costs by the end of 1994 to the same percent of total operating costs
and expenses as they were prior to adopting the plan of contraction (for
further discussion, see Note D to the Consolidated Financial Statements).

      INTEREST, NET Interest income increased $6 in 1993 and $10 in 1992 due to
the increase in investments. Cash and equivalents and marketable securities
totaled $585 and $943 at 31 December 1993 and 1992, respectively. Interest
expense decreased $3 in 1993 and $7 in 1992 due to the reduction in outstanding
debt.

      OTHER INCOME (EXPENSE), NET Other income increased in 1993 due primarily
to a $16 increase in the gain recognized from the sale of Federal Express
Corporation stock owned by the Company (for further discussion, see Note I to
the Consolidated Financial Statements), and the recognition of an additional
$14 of the deferred gain on the sale of the Company's information technology
operations due to the disposal of other operations (for further discussion, see
Note N to the Consolidated Financial Statements).  
      Other income increased in 1992 due primarily to the recognition of gains 
of $26 from the sale of various investments and the first full year recognition 
of the deferred gain from the sale of the Company's information technology 
operations.

      PROVISION (CREDIT) FOR INCOME TAXES During the third quarter, the
President signed into law the Omnibus Budget Reconciliation Act of 1993 which,
among other changes, increased the statutory Federal income tax rate from 34%
to 35%, retroactive to 1 January 1993. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
the Company recognized in its provision for income taxes in the third quarter
an $11 benefit related to the adjustment of its net deferred tax asset as of 1
January 1993 and an $11 charge related to its pretax earnings for the first six
months of 1993, including the gain on disposal of the Tactical Military
Aircraft business.
      During the fourth quarter of 1992, the Company recognized $95, or $1.26
per share, of research and experimentation and investment tax credits as a
result of the completion of a company-wide study relating to certain prior
years expenditures. During 1991, the Company recognized a $140 gain, or $1.64
per share, from an adjustment to its deferred income tax liability. For further
discussion of these items, as well as a discussion of the Company's net
deferred tax asset, see Note E to the Consolidated Financial Statements.

      DISCONTINUED OPERATIONS The Company has sold or intends to sell certain
businesses which are accounted for as discontinued operations in accordance
with Accounting Principles Board Opinion No. 30. Earnings (loss) from the
operations of these businesses amounted to $(30), or $(0.47) per share, in
1993; $136, or $1.80 per share, in 1992; and $231, or $2.70 per share, in 1991.
The decrease in earnings during the three years ended 31 December 1993 is due
primarily to the disposal of businesses (for a discussion of unusual items
impacting the operating results of discontinued operations, see Note B to the
Consolidated Financial Statements). The net loss in 1993 is due primarily to
losses recognized by the Space Launch Systems business. No additional losses
from operations are anticipated in 1994 prior to the disposal of the remaining
discontinued operations.
      In March 1993, the Company completed the sale of its Tactical Military
Aircraft business to Lockheed Corporation, recognizing a gain on disposal of
$645, or $10.19 per share, net of income taxes of $331. During 1992, the
Company completed the sales of The Cessna Aircraft Company to Textron, Inc.,
its Missile Systems business to Hughes Aircraft Company and its Electronics
business to The Carlyle Group. The Company recognized in 1992 a gain on
disposal of these businesses of $374, or $4.95 per share, net of income taxes
of $22.
      In December 1993, the Company announced the sale of its Space Launch
Systems business to Martin Marietta Corporation. The sale is expected to close
by April 1994 and result in the recognition of a gain on disposal.

      EARNINGS PER SHARE On 4 March 1994, the Company's Board of Directors
authorized a two-for-one stock split effected in the form of a 100% stock
dividend. Accordingly, earnings per share data has been restated to give
retroactive recognition to the stock split for all periods presented.
      During the third quarter of 1992, the Company  purchased $960 of its 
common stock through a tender offer. Although this transaction had no 
earnings impact, earnings per share subsequent to the purchase increased 
due to the reduction in shares outstanding.





                                   -- 15 --
<PAGE>   5
                               GENERAL DYNAMICS


FINANCIAL CONDITION

OPERATING ACTIVITIES In analyzing the cash provided by operating activities,
Management believes it is important to note the portion derived directly from
continuing operations and its relationship to operating earnings. The
reconciliation of the two is quantified by the change in net operating assets,
which Management defines as those net assets directly employed in operations.
The change in net operating assets is segregated between working capital (e.g.
receivables, inventory, payables, etc. . .) and property, plant and equipment.
Accordingly, the analysis of operating cash flows includes capital
expenditures. Federal income tax payments and other Corporate cash flows not
directly related to operations, such as interest, are separately identified.
      An analysis as discussed of the net cash provided by continuing
operations as reported on the Consolidated Statement of Cash Flows, after
capital expenditures, is as follows:


<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER                1993             1992             1991                       
- ----------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>
Operating earnings                    $309             $255             $211
Depreciation, depletion and
  amortization                          41               48               53
Capital expenditures                   (13)             (17)             (19)
Decrease in operating
 working capital                        33               54              143
Other, primarily non-cash
 items                                 (39)             (20)              35                     
- ----------------------------------------------------------------------------
Pre-tax operating cash
 flow                                  331              320              423
Allocated Federal income
 tax payments                          (78)            (108)            (162)
Corporate                               23              (29)             (29)                   
- ----------------------------------------------------------------------------
                                      $276             $183             $232
============================================================================
</TABLE>

      The Company has generated strong pre-tax operating cash flows during the
three years ended 31 December 1993. A substantial portion of cash flow came
from aggressive actions to reduce operating working capital. These actions
included more timely collection of receivables, the resolution of contractual
billing issues, and reductions in inventory levels and manufacturing span
times. In 1993, Other represents primarily the nonrecurring revenue recognized
by the ArmoredVehicles business which had previously been billed and collected.
The Company expects pre-tax operating cash flow to approximate operating
earnings in 1994.
      For purposes of preparing the Consolidated Statement of Cash Flows,
Federal income tax payments are allocated between continuing and discontinued
operations based on the portion of taxable income attributed to each. Corporate
cash flow in 1993 represents primarily interest received from investments in
excess of interest paid on debt. Corporate cash flow was negative in 1992 due
primarily to the payout of deferred compensation.
      The Company is cooperating with the U.S. Government and the Kingdom of
Saudi Arabia in the restructuring of payments due over the next two years
relating to certain arms purchases, including the Company's M1A2 tank. Because
the arms purchases are Foreign Military Sales through the U.S. Government, the
Company has no credit risk and expects no material negative cash flow impact to
result from these discussions.
      As previously reported, the Company's A-12 aircraft contract was
terminated for default by the U.S. Navy in January 1991. In February 1991, the
U.S. Navy demanded repayment of the unliquidated progress payments made under
the contract, but agreed to defer collection pending resolution of the
termination dispute, which is in litigation. For further discussion of the A-12
termination and terms of the deferment agreement, see Note P to the
Consolidated Financial Statements.
      For a discussion of environmental matters and other contingencies, see
Note O to the Consolidated Financial Statements. The Company does not deem its
liability, in the aggregate, with respect to these matters to be material to
the Company's financial condition or results of operations.
      Net cash provided by discontinued operations declined during 1993 due
primarily to the disposal of businesses. Included in the net cash provided by
discontinued operations on the Consolidated Statement of Cash Flows are the
investing and financing activities of the discontinued businesses, as well as
an allocable portion of the Company's Federal income tax payments which for
1993 included the liability related to the gain on disposal of the Company's
Tactical Military Aircraft business.

      INVESTING ACTIVITIES The Company received proceeds of $1,534 and $1,039
in 1993 and 1992, respectively, from the sale of discontinued operations (for a
discussion of individual transactions, see Note B to the Consolidated Financial
Statements). The Company expects to close the sale of its Space Launch Systems
business to Martin Marietta Corporation by April 1994 and will receive
approximately $209 in cash. Additional cash flows are expected to be generated
in 1994 from the disposal of other discontinued operations.
      During 1993, the Company purchased $50 of investments and segregated them
for the purpose of funding certain expected long-term liabilities, such as


                                   -- 16 --
<PAGE>   6
                               GENERAL DYNAMICS


unfunded compensation plans. Also, as previously discussed, the Company
received proceeds of $37 from the sale of its remaining investment in Federal
Express Corporation stock during the third quarter of 1993. The Company had
previously sold a portion of its investment in Federal Express Corporation
stock in 1992 for $21.
      Management seeks investments that strategically enhance the Company and
offer risk-adjusted after-tax cash returns that exceed the Company's long-term
weighted average cost of capital. Since the late 1980s, the significant decline
in defense spending resulted in the Company's existing capacity being well in
excess of projected demand. This, coupled with a highly disciplined business
analysis process, has resulted in dramatically reduced levels of capital
spending. Accordingly, capital expenditures for continuing operations were only
$14 in 1993.  The Company expects capital expenditures for the continuing
operations to total approximately $20 in 1994.
      As part of the sale of discontinued operations, certain related 
properties located primarily in southern California were retained by the 
Company. These properties have been segregated on the Consolidated Balance 
Sheet as real estate held for development.  The Company has retained outside 
experts to support the development of plans which will maximize the market 
value of these properties. The Company does not expect to hold these 
properties long term.

      FINANCING ACTIVITIES As part of the strategy implemented in 1991, the
Company's top priority for the use of cash was liquidity and financial
strength. Accordingly, the Company redeemed two debt issues with a total face
value of $350 in the first quarter of 1992, the entire series of 9 3/8% Notes
which had a face value of $100 in May 1993, and the remaining $45 of 5 3/4%
Debentures in July 1993.  
      After meeting its operational and investment needs, the Company
purchased in July 1992 $960 of its common stock in a "Dutch Auction" tender
offer and made three special distributions to shareholders during 1993 totaling
$1,531. The special distributions represent substantially all of the funds
available for tax-advantaged distribution to shareholders from the sales of
businesses under the Company's 1992 plan of contraction.
      On 4 March 1994, the Company's Board of Directors declared an increased
regular quarterly dividend of $.35 per share, adjusted for the previously
discussed stock split, reflecting the Board's confidence in the sustainability
of the cash flows generated by the Company's continuing operations. The Company
had previously increased the dividend to $.30 and $.20 per share in September
1993 and March 1992, respectively, also adjusted for the stock split.
      The Company's Board of Directors reconfirmed Management's authority to
repurchase, at its discretion, up to 3 million shares of the Company's common
stock.
      The Company expects to generate sufficient funds from operations to meet
both its short and long-term liquidity needs. In addition, the Company has the
capacity for long-term borrowings and currently has a committed, short-term
$850 line of credit. The line of credit expires in May 1994 at which time the
Company anticipates renewing the line or replacing it.

      ACCOUNTING CHANGE In May 1993, the Financial Accounting Standards Board
issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This new standard defines three classifications for investments
and the accounting for each. The Company is required to adopt the new
accounting and disclosure rules on a prospective basis no later than 1994. This
standard is not expected to have a material impact on the Company's financial
condition or results of operations.


                                   -- 17 --
<PAGE>   7


                                GENERAL DYNAMICS

                       CONSOLIDATED STATEMENT OF EARNINGS

                          Restated (See Notes A and K)





<TABLE>
<CAPTION>

YEAR ENDED 31 DECEMBER                                         1993             1992             1991
- -------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
<S>                                                           <C>              <C>              <C>

NET SALES                                                     $3,187           $3,225           $3,161
OPERATING COSTS AND EXPENSES                                   2,878            2,970            2,950
- -------------------------------------------------------------------------------------------------------
OPERATING EARNINGS                                               309              255              211
Interest, net                                                     36               27               10
Other income (expense), net                                       68               28              (29)
- -------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES          413              310              192
Provision (credit) for income taxes                              143                5              (82)
- -------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS                              270              305              274
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Earnings (loss) from operations                                  (30)             136              231
Gain on disposal                                                 645              374               --
- -------------------------------------------------------------------------------------------------------
                                                                 615              510              231
- -------------------------------------------------------------------------------------------------------
NET EARNINGS                                                  $  885           $  815           $  505
=======================================================================================================
NET EARNINGS PER SHARE
Continuing operations                                         $ 4.27           $ 4.03           $ 3.20
Discontinued operations:
  Earnings (loss) from operations                               (.47)            1.80             2.70
  Gain on disposal                                             10.19             4.95               --
- -------------------------------------------------------------------------------------------------------
                                                              $13.99           $10.78           $ 5.90
=======================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.





                                   -- 18 --
<PAGE>   8

                                GENERAL DYNAMICS

                           CONSOLIDATED BALANCE SHEET

                          Restated (See Notes A and K)


<TABLE>
<CAPTION>


31 DECEMBER                                                     1993             1992
- --------------------------------------------------------------------------------------
(Dollars in millions)
<S>                                                          <C>               <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents                                         $    94           $  511
Marketable securities                                            491              432
- --------------------------------------------------------------------------------------
                                                                 585              943
Accounts receivable                                               62               68
Contracts in process                                             442              432
Net assets of discontinued operations                            303              777
Other current assets                                             262              337
- --------------------------------------------------------------------------------------
Total Current Assets                                           1,654            2,557
- --------------------------------------------------------------------------------------
NONCURRENT ASSETS:
Leases receivable - finance operations                           236              251
Real estate held for development                                 142              114
Property, plant and equipment, net                               302              339
Other assets                                                     301              269
- --------------------------------------------------------------------------------------
Total Noncurrent Assets                                          981              973
- --------------------------------------------------------------------------------------
                                                              $2,635           $3,530
======================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt                             $   --           $  145
Accounts payable and accrued expenses                            566              491
Other current liabilities                                        209              342
- --------------------------------------------------------------------------------------
Total Current Liabilities                                        775              978
- --------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt                                                    38               38
Long-term debt - finance operations                              163              179
Other liabilities                                                482              461
- --------------------------------------------------------------------------------------
Total Noncurrent Liabilities                                     683              678
- --------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus (shares issued 84,387,336)        92               84
Retained earnings                                              1,709            2,432
Treasury stock (shares held 1993, 21,823,824; 
  1992, 22,545,130)                                             (624)            (642)
- --------------------------------------------------------------------------------------
Total Shareholders' Equity                                     1,177            1,874
- --------------------------------------------------------------------------------------
                                                              $2,635           $3,530
======================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.





                                   -- 19 --
<PAGE>   9

                                GENERAL DYNAMICS

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                             Restated (See Note A)





<TABLE>
<CAPTION>

YEAR ENDED 31 DECEMBER                                          1993             1992             1991
- -------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S>                                                          <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings                                                 $   885          $   815            $ 505
Adjustments to reconcile net earnings to net
  cash provided by continuing operations -
Discontinued operations                                         (615)            (510)            (231)
Depreciation, depletion and amortization                          56               57              138
Decrease (Increase) in -
   Accounts receivable                                             6               42               (3)
   Contracts in process                                          (10)              76              180
   Leases receivable - finance operations                         14               12               13
   Other current assets                                           (8)             (24)               1
Increase (Decrease) in -
   Accounts payable and other current liabilities                (73)             (98)            (126)
   Current income taxes                                           60                6             (108)
   Deferred income taxes                                           5             (109)            (136)
Other, net                                                       (30)             (63)              25
- -------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations                       290              204              258
Net cash provided (used) by discontinued operations             (438)             303              360
- -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities                (148)             507              618
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations                  1,534            1,039               --
Proceeds from sale of investments and other assets                60               32               --
Proceeds from sale of information technology operations           --               --              184
Purchases of marketable securities, net                          (59)            (125)            (307)
Purchases of investments                                         (50)              --               --
Capital expenditures                                             (14)             (21)             (26)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities               1,471              925             (149)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Special distributions to shareholders                         (1,531)              --               --
Repayment of debt                                               (146)            (454)              (8)
Dividends paid                                                   (56)             (55)             (42)
Repayment of debt - finance operations                           (15)             (14)             (12)
Purchase of common stock                                          --             (960)              --
Proceeds from option exercises                                     8               57               --
- -------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities                         (1,740)          (1,426)             (62)
- -------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                 (417)               6              407
CASH AND EQUIVALENTS AT BEGINNING OF YEAR                        511              505               98
- -------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR                          $    94          $   511            $ 505
=======================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.





                                   -- 20 --
<PAGE>   10

                                GENERAL DYNAMICS

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                             Restated (See Note K)



<TABLE>
<CAPTION>
                                                          Common Stock                                          Treasury Stock
                                      ----------------------------------------------        Retained       -----------------------
                                      Shares                Par              Surplus        Earnings       Shares           Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                    <C>              <C>           <C>             <C>              <C>
(Dollars in millions, except per 
  share amounts)

BALANCE, 31 DECEMBER 1990            110,884,200            $111             $ --          $2,164          27,541,094       $765
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                                                  505
Cash dividends declared 
  ($.50 per share)                                                                            (42)
Shares issued under Incentive 
  Compensation Plan                                                                            (7)           (484,058)       (14)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, 31 DECEMBER 1991            110,884,200             111               --           2,620          27,057,036        751
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                                                  815
Cash dividends declared 
  ($.80 per share)                                                                            (57)
Shares purchased under tender 
  offer (See Note K)                                                                                       26,496,864        960
Shares retired                       (26,496,864)            (27)                            (933)        (26,496,864)      (960)
Shares issued under Incentive 
  Compensation Plan                                                                           (13)         (4,511,906)      (109)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, 31 DECEMBER 1992             84,387,336              84               --           2,432          22,545,130        642
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                                                  885
Cash dividends declared 
  ($1.00 per share)                                                                           (62)
Special distributions to 
  shareholders (See Note C)                                                                (1,546)
Shares issued under Incentive 
  Compensation Plan                                                             8                            (721,306)       (18)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, 31 DECEMBER 1993             84,387,336            $ 84             $  8          $1,709          21,823,824       $624
==================================================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.




                                       
                                   -- 21 --
<PAGE>   11

                                GENERAL DYNAMICS

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          Restated (See Notes A and K)
                 Dollars in millions, except per share amounts
                                       



A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the
accounts of the Company and all majority-owned subsidiaries.

      SALES AND EARNINGS UNDER LONG-TERM CONTRACTS AND PROGRAMS Major defense
programs are accounted for using the percentage-of-completion method of
accounting. The combination of estimated profit rates on similar, economically
interdependent contracts is used to develop program earnings rates. These rates
are applied to contract costs as incurred for the determination of sales and
operating earnings.  All costs specifically reimbursable under contract terms,
including general and administrative expenses and research and development
costs, are treated as contract costs. Program earnings rates are reviewed
quarterly to assess revisions in contract values and estimated costs at
completion. Based on these assessments, any changes in earnings rates are made
prospectively.
      Any anticipated losses on contracts or programs are charged to earnings
when identified. Such losses encompass all costs, including general and
administrative expenses, allocable to the contracts. Revenue arising from the
claims process is not recognized either as income or as an offset against a
potential loss until it can be reliably estimated and its realization is
probable.

      GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
amounted to $292, $233 and $240 in 1993, 1992 and 1991, respectively, and are
included in operating costs and expenses on the Consolidated Statement of
Earnings.

      RESEARCH AND DEVELOPMENT COSTS Company-sponsored research and development
costs, including bid and proposal costs, amounted to $33, $32 and $32 in 1993,
1992 and 1991, respectively, and are included in operating costs and expenses
on the Consolidated Statement of Earnings.

      INTEREST, NET Interest income was $40, $34 and $24 in 1993, 1992 and
1991, respectively. Interest expense of $6, $22 and $44 has been allocated to
discontinued businesses in 1993, 1992 and 1991, respectively, on the ratio of
net assets of discontinued operations to consolidated net assets. Interest
expense incurred by the Company's finance operations totaled $15, $16 and $17,
in 1993, 1992 and 1991, respectively, and is classified as operating costs and
expenses. Interest payments for the total Company were $28, $58 and $86 in
1993, 1992 and 1991, respectively.

      NET EARNINGS PER SHARE Net earnings per share are based upon the weighted
average number of common shares and equivalents outstanding during each period.
Common share equivalents are attributable primarily to outstanding stock
options. The weighted average shares and equivalents were 63.3, 75.6 and 85.6
million in 1993, 1992 and 1991, respectively. As there is not a material
difference between primary and fully diluted earnings per share, only fully
diluted earnings per share are presented.

      CASH AND EQUIVALENTS The Company considers securities with a remaining
maturity of three months or less when purchased to be cash equivalents. Cash
and equivalents are stated at cost, which approximates market value.

      MARKETABLE SECURITIES Marketable securities consist primarily of tax-
exempt municipal bonds, direct obligations of the U.S. Government and its 
agencies, and other short-term investment funds. Marketable securities are 
stated at cost, which approximates market value based on quoted market prices.

      ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS Accounts receivable
represent only amounts billed and currently due from customers.  Recoverable
costs and accrued profit related to long-term contracts and programs on which
revenue has been recognized, but billings have not been presented to the
customer (unbilled receivable), are included in contracts in process.
      Contracts in process are stated at cost incurred, plus estimated
earnings, less progress payments. Incurred costs include production costs and
related overhead, including general and administrative expenses. Incurred costs
also include certain costs required to be recorded under generally accepted
accounting principles which are not currently allocable to contracts such as a
portion of workers' compensation and retiree medical costs.

      REAL ESTATE HELD FOR DEVELOPMENT As a result of the sale of businesses
discussed in Note B, certain related properties were retained by the Company.
These properties are carried at the lower of cost or net realizable value.

      PROPERTY, PLANT AND EQUIPMENT The Company primarily uses accelerated
methods of depreciation for depreciable assets. Depletion of coal properties is
computed using the units-of-production method.

      OTHER INVESTMENTS At 31 December 1993, the Company held investments in
preferred stock of $50 which are classified as noncurrent assets on the
Consolidated Balance Sheet. These investments are carried at cost, which
approximates market value based on quoted market prices.





                                   -- 22 --
<PAGE>   12
      ENVIRONMENTAL LIABILITIES The Company accrues environmental costs when it
is probable that a liability has been incurred and the amount can be reasonably
estimated. Any recorded liabilities have not been discounted. In circumstances
where the Company is jointly and severally liable, the Company has considered
its relative involvement in evaluating its exposure. To the extent
environmental costs are allocable to U.S.  Government contracts, such
reimbursement is considered in estimating the loss. Any liabilities related to
businesses previously sold were accrued at the time of disposal.

      CHANGES IN ACCOUNTING PRINCIPLES Effective 1 January 1993, the Company
adopted Statement of Financial Accounting Standards (SFAS) No.  106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
SFAS No. 109, "Accounting for Income Taxes," as described in Notes R and E,
respectively.
      In May 1993, the Financial Accounting Standards Board issued SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
requires the recognition of the fair value of certain investments in the
financial statements. The Company is required to adopt the provisions of this
standard on 1 January 1994. Adoption of this standard is not expected to have a
material impact on the Company's results of operations or financial condition.

      CLASSIFICATION Consistent with industry practice, assets and liabilities
relating to long-term contracts and programs are classified as current although
a portion of these amounts is not expected to be realized within one year.

      RESTATEMENTS The Consolidated Financial Statements, and the notes
thereto, have been restated to reflect the Company's Space Launch Systems
business segment as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30 (APB 30), as well as the reclassification of
certain businesses previously reported as discontinued operations to continuing
operations (see Note B for further discussion). In addition, certain prior year
amounts have been reclassified to conform to the current year presentation.

B. DISCONTINUED OPERATIONS

THE CESSNA AIRCRAFT COMPANY In February 1992, Textron, Inc. purchased The
Cessna Aircraft Company (Cessna) from the Company for $600 in cash.  The
Company recognized a gain on disposal of $358, or $4.74 per share, net of
income taxes of $14. The gain on disposal for Federal income tax purposes was
significantly less than the reported gain due to the $464 purchase price
write-off from the Company's acquisition of Cessna which was not recognized for
tax purposes.

      PLAN OF CONTRACTION On 6 May 1992, the Board of Directors of the Company
adopted a formal plan of contraction of the Company's business (for further
discussion, see Note C). In connection with the plan, the Company determined it
would focus on its area of principal competency: major weapons platform
integration. The Company believes each business must be a market leader. The
Company also believes that each business must have the potential to obtain
"critical mass", which it defines as having sufficient production volume to
retain key capabilities, ensure economies of scale and provide affordable
products and services. The Company determined that four of its businesses met
these criteria: Tactical Military Aircraft, Nuclear Submarines, Armored
Vehicles and Space Launch Systems. The Company intended to concentrate its
efforts on these businesses and therefore decided to sell all its other
businesses: the Missile Systems, Commercial Aircraft Subcontracting, Coal
Mining, Material Service, Electronics, Ship Management, and Ship Financing
businesses.
      In August 1992, the Company closed the sale of its Missile Systems
business to Hughes Aircraft Company (Hughes) in exchange for approximately 21.5
million shares of General Motors Corporation (GM) Class H common stock. The
Company recognized a gain on disposal of the business of $7, or $.09 per share,
net of income taxes of $3. In October 1992, the Company received $387 for the
shares in a public offering by GM. Under the terms of the sales agreement, the
Company was to receive from Hughes an additional $63 on 30 September 1993. In
May 1993, the Company and Hughes reached an agreement that the $63 receivable
was to be offset by amounts determined to be payable by the Company to Hughes.
As a result, Hughes paid the Company a net amount of $9. As the Company had
previously established liabilities for discontinued operations, this settlement
did not have a material impact on the Company's results of operations.
      In November 1992, the Company closed the sale of its Electronics
business, excluding the Single Channel Ground and Airborne Radio System
(SINCGARS) program, to The Carlyle Group. The Company recognized a gain on
disposal of $9, or $.12 per share, net of income taxes of $5.
      In December 1993, the Company announced the sale of the lime and brick
operations of its Material Service business for $46 in cash. The Company
expects to complete the sale in the first quarter of 1994.
      The businesses under the plan of contraction are accounted for as
discontinued operations in accordance with APB 30 which, among other
provisions, expects the plan of disposal to be carried out within one year.
During the fourth quarter of 1993, the Company identified certain businesses
included under the plan of contraction which no longer met this criteria. These
businesses have not been sold primarily because satisfactory sales terms could
not be reached. Accordingly, the Coal Mining, Ship Management and Ship
Financing businesses have been reclassified to continuing operations. In
addition, the SINCGARS program has been reclassified to continuing operations
due to Management's reassessment of the program's business opportunities. In
1992, these businesses had net sales and operating earnings of $243 and $39,
respectively, while at 31 December 1992, they had assets and liabilities
totaling $399 and $422, respectively. The Company presently intends to operate
these businesses, but, as the Company does with all of its businesses, will
continue to evaluate alternatives to maximize the value of each business. As to
the businesses remaining in discontinued operations, the Commercial





                                   -- 23 --
<PAGE>   13
Aircraft Subcontracting business will be sold or it will complete its current
contractual obligations and seek no new business, while the Company intends to
sell individually the remaining product lines of the Material Service business.

      TACTICAL MILITARY AIRCRAFT AND SPACE LAUNCH SYSTEMS In seeking to obtain
"critical mass" for the selected businesses discussed above, and only after
studying the various available strategic alternatives, the Company determined
that the sale of two of these businesses was the most viable alternative to
assure their continued strength. In March 1993, the Company closed the sale of
its Tactical Military Aircraft business to Lockheed Corporation for $1,525 in
cash. The Company recognized a gain on disposal of $645, or $10.19 per share,
net of income taxes of $331.  Any contingencies associated with the terminated
A-12 aircraft program (see discussion at Note P) have been retained by the
Company.
      In December 1993, the Company announced it had reached a definitive
agreement with Martin Marietta Corporation for the sale of the Company's Space
Launch Systems business for approximately $209 in cash. The Company expects to
close the sale by April 1994 and to recognize a gain on disposal.

      EARNINGS FROM OPERATIONS The operating results of those businesses
classified as discontinued operations at 31 December 1993 are:

<TABLE>
<CAPTION>
Year ended 31 December              1993               1992                1991
- --------------------------------------------------------------------------------
<S>                               <C>                <C>                 <C>
Net sales                         $1,474             $5,460              $6,387
================================================================================
Earnings (loss) before
  income taxes                    $  (44)            $  201              $  337
Provision (credit) for
  income taxes                       (14)                65                 106
- --------------------------------------------------------------------------------
Net earnings (loss)               $  (30)            $  136              $  231
================================================================================
Net earnings (loss)
  per share                       $ (.47)            $ 1.80              $ 2.70
================================================================================
</TABLE>


      1993, 1992 and 1991 results reflect charges of $25 ($16 after tax, or
$.25 per share), $33 ($22 after tax, or $.29 per share) and $71 ($47 after tax,
or $.55 per share), respectively, related to Space Launch System's Commercial
Atlas Expendable Launch Vehicle program. These charges were the direct result
of launch failures in each of those periods.
      1992 results reflect a $47 ($31 after tax, or $.41 per share) charge
related to the early payout of the Company's Executive Deferred Compensation
plan. Due to the significant reduction in the size of the Company, it was
determined it would be prudent to terminate the plan which represented a
significant long-term liability. The charge, taken during the fourth quarter,
represents an equitable settlement for early termination of the plan. As this
action was the result of the decision to sell certain businesses, the charge is
reported in earnings from discontinued operations.
      1991 results reflect a $109 reduction in Cessna's product liability
accrual which increased the Company's net earnings from discontinued operations
by $72, or $.84 per share. This reduction in the product liability accrual,
which was based on a report prepared by an independent actuarial firm, was the
result of favorable claim experience and favorable product liability
legislation in a number of states.

      NET ASSETS OF DISCONTINUED OPERATIONS The assets and liabilities of those
businesses classified as discontinued operations at 31 December 1993 are:

<TABLE>
<CAPTION>
31 DECEMBER                            1993           1992
- -----------------------------------------------------------
<S>                                  <C>             <C>
Current assets                       $1,429          $2,217
Noncurrent assets                       185             449
- -----------------------------------------------------------
Total Assets                         $1,614          $2,666
===========================================================
Current liabilities                  $1,280          $1,828
Noncurrent liabilities                   31              61
- -----------------------------------------------------------
Total Liabilities                    $1,311          $1,889
===========================================================
Net Assets                           $  303          $  777
===========================================================
</TABLE>

C. SPECIAL DISTRIBUTIONS TO SHAREHOLDERS

On 6 May 1992, the Board of Directors of the Company adopted a formal plan of
contraction of the Company's business within the meaning of Internal Revenue
Code Section 302(e) (1) (B). Under the plan, the Company anticipated the sale
of certain qualifying businesses and the subsequent tax-advantaged distribution
of the proceeds on or before 31 December 1993. Although not contemplated as
part of the original plan, the proceeds from the sale of the Tactical Military
Aircraft business qualified for tax-advantaged distribution. However, the
proceeds from the sale of the Space Launch Systems business will not qualify as
the sale will be completed subsequent to 31 December 1993. Under the plan, the
Company made the following special distributions in 1993:


<TABLE>
<CAPTION>
                          
                          CHARGED TO RETAINED EARNINGS                     
DATE                  ---------------------------------
DECLARED              PAID         DEFERRED      TOTAL
- -------------------------------------------------------
<S>                 <C>              <C>        <C>
March 18            $  612           $10        $  622
June 2                 551             8           559
September 15           368             5           373
- -------------------------------------------------------
                    $1,531           $23        $1,554
=======================================================
</TABLE>

      The deferred portion of the distributions relates to restricted shares
held for the benefit of employees. These amounts will become payable as the
restrictions lapse. In addition, as the deferred amounts will represent
deductible compensation for Federal income tax purposes when the restrictions
on the related shares lapse, the Company recorded a tax benefit of $8 directly
to retained earnings related to the distributions. The total of the three
special distributions represents substantially all of the funds available for
tax-advantaged distribution to shareholders.





                                   -- 24 --
<PAGE>   14
D. CORPORATE OFFICE REORGANIZATION

In March 1993, the Company announced a reorganization of its Corporate Office
as a result of the contraction of the Company. This reorganization includes
changes in senior management and reductions in corporate staff. During the
first quarter 1993, the Company recognized the estimated total cost of these
actions of approximately $75 (before tax). As a substantial amount of these
costs are directly related to the Company's formal plan of contraction, they
were charged to previously established liabilities for discontinued operations.
Consequently, these actions did not have a material impact on the Company's
results of operations.

E. INCOME TAXES

During the third quarter of 1993, the President signed into law the Omnibus
Budget Reconciliation Act of 1993 which, among other changes, increased the
statutory Federal income tax rate from 34% to 35%, retroactive to 1 January
1993. In accordance with SFAS 109, the Company recognized in its provision for
income taxes in the third quarter an $11 benefit related to the adjustment of
its net deferred tax asset as of 1 January 1993 and an $11 charge related
primarily to the adjustment of the provision for taxes on the gain on disposal
of the Tactical Military Aircraft business.
      During the fourth quarter of 1992, the Company recognized $95 ($1.26 per
share) of research and experimentation and investment tax credits as a result
of the completion of a company-wide study relating to certain prior years
expenditures. The Internal Revenue Service (IRS) issued final regulations in
1989 relating to the research and experimentation tax credit. Prior to this no
definitive guidance existed. Claims in excess of the $75 in research and
experimentation credits recognized in 1992 have been submitted to the IRS,
however, further benefits will not be recognized until realization is assured.
In addition, $20 of investment tax credits were recognized relating to asset
purchases qualifying under transition rules from the Tax Reform Act of 1986
which repealed the credit.
      During 1991, the Company recognized a $140 gain ($1.64 per share) from an
adjustment to its deferred income tax liability. The adjustment reflects the
conclusion of the IRS field audit of the Company's Federal income tax returns
for the years 1977 through 1986.
      The provision (credit) for Federal income taxes for continuing operations
is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER           1993           1992          1991
- --------------------------------------------------------------------
<S>                              <C>            <C>           <C>
Current                          $138           $114          $ 54
Deferred                            5           (109)         (136)
- --------------------------------------------------------------------
                                 $143           $  5          $(82)
====================================================================
</TABLE>

      The reconciliation from the statutory Federal income tax rate to the
Company's effective income tax rate is as follows:


<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER              1993             1992           1991
- -------------------------------------------------------------------------
<S>                                <C>              <C>            <C>
Statutory income tax rate          35.0%            34.0%          34.0%
Research and experimentation
  and investment tax
  credits                           --             (30.6)            --
Adjustment to deferred
  income tax liability              --               --           (72.9)
Tax-exempt interest
  income                           (1.0)             (.6)          (2.1)
Other                               0.6             (1.2)          (1.7)
- -------------------------------------------------------------------------
Effective income tax
  (benefit) rate                   34.6%             1.6%         (42.7)%
=========================================================================
</TABLE>

      The Company adopted SFAS No. 109, "Accounting for Income Taxes," as of 1
January 1993. As the Company had been following the provisions of SFAS No. 96,
"Accounting for Income Taxes," adoption of SFAS 109 did not have a material
impact on the Company's financial condition or results of operations.
      The tax effects of temporary differences that give rise to significant 
portions of deferred tax assets and liabilities consist of the following:


<TABLE>
<CAPTION>
31 DECEMBER                       1993       1992
- --------------------------------------------------
<S>                             <C>        <C>
Long-term contract
  costing methods               $143       $145
Accrued costs on disposed
  businesses                      84        100
A-12 termination                  71        106
Restructuring costs               40         29
Coal mining liabilities           28         32
Other                            109         53
- --------------------------------------------------
Deferred Assets                 $475       $465
==================================================
Lease income                    $ 86       $ 88
Other                             69         52
- --------------------------------------------------
Deferred Liabilities            $155       $140
==================================================
Net Deferred Asset              $320       $325
==================================================
</TABLE>

      No valuation allowance was required for the Company's deferred tax assets
as of 31 December 1993 and 1992. The current portion of the net deferred tax
asset is $214 and $203 at 31 December 1993 and 1992, respectively, and is
included in other current assets on the Consolidated Balance Sheet. Deferred
taxes for the discontinued operations are included in the net assets of
discontinued operations on the Consolidated Balance Sheet.
      The Company made Federal income tax payments of $316, $258 and $523 in
1993, 1992 and 1991, respectively.  
      Certain issues related to the IRS audit of the Company's consolidated
Federal income tax returns for the years 1977 through 1986 were not resolved at
the administrative level. Accordingly, the Company expects to receive a
Statutory Notice of Deficiency which it will contest in the U.S. Tax Court. In
addition, the IRS is





                                   -- 25 --
<PAGE>   15
reviewing the Company's consolidated Federal income tax returns for the years
1987 through 1989. The Company has recorded liabilities for tax contingencies.
Accordingly, resolution of the Tax Court litigation and the 1987-1989 audit are
not expected to have a material impact on the Company's financial condition or
results of operations.
      The provision for state and local income taxes, which is allocable to
U.S. Government contracts, is included in operating costs and expenses.

F. CONTRACTS IN PROCESS

Contracts in process consist of the following:

<TABLE>
<CAPTION>
31 DECEMBER                                  1993             1992
- -------------------------------------------------------------------
<S>                                        <C>               <C>
Government contracts in process            $4,307            $4,144
Other                                         146               119
- -------------------------------------------------------------------
                                            4,453             4,263
Less advances and progress
  payments                                  4,011             3,831
- -------------------------------------------------------------------
                                           $  442            $  432
===================================================================
</TABLE>                                                           

      At 31 December 1993 and 1992, costs of $110 and $88, respectively, are
included in contracts in process, but are not currently allocable to contracts.
Substantially all other amounts included in contracts in process represent an
unbilled receivable. General and administrative costs included in contracts in
process amounted to $28 and $25 at 31 December 1993 and 1992, respectively.
      Under the contractual arrangements by which progress payments are 
received, the U.S. Government asserts that it has a security interest in the 
contracts in process identified with the related contracts.

G. PROPERTY, PLANT AND
   EQUIPMENT, NET

The major classes of property, plant and equipment are as follows:

<TABLE>
<CAPTION>
31 DECEMBER                               1993               1992
- -------------------------------------------------------------------
<S>                                      <C>                <C>
Land and improvements                    $   79             $   93
Coal reserves                                53                 52
Buildings and improvements                  156                150
Machinery and equipment                     870                918
- -------------------------------------------------------------------
                                          1,158              1,213
Less accumulated depreciation,
  depletion and amortization                856                874
- -------------------------------------------------------------------
                                         $  302             $  339
===================================================================
</TABLE>

      Certain plant facilities are provided by the U.S. Government.

H. CURRENT LIABILITIES

Current liabilities consist of the following:

<TABLE>
<CAPTION>
31 DECEMBER                               1993               1992
- -------------------------------------------------------------------
<S>                                      <C>                <C>
Accounts payable                         $157               $126
Accrued workers'
  compensation                            174                201
Accrued salaries
  and wages                                71                 81
Income taxes payable                       35                 --
Other                                     129                 83
- -------------------------------------------------------------------
Accounts payable and
  accrued expenses                       $566               $491
===================================================================
A-12 termination liability
  and legal fees                         $ 57               $112
SINCGARS loss provision                    48                 78
Other                                     104                152
- -------------------------------------------------------------------
Other current
  liabilities                            $209               $342
===================================================================
</TABLE>

I. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
31 DECEMBER                               1993               1992
- -------------------------------------------------------------------
<S>                                       <C>                <C>
9 3/8% Notes due 1995                     $ --               $100
5 3/4% Exchangeable Subordinated
  Debentures due 2011                       --                 45
9.95% Debentures due 2018                   39                 39
- -------------------------------------------------------------------
                                            39                184
Less:
Unamortized discount                         1                  1
Current portion                             --                145
- -------------------------------------------------------------------
                                          $ 38               $ 38
===================================================================
</TABLE>

      The Company redeemed on 15 May 1993 the entire series of 9 3/8% Notes at
face value. In addition, in July 1993, the Company redeemed the remaining
5 3/4% Exchangeable Subordinated Debentures.The 5 3/4% Debentures were
exchangeable for shares of Federal Express Corporation common stock owned by
the Company and having no book value. As a result of retiring these Debentures,
the Federal Express Corporation stock held by the Company was available for
sale.These shares were sold during the third quarter of 1993 and the fourth
quarter of 1992 for $37 and $21, respectively, with the corresponding gain
reported as other income.The shares of Federal Express Corporation stock held
by the Company at 31 December 1992 had a fair market value of $35 based on
quoted market prices.
      Annual sinking fund payments, sufficient to retire 5% of the $100
aggregate principal amount originally issued, will commence in 2011 for the
9.95% Debentures. Among the restrictions under the Indenture covering the
unsecured Debentures are provisions limiting the Company's ability to secure
additional debt through mortgages on existing properties and sale and leaseback
transactions of principal properties as defined.The





                                   -- 26 --
<PAGE>   16

Company's outstanding debt had a fair value of $45 and $188 at 31
December 1993 and 1992, respectively, based on quoted market prices.  
      The Company may borrow up to $850 under a committed, short-term line of
credit.Under the line of credit, the Company pays a fee on the commitment and
would pay interest at varying rates based on market conditions.There were no
borrowings under the line of credit during 1993 and 1992.

J. OTHER LIABILITIES

Other liabilities consist of the following:

<TABLE>
<CAPTION>
31 DECEMBER                               1993                 1992
- -------------------------------------------------------------------
<S>                                       <C>                 <C>
Accrued costs on disposed
  businesses                               $239                $295
Coal mining related
  liabilities                                74                  78
Other                                       169                  88
- -------------------------------------------------------------------
                                           $482                $461
===================================================================
</TABLE>

      The Company has recorded liabilities for contingencies retained by the
Company related to disposed businesses. These liabilities include retiree
medical obligations prior to the adoption of SFAS 106, environmental, legal and
the estimated cost of facility dispositions and other restructuring actions
contemplated as a result of the Company's plan of contraction.
      The Company has certain liabilities which are specific to the coal mining
industry. These liabilities include workers' compensation, reclamation, and
mine suspension and closing costs. The Company is subject to the Federal Coal
Mine Health & Safety Act of 1969, as amended, and the related workers'
compensation laws in the states in which it operates. These laws require the
Company to pay benefits for occupational disability resulting from coal
workers' pneumoconiosis (black lung). The liability for these claims represents
the present value, based on a 6% discount rate, of known claims and an
actuarially-determined estimate of future claims that will be awarded to
current and former employees.  Liabilities to reclaim land disturbed by the
mining process and to perform other closing functions are recorded over the
production lives of the mines. Liabilities related to closed or suspended mines
were established in connection with the termination of a coal supply agreement.

K. SHAREHOLDERS' EQUITY

      STOCK SPLIT On 4 March 1994, the Company's Board of Directors authorized
a two-for-one stock split effected in the form of a 100% stock dividend to be
distributed on 11 April 1994 to shareholders of record on 21 March 1994.
Shareholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from retained earnings
to common stock the par value of the additional shares arising from the split.
In addition, all references in the financial statements to number of shares,
per share amounts, stock option data, and market prices of the Company's
common stock have been restated.

      AUTHORIZED STOCK The authorized capital stock of the Company consists of
200 million shares of $1 par value common stock and 50 million shares of $1 par
value preferred stock issuable in series, with the rights, preferences and
limitations of each series to be determined by the Board of Directors.

      TENDER OFFER During the third quarter of 1992, the Company completed the
purchase of $960 of its common stock, including transaction costs of
approximately $3, in accordance with the terms of its "Dutch Auction" tender
offer. All shares acquired through the tender offer were retired.

L. FINANCE OPERATIONS

The Company owns three liquefied natural gas (LNG) tankers which have been
leased to nonrelated companies through the year 2004. The leases are financed
through Title XI Bonds which are secured by the LNG tankers. Under Title XI
financing, the debt is guaranteed by the U.S. Government with no recourse to
the Company. Accordingly, in the event the lessee defaults on the lease
payments, the Company is not obligated to repay the debt.
      The following is a summary of the comparative financial statements for
the finance operations:


<TABLE>
<CAPTION>
BALANCE SHEET DATA

31 DECEMBER                               1993                 1992
- -------------------------------------------------------------------
<S>                                      <C>                  <C>
ASSETS
Leases receivable                        $251                 $265
Due from parent                            92                  100
- ------------------------------------------------------------------
                                         $343                 $365
==================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt                                     $175                 $190
Income taxes                               86                   88
Shareholder's equity                       82                   87
- -------------------------------------------------------------------
                                         $343                 $365
===================================================================
</TABLE>

<TABLE>
EARNINGS DATA

YEAR ENDED 31 DECEMBER          1993            1992           1991
- -------------------------------------------------------------------
<S>                             <C>             <C>            <C>
Interest income                 $17             $18             $18
Interest expense and
  income taxes                   16              17              17
- -------------------------------------------------------------------
Net earnings                    $ 1             $ 1             $ 1
===================================================================
</TABLE>





                                   -- 27 --
<PAGE>   17
      The Company is scheduled to receive a $31 minimum lease payment annually
through the year 2003. The components of the Company's net investment in the
leases receivable are as follows:

31 DECEMBER                               1993                1992
- -------------------------------------------------------------------
Aggregate future minimum
  lease payments                          $319                $350
Unguaranteed residual value                 38                  38
Less unearned interest income              106                 123
- -------------------------------------------------------------------
                                          $251                $265
===================================================================


      The finance operations debt had an estimated fair value of $181 and $195
at 31 December 1993 and 1992, respectively, based on a risk-adjusted discount
rate. Semiannual sinking fund payments, sufficient to retire 100% of the
aggregate principal amount of the debt, have commenced and will continue
through maturity in 2004. The interest rate on the debt varies from 8.0% to
9.0%, with a weighted average rate of 8.1%. The schedule of principal payments
for the next five years is $12 in 1994, $13 in 1995, $14 in 1996, $15 in 1997
and $16 in 1998.

M. LEASES

Rental expense, substantially all of which is minimum rentals, was $24, $29 and
$37 in 1993, 1992 and 1991, respectively. Rental commitments under existing
operating leases at 31 December 1993 are $22 in 1994, $14 in 1995, $11 in 1996,
$3 in 1997, $3 in 1998 and $6 thereafter.

N. OUTSOURCING OF INFORMATION TECHNOLOGY OPERATIONS

In November 1991, the Company signed an agreement with Computer Sciences
Corporation (CSC) for the sale of the information technology operations of the
Company's Data Systems Division. Under a related agreement, CSC has the
exclusive right to provide information technology services to the Company's
defense units for ten years. The agreement provides for minimum aggregate
payments to CSC during the first three years of the service agreement and
payments equal to 90% of the Company's estimated annual usage thereafter. At 31
December 1993, the Company has substantially fulfilled the minimum aggregate
payments related to the first three years. As the Company had a significant
continuing involvement in the use of the assets sold, the $51 gain (before tax)
on the sale was being deferred and amortized on a straight-line basis over
three years into other income. Due to the novation of the Company's agreement
with CSC allowing the buyers of the Company's sold businesses to assume the
remaining obligation applicable to businesses sold, the Company's continuing
involvement has diminished. Accordingly, after completing an analysis during
the second quarter of 1993, the Company recorded $14 of the previously deferred
gain which was attributable to businesses sold. The remaining balance is being
recognized on a straight-line basis through the end of 1994, which is
consistent with the original amortization period.

O. CONTINGENCIES

As previously reported, the Company is a defendant in U.S. vs. Davis et al, a
civil action in the Federal District Court for the Southern District of New
York in which the U.S. Government alleges claims under the Civil False Claims
Act.  A judgment in favor of the Company was entered on 2 October 1992. On 4
January 1993, the U.S. Government appealed the District Court's judgment in
favor of the Company. This appeal is now pending.
      On 7 January 1991, the U.S. Navy terminated for default a contract with
the Company and McDonnell Douglas Corporation (McDonnell Douglas) for the
full-scale development of the U.S. Navy's A-12 aircraft. The U.S. Navy has
demanded repayment of unliquidated progress payments. The Company and McDonnell
Douglas have a claim pending against the U.S. Government in the Court of
Federal Claims (See Note P).
      The Company is a defendant in a shareholders' derivative action filed in
the California Superior Court for San Diego County on 17 January 1991. The suit
was dismissed by the court on 10 May 1993, because the plaintiffs failed to
make a demand on the Board of Directors of the Company prior to bringing
action. The period to amend the complaint has expired.
      On 8 March 1993, a class action lawsuit, Berchin et al vs. General
Dynamics Corporation and William A. Anders, was filed in the Federal District
Court for the Southern District of New York. The suit alleges violations of
various provisions of federal securities laws, fraud, negligent
misrepresentation, and breach of fiduciary duty by the defendants with regard
to disclosures made, or omitted, in the Company's tender offer completed in
July 1992 and the subsequent divestiture of core businesses. The Company
believes there is no liability in connection with this matter and intends to
vigorously defend itself.
      The Company is also involved in other suits, proceedings and
investigations. The Company is involved in or has been designated a Potentially
Responsible Party in respect to a number of Superfund and waste disposal sites
with potential liability for cleanup costs under the Federal Comprehensive
Environmental Response, Compensation and Liability Act. The Company has made a
detailed review of these waste disposal sites, giving consideration to the
Company's relative involvement in the sites compared to other companies. Most
of the sites in question were used in the conduct of the Company's U.S.
Government contracting business. To the extent cleanup costs are allocable to
U.S.  Government contracts, such reimbursement has been considered in
estimating the Company's loss. While the extent of remediation and of the
Company's liability in these matters is difficult to estimate, in the aggregate
these proceedings and matters are not deemed material to the financial
condition or results of operations of the Company.
      In the ordinary course of business, the Company has entered into letter
of credit agreements and other arrangements with financial institutions
aggregating approximately $120 at 31 December 1993. The Company also has a
remaining firm purchase commitment for rocket engines of $255 at 31 December
1993. The Company was





                                   -- 28 --
<PAGE>   18
contingently liable for debt and lease guarantees and other arrangements
aggregating up to a maximum of approximately $160 and $170 at 31 December 1993
and 1992, respectively. Approximately $45 of the $160 the Company was
contingently liable for at 31 December 1993, as well as the aforementioned firm
purchase commitment, will be assumed by the buyer of the Company's Space Launch
Systems business.
      In connection with the sale of defense businesses, the Company remains
contingently liable for performance by the purchaser of these businesses under
contracts entered into with the U.S. Government. The Company believes the
probability of any liability arising from this matter is remote. In addition,
the sales agreements contain certain representations and warranties under which
the purchasers have certain specified periods of time to assert claims against
the Company. Some claims have been asserted which are material in amount, but
the Company does not believe that its liability as a result of these claims
will exceed the liabilities recorded at the time of the sales.

P. A-12 TERMINATION

As stated above, on 7 January 1991, the U.S. Navy terminated the Company's A-12
aircraft contract for default. The Company's A-12 contract was a fixed-price
incentive contract for the full-scale development and initial production of the
U.S. Navy's new carrier-based Advanced Tactical Aircraft. Both the Company and
McDonnell Douglas were parties to the contract with the U.S. Navy and each had
full responsibility to the U.S.  Navy for performance under the contract. Also,
the Company and McDonnell Douglas are parties to a teaming agreement in which
profits and losses under the contract are shared equally. The Company and
McDonnell Douglas remain jointly and severally liable to the U.S. Navy under
the A-12 contract for any potential liabilities arising out of the termination.
      As a result of the termination, the Company fully reserved the contracts
in process balance associated with the A-12 program and recognized the
Company's estimated termination liabilities, primarily to its vendors. The
Company has neither recognized any claim revenue from the U.S. Navy, nor any
potential return of unliquidated progress payments to the U.S. Navy, in its
financial statements. The Company recorded charges in 1990 totaling $724
(before tax), which are included in earnings from discontinued operations,
related to the A-12 program due to its termination and earlier identified cost
overruns.
      In February 1991, the U.S. Navy demanded payment of unliquidated progress
payments in the approximate amount of $1,400 from the team, but agreed to defer
collection pending resolution of the termination dispute. Terms of the
deferment agreement include a requirement for the team to maintain sufficient
assets or available credit to pay the unliquidated progress payments plus any
accrued interest. As a result of the review, the team is also required to
notify the U.S. Navy prior to any special distributions to shareholders or
repurchase of a material amount of its stock.
      The Company and McDonnell Douglas filed a complaint on 7 June 1991 in the
U.S. Court of Federal Claims to contest the default termination. The suit, in
effect, seeks to convert the termination for default to a termination for
convenience of the U.S. Government. The Company and McDonnell Douglas also
filed, in the second quarter of 1991, an equitable adjustment claim against the
U.S. Navy for approximately $1,100 and a claim in the nature of a termination
settlement proposal in the approximate amount of $1,300. These claim amounts
are not exclusive of each other. Additional claims are expected to be filed at
a later date. In the aggregate, through these claims, the Company and McDonnell
Douglas seek to recover payment for all work done and costs incurred in the
A-12 program and its termination.
      A trial on Count XVII of the complaint, which relates to the propriety of
the termination for default, was concluded in October 1993. In December 1993,
the Court issued preliminary findings of fact which appear favorable to the
Company and McDonnell Douglas. The Court will not issue a decision before 21
July 1994, during which time other counts in the complaint will be prepared for
decision. Except for default or a violation of one of the terms on financial
responsibility, the U.S. Navy has agreed not to seek to terminate the deferment
agreement prior to a ruling by the U.S. Court of Federal Claims. The Company
believes that ultimately it will be found not to have been in default of the
contract.
      In the unlikely event that the Company and McDonnell Douglas are
ultimately found to be in default of the A-12 contract, additional losses of
approximately $650 (before tax) may be recognized by the Company. This
estimated additional loss is based upon certain assumptions which are
periodically reviewed by the Company and McDonnell Douglas. This estimate does
not include interest that may ultimately be payable to the U.S.  Government as
provided by the deferment agreement.

Q. INCENTIVE COMPENSATION PLAN

Under the 1988 Incentive Compensation Plan, as amended, the Company may grant
awards in combination of cash, common stock, stock options and restricted
stock. In order to encourage Management to continue focusing on shareholder
value, the Company introduced a new long-term incentive program in October
1993. The program includes Performance Restricted Stock and Performance Stock
Options granted at the then current market value of $47 per share. The
restricted stock has a two year performance period with 50% of the grant
dependent on performance as measured at the end of 1994 and the remaining 50%
dependent on performance as measured at the end of 1995. For every dollar
change in the stock price during the performance period, an additional dollar's
worth of restricted stock will be granted (stock price increase) or forfeited
(stock price decrease) for each share originally granted. Restrictions on the
shares lapse two years after the performance period.  The stock options become
exercisable when a specific time period has lapsed and a stock price "hurdle"
has been achieved. Fifty percent of the options may be





                                   -- 29 --
<PAGE>   19
exercised after 31 December 1994 if the first price hurdle of $52.50 per share
is achieved, and the remaining 50% may be exercised after 31 December 1995 if
the second price hurdle of $60 per share is achieved. The hurdles are deemed
achieved whenever the average stock price is at or above the price hurdle for
30 consecutive trading days anytime during the five year term of the options.
In addition, the options become exercisable during the last 30 days of their
term even if the hurdles are not achieved. 
      There were 327,140 shares of restricted
stock awarded in 1993, and 1,127,680 shares outstanding at year end.
Information with respect to stock options is as follows:

<TABLE>
<CAPTION>
                                       1993                1992
- -------------------------------------------------------------------
<S>                              <C>                   <C>
NUMBER OF SHARES UNDER
 STOCK OPTIONS:
 Outstanding at beginning
  of year                           2,937,704             7,575,152
    Granted                         1,394,190               233,190
    Exercised                        (493,308)           (4,399,730)
    Canceled                         (228,158)             (470,908)
- -------------------------------------------------------------------
 Outstanding at end of year         3,610,428             2,937,704
===================================================================
PRICE OF STOCK OPTIONS:
  Granted                        $46.66-50.07          $28.32-39.75
  Exercised                      $ 7.21-39.16          $11.91-39.16
  Canceled                       $ 7.58-38.19          $12.16-39.16
  Outstanding                    $ 7.21-47.00          $12.16-39.75
===================================================================
</TABLE>

      There were 205,518 and 324,438 stock options exercisable at 31 December
1993 and 1992, respectively. An additional 2,006,000 stock options became
exercisable in February 1994. At 31 December 1993, 1,915,348 shares have been
reserved for options which may be granted in the future in addition to the
shares reserved for issuance on the exercise of options outstanding.
      The price of stock options was adjusted in 1993 for the impact of the
Company's special distribution to shareholders.  
      During 1993 and 1992, Federal income tax benefits of $7 and $54, 
respectively, were credited to shareholders'equity primarily as a result of 
the exercise of non-qualified stock options which generated deductions for the 
Company equal to the difference between the market price at the date of 
exercise and the option price.

R. RETIREMENT PLANS

PENSION The Company has five trusteed noncontributory defined benefit pension
plans covering substantially all employees. Under certain of the plans,
benefits are primarily a function of both the employee's years of service and
level of compensation, while under other plans, benefits are a function only of
years of service.
      It is the Company's policy to fund the plans to the maximum extent
deductible under existing Federal income tax regulations. Such contributions
are intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
      Net periodic pension cost for the total Company included the following:

<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER                 1993              1992            1991
- ------------------------------------------------------------------------------
<S>                                   <C>               <C>             <C>
Service cost-benefits earned
  during period                       $ 70              $124            $153
Interest cost on projected
  benefit obligation                   164               263             269
Actual return on plan
  assets                              (350)             (246)           (923)
Net amortization and
  deferral                             129               (92)            604
- ------------------------------------------------------------------------------
                                      $ 13              $ 49            $103
==============================================================================
</TABLE>

      The following table sets forth the plans' funded status:

<TABLE>
<CAPTION>
31 DECEMBER                                1993               1992
- -------------------------------------------------------------------
<S>                                      <C>                <C>
Actuarial present value of
 benefit obligations:
  Vested benefit
    obligation                           $(1,891)           $(2,374)
- -------------------------------------------------------------------
  Accumulated benefit
    obligation                           $(1,933)           $(2,424)
- -------------------------------------------------------------------
  Projected benefit obligation           $(2,138)           $(2,699)
Plans' assets at fair value                2,674              3,910
- -------------------------------------------------------------------
Plans' assets in excess of projected
  benefit obligation                         536              1,211
Unrecognized net gain                       (284)              (823)
Unrecognized prior service cost              362                282
Unrecognized net asset at
  1 January 1986                             (65)              (139)
- -------------------------------------------------------------------
Prepaid pension cost                     $   549            $   531
===================================================================
</TABLE>

      Assumptions used in accounting for the plans are
as follows:

<TABLE>
<CAPTION>
                                       1993      1992       1991
- -----------------------------------------------------------------
<S>                                  <C>       <C>        <C>
Discount rate                             7%        8%         8%
Varying rates of increase in
  compensation levels
  based on age                       4.5-10%   4.5-10%    4.5-10%
Expected long-term rate of
  return on assets                        8%        8%         8%
=================================================================
</TABLE>

      Under SFAS No. 87, "Employers' Accounting for Pensions," the Company is
required to assume a discount rate at which the obligation could be currently 
settled. Due to the current decline in long-term interest rates, the
Company reduced its discount rate assumption from 8% to 7% at 31 December 1993
which increased the projected benefit obligation at 31 December 1993
approximately $265. In addition, plan amendments were adopted during 1993 (see
discussion under other postretirement benefits) which increased the projected
benefit obligation at 31 December 1993 approximately $160 and net periodic
pension cost for 1993 approximately $15. The sale of the Company's Tactical
Military Aircraft business was the primary reason for the overall decrease in
the projected benefit obligation, plan assets and net periodic pension cost in
1993.




                                   -- 30 --
<PAGE>   20
      Increases in prior service cost resulting from plan amendments are
amortized on a straight-line basis over the average remaining service period of
employees expected to receive benefits under the plan.
      During 1992, the pension obligation associated with certain employees
covered under the commercial plan was annuitized, resulting in the realization
of a settlement gain of approximately $82 (before tax). This gain has been
deferred to offset any costs associated with the final disposition of the
commercial plan, either through reversion or other actions. This deferred gain
has been classified against the prepaid pension cost related to the commercial
plan resulting in a net asset of $115 and $106 at 31 December 1993 and 1992,
respectively, which is included in other noncurrent assets on the Consolidated
Balance Sheet. Also during 1992, the Company recognized a $40 (before tax)
pension settlement and curtailment gain as part of the gain on disposal of
Cessna.
      The Company's contractual arrangements with the U.S. Government provide
for the recovery of contributions to the Company's government plans.
Historically, the amount contributed to these plans, charged to contracts and
included in net sales has exceeded the net periodic pension cost included in
operating costs and expenses as determined under SFAS 87. Therefore, the
Company has deferred recognition of earnings resulting from the difference
between contributions and net periodic pension cost to provide better matching
of revenues and expenses.  Similarly, pension settlements and curtailments
which resulted from the sale of businesses whose employees were covered under
the government plans have also been deferred. As the U.S. Government will
receive an equitable interest in the excess assets of a government pension plan
in the event of plan termination, the aforementioned deferrals have been
classified against the prepaid pension cost related to the government plans
resulting in the recognition of no net asset on the Consolidated Balance Sheet.
      At 31 December 1993, approximately 54% of the plans' assets are invested
in securities of the U.S. Government or its agencies, 34% in common stocks and
equivalents, and 12% in diversified corporate fixed income securities.
      In addition to the defined benefit plans, the Company provides eligible
employees the opportunity to participate in savings plans that permit
contributions on both a pre-tax and after-tax basis. Generally, salaried
employees and certain hourly employees with at least one year of continuous
service are eligible to participate. Under the plans, the employee may
contribute to various investment alternatives, including investment in the
Company's common stock. In certain of the plans, the Company matches a portion
of the employees' contributions with contributions to a fund which invests in
the Company's common stock. The Company's contributions amounted to $43, $84
and $99 in 1993, 1992 and 1991, respectively. Approximately 6 million shares of
the Company's common stock were held by the plans at both 31 December 1993 and
1992.

      OTHER POSTRETIREMENT BENEFITS Historically, the Company has provided
certain health care and life insurance benefits for retired employees. The
coverage provided and the extent to which retirees share in the cost of the
benefits vary. During the first quarter of 1993, the Company announced a number
of changes to the retiree medical programs for its non-union retirees and
employees. Commencing 1 July 1993, the Company discontinued its post-65,
self-insured retiree medical program. Concurrently, a pension improvement of
$94 per month was provided to retirees and their spouses age 65 and older.
Additionally, the Company's pre-65 retiree medical program continued to be
available only for retirees age 55 and older, and those employees who had
attained the age of 50 and with a certain number of years of service as of 1
July 1993. Later in 1993, this program was also negotiated with certain union
groups.
      Effective 1 January 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires the
recognition of postretirement benefits over the period in which active
employees become eligible for such benefits.  Previously, the Company
recognized these costs on the cash basis which amounted to $40 and $33 in 1992
and 1991, respectively. The Company elected to implement this new standard by
recognizing the transition obligation prospectively over the average estimated
remaining service life of active employees. The transition obligation excludes
the estimated retiree medical liability retained by the Company for businesses
sold prior to the adoption of SFAS 106 which was recognized at disposition in
accordance with the provisions of APB 30.
      The net periodic postretirement benefit cost for the total Company
included the following:

<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER 1993
- --------------------------------------------------------------
<S>                                                        <C>
Service cost - benefits earned during period               $13
Interest cost on projected benefit obligation               41
Actual return on plan assets                                (6)
Amortization of unrecognized
 transition obligation                                      41
- --------------------------------------------------------------
                                                           $89
==============================================================
</TABLE>

      The following table sets forth the plans' funded status:

<TABLE>
<CAPTION>
31 DECEMBER 1993
- --------------------------------------------------------------
<S>                                                      <C>
Accumulated postretirement benefit obligation:
   Retirees                                              $ 307
   Other fully eligible participants                       139
   Other active participants                               285
- --------------------------------------------------------------
                                                           731
Less plans' assets at fair value                            98
- --------------------------------------------------------------
Obligation in excess of plans' assets                      633
Unrecognized transition obligation                        (518)
Unrecognized net loss                                      (88)
- --------------------------------------------------------------
Accrued postretirement benefit obligation                $  27
==============================================================
</TABLE>






                                   -- 31 --
<PAGE>   21
      Since the adoption of SFAS 106 in the first quarter of 1993, the Company
has reclassified certain businesses previously reported as discontinued
operations to continuing operations. The accumulated postretirement benefit
obligation associated with these businesses at 31 December 1993 is $130 and
their net periodic cost is $20. Substantially all of the obligation and cost is
related to the Company's coal mining business.
      Assumptions used in accounting for the plans were a discount rate of 7%,
an expected long-term rate of return on plan assets of 8%, and health care cost
trend rates of 9% and 11.5% to 15% for post-65 and pre-65 claim groups,
respectively, in 1993, gradually declining to 4.5% and 5.0% for post-65 and
pre-65 claim groups, respectively, in the year 2004 and thereafter over the
projected payout period of the benefits.  
      The effect of a one percent increase each year in the health care cost 
trend rate used would result in an increase of $85 in the accumulated 
postretirement benefit obligation at 31 December 1993, and an increase of $8 
in the aggregate of the service and interest cost components of the 1993 net 
periodic cost.
        The Company established and began funding a Voluntary Employees'
Beneficiary Association (VEBA) trust in 1992 for certain plans in the amount of
their related annual net periodic postretirement benefit cost under SFAS 106.
At 31 December 1993, the trust's assets were invested primarily in securities
of the U.S. Government and short-term investment funds. The remaining plans 
are primarily funded as claims are received.
      The Company's contractual arrangements with the U.S. Government provide
for the recovery of contributions to a VEBA and costs based on claims paid. The
net periodic postretirement benefit cost calculated pursuant to SFAS 106 is
expected to exceed the Company's currently recoverable cost. To the extent the
Company has firm contracts in backlog sufficient to recover the excess SFAS 106
cost, the Company is deferring the charge in contracts in process until such
time that the cost is allocable to contracts. As a result, the adoption of SFAS
106 did not have a material impact on the Company's 1993 results of operations.
      In addition to the provided benefits discussed above, the Company has
certain employees covered by multiemployer plans, including the fund
established by the Coal Industry Retiree Health Benefit Act of 1992 (the Act).
The Company estimates its obligation under the Act to former employees to be
approximately $35 at 31 December 1993. The Act also provides for the allocation
of beneficiaries who cannot be assigned to an employer. The Company's
obligation related to such beneficiaries cannot be determined at this time. The
Company accounts for its contributions related to these plans on the cash
basis.

S. SUMMARY OF BUSINESS SEGMENT INFORMATION

Business Segment Information is included in Management's Discussion and
Analysis of the Results of Operations and Financial Condition.


T. QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>                                                                                                            
                                                                                                    COMMON STOCK (e)
                                                                                      --------------------------------------------
                                                                                       MARKET PRICE
                                                                                         RANGE (f)
                           NET        OPERATING          NET         EARNINGS         -----------------                  SPECIAL
                         SALES(d)     EARNINGS(d)      EARNINGS     PER SHARE(e)      HIGH          LOW    DIVIDENDS  DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>           <C>              <C>           <C>           <C>           <C>        <C>          <C>
1993 4th Quarter         $779          $90              $ 64          $  1.01        $49 9/16     $44 3/8     $.30         $ --
     3rd Quarter          776           64                73             1.15         50 3/8       43 5/8      .30            6
     2nd Quarter          774           65                61              .97         49 7/8       40 3/16     .20            9
     1st Quarter (a)      858           90               687            10.90         60           47 11/16    .20           10
- -----------------------------------------------------------------------------------------------------------------------------------
1992 4th Quarter (b)     $911          $77              $174          $  2.80        $53 15/16    $42 9/16    $.20         $ --
     3rd Quarter          753           63               120             1.89         42 3/4       35 9/16     .20           --
     2nd Quarter          800           59                86              .98         35 15/16     30 3/4      .20           --
     1st Quarter (c)      761           56               435             5.01         32 5/8       26 11/16    .20           --
===================================================================================================================================
</TABLE>

(a)   Includes gain from the sale of the Tactical Military Aircraft business
      which increased net earnings and net earnings per share by $645 and
      $10.23, respectively. See Note B.
(b)   Includes a gain from the recognition of research and experimentation and
      investment tax credits which increased net earnings and net earnings per
      share by $95 and $1.53, respectively. See Note E.
(c)   Includes gain from the sale of Cessna which increased net earnings and
      net earnings per share by $358 and $4.12, respectively. See Note B.
(d)   Data has been restated to treat the Company's Space Launch Systems
      business as a discontinued operation, and the reclassification of certain
      businesses discussed in Note B from discontinued operations to continuing
      operations.
(e)   Data has been restated to give retroactive recognition to the Company's
      announced two-for-one stock split. See Note K.  
(f)   1993 market prices reflect the impact of the Company's special 
      distributions to shareholders.

                                   -- 32 --
<PAGE>   22
                     STATEMENT OF FINANCIAL RESPONSIBILITY

To the Shareholders of General Dynamics Corporation:

      The management of General Dynamics Corporation is responsible for the
consolidated financial statements and all related financial information
contained in this report. The financial statements, which include amounts based
on estimates and judgments, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis.
      The Company maintains a system of internal accounting controls designed
and intended to provide reasonable assurance that assets are safeguarded, that
transactions are executed and recorded in accordance with management's
authorization and that accountability for assets is maintained. An environment
that establishes an appropriate level of control consciousness is maintained
and monitored and includes internal audits and audits by the independent
public accountants.
      The Audit Committee of the Board of Directors, which is composed of five
outside directors, meets periodically and, when appropriate, separately with
the independent auditors, management and the internal auditors to review the
activities of each.  
      The financial statements have been audited by Arthur Andersen & Co.,
independent public accountants, whose report follows.


                                        /s/ J. STEVEN KEATE
                                        ------------------------
                                        J. Steven Keate
                                        Vice President and Controller

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To General Dynamics Corporation:

      We have audited the accompanying Consolidated Balance Sheet of General
Dynamics Corporation (a Delaware corporation) and subsidiaries as of 31
December 1993 and 1992, and the related Consolidated Statements of Earnings,
Shareholders' Equity and Cash Flows for each of the three years in the period
ended 31 December 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
      We conducted our audits 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
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
      In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of General Dynamics
Corporation and subsidiaries as of 31 December 1993 and 1992, and the results
of their operations and their cash flows for each of the three years in the
period ended 31 December 1993, in conformity with generally accepted accounting
principles.
      As discussed in Note P to the financial statements, the U.S. Navy on 7
January 1991, terminated for default the A-12 contract between the U.S. Navy
and General Dynamics Corporation and its partner, McDonnell Douglas
Corporation. The companies deny they were in default on the contract and are
pursuing reimbursement for all work done on the program. The U.S. Navy has
demanded payment of $1.4 billion of unliquidated progress payments under the
contract; however, the U.S. Navy has deferred collection enforcement pending
resolution of this dispute. As a result of the uncertainties arising from the
termination, General Dynamics Corporation has reserved for all A-12 related
assets and has provided for known liabilities stemming from the termination.
The ultimate outcome of the above dispute cannot presently be determined.
Accordingly, no provision for any additional liability that may result upon
resolution of this dispute has been made in the accompanying financial
statements.
      As discussed in Note R to the financial statements, effective 1 January
1993, the Company changed its method of accounting for postretirement benefits
other than pensions.

                                        ARTHUR ANDERSEN & CO.
Washington, D.C.,
25 January 1994 (except with respect to the stock split discussed
in Note K, as to which the date is 4 March 1994)





                                   -- 33 --
<PAGE>   23

                                GENERAL DYNAMICS

                            SELECTED FINANCIAL DATA

                                  (Unaudited)





<TABLE>
<CAPTION>
                                                     1993             1992             1991             1990             1989
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share 
and per employee amounts)
<S>                                                <C>              <C>              <C>              <C>              <C>
SUMMARY OF OPERATIONS (a)
Net sales                                          $ 3,187          $ 3,225          $ 3,161          $ 3,051          $ 2,975
Operating costs and expenses                         2,878            2,970            2,950            2,982            2,828
Interest, net                                           36               27               10              (11)             (15)
Provision (credit) for
  income taxes                                         143                5              (82)              (2)              35
Earnings (loss) from
  continuing operations                                270              305(d)           274(e)            (1)              67
Earnings (loss) per share from
  continuing operations (b)                           4.27             4.03(d)          3.20(e)          (.01)             .80
Cash dividends on
  common stock (b)                                    1.00              .80              .50              .50              .50
Sales per employee                                 138,100          121,500          102,800           80,800           78,500
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT 31 DECEMBER (a)
Property, plant and
  equipment, net                                   $   302          $   339          $   380          $   654          $   696
Total assets                                         2,635            3,530            4,177            3,883            4,566
Long-term debt (including
  current portion)                                      38              183              613              611              610
Long-term debt - finance operations
  (including current portion)                          175              190              204              216              226
Shareholders' equity                                 1,177            1,874            1,980            1,510            2,126
  Per share (b)                                      18.81            30.30            23.62            18.12            25.57
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH FLOW
Cash and marketable
  securities (a)                                   $   585          $   943          $   812          $    98          $     6
Free cash flow (c)                                   1,382            1,557              776              339             (308)
Dividends, distributions and
   tender offer                                      1,587            1,015               42               41               42
- -------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Funded backlog (a)                                  $5,487          $ 6,780          $ 8,214          $ 7,995          $ 8,274
Total backlog (a)                                    7,015            8,488            9,846            9,491            9,803
Shares outstanding at 31 December
  (in millions) (b)                                   62.6             61.8             83.8             83.3             83.2
Fully diluted weighted average shares
  outstanding (in millions) (b)                       63.3             75.6             85.6             83.4             84.0
Common shareholders of record at
  31 December                                       24,496           26,158           33,078           34,178           33,877
Active employees at 31 December
  Total Company                                     30,500           56,800           80,600           98,100          102,200
  Excluding discontinued  
    operations                                      23,100           26,500           30,700           37,800           37,900
===============================================================================================================================
</TABLE>

(a)  Data has been restated to treat the Company's Space Launch Systems
     business as a discontinued operation, and the reclassification of certain
     businesses discussed in Note B from discontinued operations to continuing
     operations.
(b)  Data has been restated to give retroactive recognition to the Company's
     announced two-for-one stock split. See Note K.
(c)  The Company defines "free cash flow" as cash flow from operating and
     investing activities, excluding investment in marketable securities.
(d)  Includes a $95 gain ($1.26 per share) from the recognition of research and
     experimentation and investment tax credits. See Note E.
(e)  Includes a $140 gain ($1.64 per share) from an adjustment to the Company's
     deferred income tax liability. See Note E.




                                   -- 34 --
