
<PAGE>   1
                                                                      EXHIBIT 13
                                                                      

General Dynamics Corporation



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


(Dollars in millions, except per share amounts)

BUSINESS SEGMENT INFORMATION

A description of the company's business segments follows:

       NUCLEAR SUBMARINES. The company's Electric Boat Division designs and
builds nuclear submarines for the U.S. Navy. The company has contracts for
construction of Los Angeles class attack submarines (688), Ohio class ballistic
missile submarines (Trident) and Seawolf class attack submarines (Seawolf). The
Electric Boat Division also performs overhaul and repair work on submarines as
well as a broad range of engineering work, including the design of the New
Attack Submarine (NSSN).

       ARMORED VEHICLES. The company's Land Systems Division designs and
manufactures the M1 Series Abrams Main Battle Tank for the U.S. Army and the
U.S. Marine Corps. The company is currently under contract with the U.S. Army to
upgrade M1 tanks to the M1A2 configuration, the latest version of the M1. In
addition to domestic sales, the company is under contract with the U.S. Army to
manufacture M1A2 tanks for Saudi Arabia and Kuwait, and M1A1 kits to be
assembled in Egypt as part of a coproduction program. The company also provides
training, maintenance and other logistical support on international sales. The
company is the second-source producer of the Single Channel Ground and Airborne
Radio System (SINCGARS) for the U.S. Army.

       OTHER. The company has coal mining operations located primarily in
central Illinois, provides ship management services for the U.S. government on
prepositioning and ready reserve ships, and leases liquefied natural gas
tankers.

<TABLE>
<CAPTION>

                                       Net Sales                    Operating Earnings             Sales to U.S. Government
- - -----------------------------------------------------------------------------------------------------------------------------
                               1994      1993       1992         1994      1993       1992        1994       1993       1992
- - -----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>        <C>          <C>       <C>        <C>         <C>       <C>        <C>
Nuclear Submarines.........   $ 1,678   $ 1,711    $ 1,730      $ 173     $  124     $  94       $ 1,666   $ 1,684    $ 1,693
Armored Vehicles...........     1,184     1,286      1,261        140        174       122         1,159     1,266      1,234
Other......................       196       190        234          8         11        39            55        53         55
                              -----------------------------------------------------------------------------------------------
                              $ 3,058   $ 3,187    $ 3,225      $ 321     $  309     $ 255       $ 2,880   $ 3,003    $ 2,982
=============================================================================================================================

<CAPTION>
                                                                                                    Depreciation, Depletion
                                  Identifiable Assets              Capital Expenditures                and Amortization
- - -----------------------------------------------------------------------------------------------------------------------------
                               1994      1993       1992         1994      1993       1992        1994       1993       1992
- - -----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>        <C>          <C>        <C>        <C>         <C>        <C>       <C>
Nuclear Submarines.........   $   365   $   387    $   404      $   6      $  4       $ 5         $ 20       $ 24      $  27
Armored Vehicles...........       239       296        329          5         5         4           10         11         15
Other......................       360       372        386          6         4         8            8          6          6
Corporate*.................     1,709     1,580      2,411          6         1         4            1         15          9
                              -----------------------------------------------------------------------------------------------
                              $ 2,673   $ 2,635    $ 3,530      $  23      $ 14       $21         $ 39       $ 56      $  57
=============================================================================================================================
</TABLE>

*  Corporate identifiable assets include cash and equivalents and marketable
   securities, deferred taxes, real estate held for development, net assets of
   discontinued operations and prepaid pension cost.


14

<PAGE>   2

                                                    General Dynamics Corporation



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 anticipated 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
proved to be true as evidenced by declines, in real terms, in the defense budget
and by the number of industry combinations in recent years. The company has been
involved in a number of these transactions, including the sales of its Tactical
Military Aircraft, Missile Systems and Space Launch Systems businesses (see Note
B to the Consolidated Financial Statements for further discussion).

       In response to budgetary pressures, the Department of Defense (DoD)
completed in 1993 the "Bottom-Up Review" (BUR), a comprehensive study to
reassess, in the post-Cold War environment, potential threats to national
security and to determine the military capabilities needed to address those
threats. The company was encouraged by the results of the BUR which recommended
construction of a third Seawolf and the NSSN, as well as designated the
company's Electric Boat Division as the shipyard to build those submarines.
Congress approved funding for long-lead activity on the third Seawolf in 1992
and for the NSSN development program in 1994. The president's FY96 budget, as
submitted to Congress, includes the remaining funding for the third Seawolf, but
based on the current political environment, opposition is expected from some
members of Congress. The contract for the third Seawolf would provide the level
of construction activity necessary to maintain operation of all of Electric
Boat's facilities until construction begins on the NSSN, which the DoD currently
plans for 1998.

       The U.S. Army has a stated acquisition objective to upgrade 1,079 of its
M1 Abrams tanks to the M1A2 configuration by the year 2003. The first 210 units
of this program have been funded. The president's FY96 budget submission
includes the upgrade of approximately 100 additional units, which the company
expects Congress to support and fund. Because the anticipated procurement rate
of the upgrade program is significantly less than previous domestic tank
production programs, the company is seeking to supplement volumes by further
expanding international sales.

       The company is working closely with its customers to meet demands for
capability and affordability at significantly reduced procurement rates.
Accordingly, management is continuing to focus on aggressively reengineering the
cost structures of all operations to create highly efficient businesses capable
of operating profitably at significantly lower volumes. With DoD initiatives to
reduce its own infrastructure, additional opportunities may be available for
greater involvement in overhaul, maintenance, upgrade and modification work. In
addition, the company continues to explore ways to utilize its financial
capacity to strengthen its operations through both internal and external
investments. Accordingly, management is considering, among other things, the
benefits of corporate business combinations.

BACKLOG

The following table shows the approximate backlog of the company as calculated
at December 31, 1994 and 1993, and the portion of the December 31, 1994, backlog
not reasonably expected to be filled in 1995:

<TABLE>
<CAPTION>

                                          December 31
- - ----------------------------------------------------------------------
                                                            Not Filled
                                      1994        1993        in 1995
- - ----------------------------------------------------------------------
<S>                                  <C>         <C>           <C>
Nuclear Submarines................   $ 2,463     $  3,611      $1,292
Armored Vehicles..................     1,378        1,006         337
Other.............................       721          870         650
- - ----------------------------------------------------------------------
    Funded Backlog................   $ 4,562     $  5,487      $2,279
======================================================================
    Total Backlog.................   $ 6,006     $  7,015      $3,612
======================================================================
</TABLE>

       Funded backlog represents the total estimated remaining sales value of
authorized work that has been appropriated by Congress, and authorized and
funded by the procuring agency. Funded backlog also includes amounts for
long-term coal contracts. To the extent backlog has not been funded, there is no
assurance that congressional appropriations or agency allotments will be
forthcoming.

RESULTS OF OPERATIONS

The following table sets forth the increase (decrease) in net sales and
operating earnings for the years ended December 31, 1994 and 1993:

<TABLE>
<CAPTION>

                                  1994                    1993
                           Increase (Decrease)     Increase (Decrease)
                                Over 1993               Over 1992
- - ----------------------------------------------------------------------
                             Net    Operating         Net    Operating
                            Sales   Earnings         Sales   Earnings
- - ----------------------------------------------------------------------
<S>                        <C>        <C>            <C>       <C>
Nuclear Submarines......   $  (33)    $ 49           $(19)     $ 30
Armored Vehicles........     (102)     (34)            25        52
Other...................        6       (3)           (44)      (28)
- - ----------------------------------------------------------------------
                           $ (129)    $ 12           $(38)     $ 54
======================================================================
</TABLE>

       NUCLEAR SUBMARINES. Operating earnings increased $49 during 1994 due to
increased earnings on all three construction programs. Cost reengineering
efforts allowed the company to increase the earnings rates on the 688 and
Trident programs and




                                                                             15
<PAGE>   3
General Dynamics Corporation



begin earnings recognition on the Seawolf program in the fourth quarter of 1993.
The company further increased the earnings rates on the 688 and Trident programs
in the first and third quarters of 1994 due to continuing cost reduction
efforts. Prior to 1994, increases in Seawolf construction activity along with
the aforementioned earnings rates increases had largely offset the declines in
688 and Trident construction activity resulting from the reduced number of
submarines under construction. During 1994, Seawolf construction activity
leveled off while 688 and Trident construction activity continued to decline as
these mature programs near completion resulting in a decrease in net sales for
1994.

       All of the submarines in the company's backlog are currently under
construction. In 1994, the company delivered one 688 and one Trident, reducing
backlog to one and three ships, respectively. Delivery of the final 688 is
scheduled for September of 1995, while the delivery of one Trident per year is
scheduled through 1997. The company is also constructing the first two Seawolfs,
with the lead ship scheduled to be completed in 1996 and the second ship in
1998. Construction revenues will continue to decline as the company delivers out
these ships.

       Included in contracts in process at Electric Boat are certain costs
required to be recorded under generally accepted accounting principles which are
not allocable to contracts until incurred. These costs have been deferred
because their recovery under contracts is considered probable based upon
existing backlog. If the level of backlog in the future does not support the
continued deferral of these costs, their recognition, along with other cost
implications of a reduced business base, could impact the profitability of the
remaining contracts in backlog.

       Net sales decreased $19 during 1993 due primarily to decreased
construction activity on the Trident and 688 programs. Operating earnings
increased $30 during 1993 due primarily to earnings rate increases during 1993
on all three construction programs.

       ARMORED VEHICLES. Net sales decreased $102 during 1994 due primarily to
the completion of the Fox Nuclear, Biological and Chemical Reconnaissance
vehicle program in the fourth quarter of 1993, lower production levels on the M1
program and scheduled reductions in work content on the Egyptian coproduction
program. Operating earnings decreased $34 in 1994 due primarily to the absence
of approximately $40 of nonrecurring revenue from the close-out of certain
non-production contracts in 1993, partially offset by an increase in the M1
program earnings rate during the third quarter of 1994 as a result of continuing
cost reengineering efforts.

       Production of 315 M1A2 tanks for Saudi Arabia was completed during the
third quarter of 1994, while production of 218 M1A2 tanks for Kuwait began in
1994 with final delivery expected in the first quarter of 1996. Work also began
in 1994 on the contract to upgrade 210 of the U.S. Army's tanks to the M1A2
configuration with delivery of the final unit expected in the third quarter of
1996. These contracts collectively are referred to as the M1 program and have
been combined for revenue recognition purposes as has been the practice with
similar M1 production contracts in the past. The M1 program (as defined above)
accounted for approximately one half of Armored Vehicles' revenues in 1994. The
current M1 program earnings rate, which yields a substantially higher margin
than other armored vehicle business, has benefited from the company's cost
reengineering efforts and conservative revenue recognition practices during the
early stages of the program. Due to the method of pricing business under
government contracts, the cost reengineering benefits the company is currently
realizing will be passed on to the customer in future contracts and will result
in new business that will yield a lower margin than the current contracts which
run through mid-1996.

       In addition to the 25 complete M1A1 tanks previously delivered, the
company is under contract to manufacture 499 M1A1 kits for Egypt. Revenues are
expected to remain at levels similar to 1994 through the end of 1996 as
production completes in early 1997.

       Production levels continued to increase on the SINCGARS program during
1994. In addition, the company began recognizing earnings on the program during
the third quarter of 1994 due to improving performance and the favorable impact
of the approximate 40 percent share of the FY94 dual-source competitive
procurement. In February 1995, the company was awarded an approximate 45 percent
share of the FY95 procurement.

       Net sales and operating earnings increased $25 and $52, respectively,
during 1993 due primarily to the nonrecurring revenue previously discussed. In
addition, 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 which also contributed to the increase in
operating earnings during 1993.

       OTHER. Net sales and operating earnings decreased $44 and $28,
respectively, during 1993 due primarily to the company's coal operations. In
1993, an increasing percentage of coal was sold in the spot market, wherein
prevailing prices are lower than those under the long-term contracts which
expired at the end of 1992.

       GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased during 1994 due primarily to a lower 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 tax
on the gain on disposal of the Tactical Military Aircraft business.

       INTEREST, NET. The company's interest income varies from period to period
based primarily on the average balance of cash and equivalents and marketable
securities. The average balance has fluctuated significantly during the last
three years as a result of transactions such as the sales of businesses, a
tender offer and special distributions. Interest expense has decreased during
the three year period ended December 31, 1994, due to the reduction in
outstanding debt.







16

<PAGE>   4

                                                    General Dynamics Corporation



       OTHER INCOME, NET. In 1993, the company recognized a $37 gain from the
sale of Federal Express Corporation stock and recognized an additional $14 in
excess of scheduled amortization of the deferred gain on the sale of the
company's information technology operations due to the disposal of other
operations. In 1992, the company recognized a gain of $21 also on the sale of
Federal Express Corporation stock. For further discussion of other income items,
see Note N to the Consolidated Financial Statements.

       The company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115)
as of January 1, 1994. The company determined all of its investments currently
held in debt and equity securities are trading securities as defined by SFAS 115
and as such are reported at fair value. Unrealized holding gains and losses (the
adjustment to fair value) recognized in other income in 1994 were not
significant. Accordingly, the adoption of SFAS 115 did not have a significant
impact on the company's financial condition or results of operations.

       PROVISION FOR 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
percent to 35 percent, retroactive to January 1, 1993. This rate change did not
have a significant impact on the company's financial condition or results of
operations.

       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. For further discussion of these items, as well as a
discussion of the company's net deferred tax asset, see Note E to the Consoli-
dated 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. There were no earnings (loss) from
the operations of these businesses in 1994. Earnings improved in 1994 due
primarily to the absence of the loss recognized by the company's Space Launch
Systems business in 1993. No additional losses from operations are anticipated
prior to the disposal of the remaining discontinued operations. Earnings
decreased in 1993 due primarily to the absence of earnings from businesses which
were subsequently sold. For a discussion of unusual items impacting the
operating results of discontinued operations and the financial impact from the
disposal of discontinued operations, see Note B to the Consolidated Financial
Statements.

       EARNINGS PER SHARE. On March 4, 1994, the company's board of directors
authorized a two-for-one stock split effected in the form of a 100 percent stock
dividend. Accordingly, earnings per share data has been restated to give
retroactive recognition to the stock split in prior periods.

       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.

FINANCIAL CONDITION

The company's liquidity and financial condition continued to improve during 1994
as the balance of cash and equivalents and marketable securities increased from
$585 at December 31, 1993, to $1,059 at December 31, 1994. A discussion of the
company's financial condition in terms of its operating, investing and financing
activities as defined in the Consolidated Statement of Cash Flows follows.

       OPERATING ACTIVITIES. The net cash provided by continuing operations as
reported on the Consolidated Statement of Cash Flows is summarized by type as
follows:

<TABLE>
<CAPTION>
                                         Year Ended December 31
- - -------------------------------------------------------------------
                                      1994        1993         1992
- - -------------------------------------------------------------------
<S>                                  <C>         <C>          <C>
Operations.......................    $  343      $  344       $ 337
Allocated federal income
    tax payments.................       (89)        (78)       (108)
Purchase of marketable
    securities, net..............      (136)       (109)       (125)
Other............................       (10)         24         (25)
- - -------------------------------------------------------------------
                                     $  108      $  181       $  79
===================================================================
</TABLE>


       Operations represent the pre-tax cash flows generated by the company's
three business segments. The company has generated strong cash flows from
operations during the three years ended December 31, 1994. In prior years, 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. In 1994, cash flows from operations approximated operating
earnings and the company expects the same to be true in 1995.

       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.

       As previously discussed, the company adopted SFAS 115 in 1994. In
accordance with SFAS 115, the net change in marketable securities is included in
operating activities on the Consolidated Statement of Cash Flows.

       Other cash flows include items which are not directly attributable to a
business segment such as interest received from investments in excess of
interest paid on debt. Other cash flows were negative in 1994 and 1992 due
primarily to the payment of previously deferred compensation.

       For a discussion of environmental matters and other contingencies, see
Note O to the Consolidated Financial Statements. The company believes that the
amount it has recorded with respect to these matters is adequate, and any amount
by which the liability exceeds the recorded amount would not be deemed material
to the company's financial condition or results of operations.

       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

                                                                              17
<PAGE>   5

General Dynamics Corporation



as an allocable portion of the company's federal income tax payments which in
1993 included approximately $180 related to the gain on disposal of the
company's Tactical Military Aircraft business. In addition to lower taxes, net
cash provided by discontinued operations increased during 1994 due to the
improved operating cash flows of the discontinued businesses and a decrease in
payments for disposition related liabilities. The improvement in operating cash
flows for the discontinued businesses was due primarily to the receipt of
scheduled payments by the company's Commercial Aircraft Subcontracting business
in accordance with the terms of the termination agreement with McDonnell Douglas
Corporation (for further discussion, see Note B to the Consolidated Financial
Statements).

       INVESTING ACTIVITIES. The company has received significant proceeds over
the last three years from the sale of discontinued operations (for a discussion
of individual transactions, see Note B to the Consolidated Financial
Statements).

       As previously discussed, the company received proceeds of $37 and $21 in
1993 and 1992, respectively, from the sale of its investment in Federal Express
Corporation stock.

       The significant decline in defense spending has resulted in excess
capacity. Accordingly, the company reduced its level of capital spending at its
defense businesses and sought to sell idle or underutilized assets when
possible.

       As part of the sale of discontinued operations, certain 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 carrying value of these properties decreased in 1994
due to incidental rental income associated with certain of these properties
being treated as a reduction in carrying value in accordance with generally
accepted accounting principles. 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.
Development work began on certain of these properties during 1994 which was the
primary reason for the overall increase in the company's capital expenditures.
Due to increasing activity on these development projects, the company expects
total capital expenditures to be approximately $40 in 1995.

       FINANCING ACTIVITIES. In order to establish liquidity and financial
strength, the company redeemed the entire series of 7 7/8 percent Notes and 9
percent Debentures which had a combined face value of $350, and $61 of the 9.95
percent Debentures in 1992. In addition, the company redeemed the entire series
of 9 3/8 percent Notes which had a face value of $100 and the remaining $45 of
5 3/4 percent Debentures in 1993.

       After meeting its operational and investment needs, the company purchased
$960 of its common stock in a tender offer in 1992 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 (for further discussion, see Note C to
the Consolidated Financial Statements).

       In the first quarter of 1994, the company's board of directors declared
an increased regular quarterly dividend of $.35 per share, 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.

       In 1994, 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. During 1994, the company repurchased approximately
530,000 shares of its stock on the open market for a total of $22.

       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 1995 at which time the company
anticipates renewing or replacing it as deemed appropriate.





18
<PAGE>   6


                                                    General Dynamics Corporation



CONSOLIDATED STATEMENT OF EARNINGS

<TABLE>
<CAPTION>                                                              
                                                                       
                                                                                         Year Ended December 31
- - ----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)                               1994                1993                1992
                                                                       
<S>                                                                        <C>                  <C>                <C>
NET SALES..............................................................    $   3,058            $  3,187           $   3,225
OPERATING COSTS AND EXPENSES...........................................        2,737               2,878               2,970
- - ----------------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS.....................................................          321                 309                 255
Interest, net..........................................................           22                  36                  27
Other income, net......................................................           --                  68                  28
- - ----------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................          343                 413                 310
Provision for income taxes.............................................          120                 143                   5
- - ----------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS....................................          223                 270                 305
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:                          
Earnings (loss) from operations........................................           --                 (30)                136
Gain on disposal.......................................................           15                 645                 374
- - ----------------------------------------------------------------------------------------------------------------------------
                                                                                  15                 615                 510
- - ----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS...........................................................    $     238            $    885           $     815
============================================================================================================================
NET EARNINGS PER SHARE:                                                
Continuing operations..................................................    $    3.51            $   4.27           $    4.03
Discontinued operations:                                               
    Earnings (loss) from operations....................................           --                (.47)               1.80
    Gain on disposal                                                             .24               10.19                4.95
- - ----------------------------------------------------------------------------------------------------------------------------
                                                                           $    3.75            $  13.99           $   10.78
============================================================================================================================
</TABLE>                                                               
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.


                                                                              19
<PAGE>   7


General Dynamics Corporation



CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

                                                                                                    December 31
- - ------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)                                                                      1994                   1993

Assets
<S>                                                                                     <C>                     <C>
CURRENT ASSETS:
Cash and equivalents.........................................................           $     382               $     94
Marketable securities........................................................                 677                    491
- - ------------------------------------------------------------------------------------------------------------------------
                                                                                            1,059                    585
Accounts receivable..........................................................                 104                     62
Contracts in process.........................................................                 351                    442
Net assets of discontinued operations........................................                  44                    303
Other current assets.........................................................                 239                    262
- - ------------------------------------------------------------------------------------------------------------------------
Total Current Assets.........................................................               1,797                  1,654
- - ------------------------------------------------------------------------------------------------------------------------
NONCURRENT ASSETS:
Leases receivable - finance operations.......................................                 220                    236
Real estate held for development.............................................                 128                    142
Property, plant and equipment, net...........................................                 264                    302
Other assets.................................................................                 264                    301
- - ------------------------------------------------------------------------------------------------------------------------
Total Noncurrent Assets......................................................                 876                    981
- - ------------------------------------------------------------------------------------------------------------------------
                                                                                        $   2,673               $  2,635
- - ------------------------------------------------------------------------------------------------------------------------

Liabilities and Shareholders' Equity

CURRENT LIABILITIES:
Accounts payable.............................................................           $     134               $    157
Other current liabilities....................................................                 492                    618
- - ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities....................................................                 626                    775
- - ------------------------------------------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt...............................................................                  39                     38
Long-term debt - finance operations..........................................                 157                    163
Other liabilities............................................................                 535                    482
Commitments and contingencies (See Note O)
- - ------------------------------------------------------------------------------------------------------------------------
Total Noncurrent Liabilities.................................................                 731                    683
- - ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus (shares issued 84,387,336)...................                  87                     92
Retained earnings............................................................               1,860                  1,709
Treasury stock (shares held 1994, 21,391,547; 1993, 21,823,824)..............                (631)                  (624)
- - ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity...................................................               1,316                  1,177
- - ------------------------------------------------------------------------------------------------------------------------
                                                                                        $   2,673               $  2,635
========================================================================================================================
</TABLE>

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







20
<PAGE>   8


                                                    General Dynamics Corporation



CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31
- - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)                                                              1994                1993                1992

<S>                                                                             <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...........................................................         $    238            $    885            $    815
Adjustments to reconcile net earnings to net
    cash provided by continuing operations -
Discontinued operations................................................              (15)               (615)               (510)
Depreciation, depletion and amortization...............................               39                  56                  57
Decrease (Increase) in -
    Marketable securities..............................................             (136)               (109)               (125)
    Accounts receivable................................................              (42)                  6                  42
    Contracts in process...............................................               91                 (10)                 76
    Leases receivable - finance operations                                            15                  14                  12
    Other current assets...............................................                6                  (8)                (24)
Increase (Decrease) in -
    Accounts payable and other current liabilities.....................             (105)                (73)                (98)
    Current income taxes...............................................               27                  60                   6
    Deferred income taxes..............................................                4                   5                (109)
Other, net.............................................................              (14)                (30)                (63)
- - --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations.............................              108                 181                  79
Net cash provided (used) by discontinued operations....................               31                (438)                303
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities.......................              139                (257)                382
- - --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations..........................              259               1,534               1,039
Proceeds from sale of investments and other assets.....................               17                  60                  32
Capital expenditures...................................................              (23)                (14)                (21)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities..............................              253               1,580               1,050
- - --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt......................................................               (2)               (146)               (454)
Repayment of debt - finance operations.................................              (14)                (15)                (14)
Dividends paid.........................................................              (84)                (56)                (55)
Special distributions to shareholders..................................               --              (1,531)                 --
Purchase of common stock...............................................              (22)                 --                (960)
Proceeds from option exercises.........................................               14                   8                  57
Other..................................................................                4                  --                  --
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities..................................             (104)             (1,740)             (1,426)
- - --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................              288                (417)                  6
CASH AND EQUIVALENTS AT BEGINNING OF YEAR..............................               94                 511                 505
- - --------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR....................................         $    382            $     94            $    511
================================================================================================================================
</TABLE>

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







                                                                              21
<PAGE>   9


General Dynamics Corporation



CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>

(Dollars in millions, except per share amounts)                  Common Stock               Retained            Treasury Stock
                                                     ----------------------------------                     -----------------------
                                                     Shares           Par       Surplus     Earnings        Shares           Amount
                                                     ------------------------------------------------------------------------------

<S>                                                 <C>             <C>         <C>        <C>             <C>                <C>
BALANCE, DECEMBER 31, 1991......................    110,884,200     $ 111       $  --      $   2,620       27,057,036         $ 751
- - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings....................................                                                 815
Cash dividends declared ($.80 per share)........                                                 (57)
Shares purchased and retired....................    (26,496,864)      (27)                      (933)
Shares issued under Incentive
    Compensation Plan...........................                                                 (13)      (4,511,906)         (109)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 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...........                                              (1,546)
Shares issued under Incentive
    Compensation Plan...........................                                    8                        (721,306)          (18)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993......................     84,387,336        84           8          1,709       21,823,824           624
- - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings....................................                                                 238
Cash dividends declared ($1.40 per share).......                                                 (87)
Shares purchased................................                                                              529,600            22
Shares issued under Incentive
    Compensation Plan...........................                                   (5)                       (961,877)          (15)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994......................     84,387,336     $  84       $   3      $   1,860       21,391,547         $ 631
===================================================================================================================================
</TABLE>

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






22
<PAGE>   10
                                                    General Dynamics Corporation



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(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.

       ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.

       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, including general and administrative expenses and
research and development costs, as incurred for the determination of sales and
operating earnings. 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 $234, $292 and $233 in 1994, 1993 and 1992, 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 $30, $33 and
$32 in 1994, 1993 and 1992, respectively, and are included in operating costs
and expenses on the Consolidated Statement of Earnings.

       INTEREST, NET. Interest income was $27, $40 and $34 in 1994, 1993 and
1992, respectively. Interest expense of $6 and $22 has been allocated to
discontinued businesses in 1993 and 1992, respectively, on the ratio of net
assets of discontinued operations to consolidated net assets. Interest expense
incurred by the company's finance operations totaled $13, $15 and $16, in 1994,
1993 and 1992, respectively, and is classified as operating costs and expenses.
Interest payments for the total company were $16, $28 and $58 in 1994, 1993 and
1992, 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 63.4, 63.3 and 75.6
million in 1994, 1993 and 1992, 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 AND MARKETABLE SECURITIES. The company considers
securities with a remaining maturity of three months or less when purchased to
be cash equivalents. Marketable securities consist primarily of tax-exempt
municipal bonds, investment grade commercial paper, direct obligations of the
U.S. government and its agencies, preferred stock, and other short-term
investment funds. The company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of January 1, 1994. The company determined all of its
investments currently held in debt and equity securities are trading securities
as defined by SFAS 115 and as such are reported at fair value. Prior to adoption
of SFAS 115, cash and equivalents and marketable securities were stated at cost.
Unrealized holding gains and losses (the adjustment to fair value) recognized in
earnings during 1994 were not significant. Accordingly, the adoption of SFAS 115
did not have a significant impact on the company's financial condition or
results of operations.

       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, plus estimated earnings, less
progress payments. Cost includes amounts incurred, as well as amounts required
to be recorded under GAAP which have been deferred. Incurred costs include
production costs and related overhead, including general and administrative
expenses. Deferred costs represent the portion of the company's estimated
workers' compensation and retiree medical costs which is not allocable to
contracts until incurred.

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





                                                                              23
<PAGE>   11
General Dynamics Corporation



       PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried
at cost net of accumulated depreciation. The company primarily uses accelerated
methods of depreciation for depreciable assets. Depletion of coal properties is
computed using the units-of-production method.

       ENVIRONMENTAL LIABILITIES. The company accrues environmental costs when
it is probable that a liability has been incurred and the amount can be
reasonably estimated. Cleanup and other environmental exit costs related to
discontinued operations are recorded at the time of disposal of the operation.
Recorded liabilities have not been discounted. To the extent the U.S. government
has specifically agreed to pay the ongoing maintenance and monitoring costs at
sites currently used in the conduct of the company's government contracting
business, these costs are treated as contract costs and recognized as incurred.

       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.

       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.

       MISSILE SYSTEMS. 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
September 30, 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.

       ELECTRONICS. 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.

       TACTICAL MILITARY AIRCRAFT. 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.

       MATERIAL SERVICE. During the first quarter of 1994, the company closed
the sales of the lime, brick and a portion of the concrete pipe operations of
its Material Service business for a total of $50 in cash. No gains or losses
were recognized on the sales. The company intends to sell the remaining product
lines of the Material Service business.

       SPACE LAUNCH SYSTEMS. On May 1, 1994, the company closed the sale of its
Space Launch Systems business to Martin Marietta Corporation for $209 in cash.
The company recognized a gain on disposal of $15, or $.24 per share, net of
income taxes of $8.

       COMMERCIAL AIRCRAFT SUBCONTRACTING. On July 1, 1994, the company and
McDonnell Douglas Corporation (McDonnell Douglas) announced an agreement to
terminate their contract for the company's production of fuselage sections for
the MD-11 jetliner. Under the agreement, the responsibility for production of
fuselages will be transferred from the company's Commercial Aircraft
Subcontracting business to McDonnell Douglas with the delivery of the 166th
shipset in early 1996. Also as part of the agreement, all previous unnegotiated
contract changes were settled. The company's Commercial Aircraft Subcontracting
business will seek no new business and will cease operations after the
completion of its obligations under this agreement.

       EARNINGS FROM OPERATIONS. The operating results of discontinued
operations are:

<TABLE>
<CAPTION>


                                        Year Ended December 31
- - -------------------------------------------------------------------
                                      1994       1993         1992
- - -------------------------------------------------------------------
<S>                                  <C>        <C>         <C>
Net sales........................    $  644     $ 1,474     $ 5,460
===================================================================
Earnings (loss) before
    income taxes.................    $   --     $   (44)    $   201
Provision (credit) for
    income taxes.................        --         (14)         65
- - -------------------------------------------------------------------
Net earnings (loss)..............    $   --     $   (30)    $   136
- - -------------------------------------------------------------------
Net earnings (loss) per share....    $   --     $  (.47)    $  1.80
===================================================================
</TABLE>


       The 1993 and 1992 results reflect charges of $25 ($16 after tax, or $.25
per share) and $33 ($22 after tax, or $.29 per share), respectively, related to
Space Launch Systems' Commercial Atlas Expendable Launch Vehicle program. These
charges were the direct result of launch failures in each of those periods.

       The 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.






24
<PAGE>   12
                                                    General Dynamics Corporation



       NET ASSETS OF DISCONTINUED OPERATIONS. The assets and liabilities of
discontinued operations are:

<TABLE>
<CAPTION>

                                                    December 31
- - -------------------------------------------------------------------
                                                 1994         1993
- - -------------------------------------------------------------------
<S>                                             <C>         <C>
Current assets...........................       $  52       $ 1,429
Noncurrent assets........................         124           185
- - -------------------------------------------------------------------
Total Assets.............................       $ 176       $ 1,614
===================================================================
Current liabilities......................       $  79       $ 1,280
Noncurrent liabilities...................          53            31
- - -------------------------------------------------------------------
Total Liabilities........................       $ 132       $ 1,311
- - -------------------------------------------------------------------
Net Assets...............................       $  44       $   303
===================================================================
</TABLE>


C. SPECIAL DISTRIBUTIONS TO SHAREHOLDERS

On May 6, 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 December 31, 1993. 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

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 included 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

The provision (credit) for federal income taxes for continuing operations is
summarized as follows:

<TABLE>
<CAPTION>
                                         Year Ended December 31
- - -------------------------------------------------------------------
                                     1994         1993         1992
- - -------------------------------------------------------------------
<S>                                 <C>          <C>          <C>
Current........................     $ 116        $ 138        $ 114
Deferred.......................         4            5         (109)
- - -------------------------------------------------------------------
                                    $ 120        $ 143        $   5
===================================================================
</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 December 31
- - ----------------------------------------------------------------
                                      1994      1993        1992
- - ----------------------------------------------------------------
<S>                                   <C>       <C>        <C>
Statutory income tax rate.........    35.0%     35.0%       34.0%
Research and experimentation
    and investment tax credits....      --        --       (30.6)
Other.............................      --       (.4)       (1.8)
- - ----------------------------------------------------------------
Effective income tax rate.........    35.0%     34.6%        1.6%
================================================================
</TABLE>

       In 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. Claims in
excess of the research and experimentation credits recognized have been
disallowed by the Internal Revenue Service (IRS). The company is contesting this
disallowance in the U.S. Tax Court. No further benefits will be recognized until
the resolution of the Tax Court litigation.






                                                                              25
<PAGE>   13
General Dynamics Corporation



       The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following:

<TABLE>
<CAPTION>
                                                      December 31
- - -------------------------------------------------------------------
                                                   1994        1993
- - -------------------------------------------------------------------
<S>                                               <C>         <C>
Long-term contract costing methods...........     $ 120       $ 143
Accrued costs on disposed businesses.........       107          84
A-12 termination.............................        90          71
Restructuring costs..........................        28          40
Coal mining liabilities......................        27          28
Other........................................        89         109
- - -------------------------------------------------------------------
Deferred Assets..............................     $ 461       $ 475
===================================================================
Lease income.................................     $  79       $  86
Other........................................        66          69
- - -------------------------------------------------------------------
Deferred Liabilities.........................     $ 145       $ 155
===================================================================
Net Deferred Asset...........................     $ 316       $ 320
===================================================================
</TABLE>

       No valuation allowance was required for the company's deferred tax assets
at December 31, 1994 and 1993. The current portion of the net deferred tax asset
is $185 and $214 at December 31, 1994 and 1993, 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 $107, $316 and $258 in
1994, 1993 and 1992, respectively.

       The IRS has completed its examination of the company's consolidated tax
returns for the years 1977 through 1989. Certain issues related to the years
1977 through 1986 are in litigation (for further discussion see Note O). Other
issues related to the years 1987 through 1989 have been protested to the IRS
Appeals Division. In addition, the IRS is currently examining the company's
consolidated tax returns for the years 1990 through 1993. As the company has
recorded liabilities for tax contingencies, resolution of these matters is 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>

                                                     December 31
- - -------------------------------------------------------------------
                                                   1994        1993
- - -------------------------------------------------------------------
<S>                                             <C>         <C>
Incurred costs and estimated profits........    $ 4,072     $ 4,307
Other costs.................................        160         146
- - -------------------------------------------------------------------
                                                  4,232       4,453
Less advances and progress payments.........      3,881       4,011
- - -------------------------------------------------------------------
                                                $   351     $   442
===================================================================
</TABLE>

       At December 31, 1994 and 1993, contracts in process include $129 and
$110, respectively, of deferred costs. Substantially all other amounts included
in contracts in process represent an unbilled receivable. General and
administrative costs included in contracts in process amounted to $18 and $28 at
December 31, 1994 and 1993, 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>

                                                     December 31
- - -------------------------------------------------------------------
                                                   1994        1993
- - -------------------------------------------------------------------
<S>                                             <C>         <C>
Land and improvements......................     $    72     $    79
Coal reserves..............................          52          53
Buildings and improvements.................         152         156
Machinery and equipment....................         797         870
- - -------------------------------------------------------------------
                                                  1,073       1,158

Less accumulated depreciation,
    depletion and amortization.............         809         856
- - -------------------------------------------------------------------
                                                $   264     $   302
===================================================================
</TABLE>

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

H. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>

                                                     December 31
- - -------------------------------------------------------------------
                                                  1994         1993
- - -------------------------------------------------------------------
<S>                                             <C>           <C>
Workers' compensation........................   $  162        $ 174
A-12 termination liability and legal fees....       61           57
Salaries and wages...........................       56           71
Retiree medical..............................       50           26
Accrued costs on SINCGARS....................       14           48
Income taxes payable.........................       --           35
Other.......................................       149          207
- - -------------------------------------------------------------------
                                                $  492        $ 618
===================================================================
</TABLE>






26
<PAGE>   14
                                                    General Dynamics Corporation



I. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                     December 31
- - -------------------------------------------------------------------
                                                 1994          1993
- - -------------------------------------------------------------------
<S>                                             <C>           <C>
9.95% Debentures due 2018..................     $  39         $  39
Other......................................         2            --
- - -------------------------------------------------------------------
                                                   41            39
Less:
Unamortized discount.......................         1             1
Current portion............................         1            --
- - -------------------------------------------------------------------
                                                $  39         $  38
===================================================================
</TABLE>

       Annual sinking fund payments, sufficient to retire 5 percent of the $100
aggregate principal amount of the 9.95 percent Debentures originally issued,
will commence in 2011. 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 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 1994 and 1993.

J. OTHER LIABILITIES

Other liabilities consist of the following:

<TABLE>
<CAPTION>

                                                     December 31
- - -------------------------------------------------------------------
                                                  1994         1993
- - -------------------------------------------------------------------
<S>                                             <C>          <C>
Accrued costs on disposed businesses.........   $  306       $  239
Coal mining related liabilities..............       73           74
Other........................................      156          169
- - -------------------------------------------------------------------
                                                $  535       $  482
===================================================================
</TABLE>

       The company has recorded liabilities for contingencies retained by the
company related to disposed businesses. These liabilities include retiree
medical, 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, including workers' compensation and reclamation. 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 known claims
and an actuarially-determined estimate of future claims that will be awarded to
current and former employees is discounted based on a rate of 7.25 percent and 6
percent at December 31, 1994 and 1993, respectively. Liabilities to reclaim land
disturbed by the mining process and to perform other closing functions are
recorded over the production lives of the mines.

K. SHAREHOLDERS' EQUITY

STOCK SPLIT. On March 4, 1994, the company's board of directors authorized a
two-for-one stock split effected in the form of a 100 percent stock dividend
distributed on April 11, 1994, to shareholders of record on March 21, 1994.
Shareholders' equity has been restated to give retroactive recognition to the
stock split in prior periods 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 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
                                                     December 31
- - -------------------------------------------------------------------
                                                  1994         1993
- - -------------------------------------------------------------------
<S>                                             <C>           <C>
ASSETS
Leases receivable.......................        $  236        $ 251
Due from parent.........................            83           92
- - -------------------------------------------------------------------
                                                $  319        $ 343
===================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt....................................        $  161        $ 175
Income taxes............................            79           86
Shareholder's equity....................            79           82
- - -------------------------------------------------------------------
                                                $  319        $ 343
===================================================================
</TABLE>






                                                                             27
<PAGE>   15

General Dynamics Corporation


<TABLE>
<CAPTION>

  EARNINGS DATA

                                            Year Ended December 31
- - -------------------------------------------------------------------
                                          1994       1993      1992
- - -------------------------------------------------------------------
<S>                                       <C>       <C>        <C>
Interest income......................     $ 16      $  17      $ 18
Interest expense and income taxes....       14         16        17
- - -------------------------------------------------------------------
Net earnings.........................     $  2      $   1      $  1
===================================================================
</TABLE>

       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:

<TABLE>
<CAPTION>

                                                     December 31
- - -------------------------------------------------------------------
                                                 1994          1993
- - -------------------------------------------------------------------
<S>                                             <C>           <C>
Aggregate future minimum
    lease payments.........................     $ 288         $ 319
Unguaranteed residual value................        38            38
Less unearned interest income..............        90           106
- - -------------------------------------------------------------------
                                                $ 236         $ 251
===================================================================
</TABLE>

       Semiannual sinking fund payments, sufficient to retire 100 percent 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 percent to 9
percent, with a weighted average rate of 8.1 percent. The schedule of principal
payments for the next five years is $4 in 1995, $14 in 1996, $14 in 1997, $16 in
1998 and $20 in 1999.

M. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the company's financial instruments are as follows:

<TABLE>
<CAPTION>

                                            December 31
- - ----------------------------------------------------------------------
                                   1994                   1993
- - ----------------------------------------------------------------------
                            Carrying      Fair     Carrying      Fair
                             Amount       Value     Amount       Value
- - ----------------------------------------------------------------------
<S>                           <C>        <C>         <C>         <C>
Cash and equivalents and
    marketable securities.    $1,059     $1,059      $585        $585
Other investments.........        --         --        50          50
Long-term debt............        40         42        38          45
Long-term debt-finance
    operations............       161        163       175         181
======================================================================
</TABLE>

       Fair value is based on quoted market prices, except for long-term
debt-finance operations where fair value is based on a risk-adjusted discount
rate. The company was contingently liable for debt and lease guarantees and
other arrangements aggregating up to a maximum of approximately $105 and $160 at
December 31, 1994 and 1993, respectively. The company knows of no event of
default which would require it to satisfy these guarantees and, therefore, the
fair value of these contingent liabilities is considered immaterial.

N. OTHER INCOME, NET

Other income, net consists of the following:

<TABLE>
<CAPTION>

                                          Year Ended December 31
- - -------------------------------------------------------------------
                                         1994       1993       1992
- - -------------------------------------------------------------------
<S>                                    <C>          <C>       <C>
Gain on sale of Federal
    Express Corporation stock.....     $  --        $  37     $  21
Amortization of gain on
    sale of DSD...................         7           26        16
Other, net........................        (7)           5        (9)
- - -------------------------------------------------------------------
..................................     $  --        $  68     $  28
===================================================================
</TABLE>

       During 1992 and 1993, the company redeemed its 5 3/4 percent Debentures
which were exchangeable for shares of Federal Express Corporation common stock
owned by the company and having no book value. As a result, the company sold
these shares 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.

       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 (DSD). 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
had 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 was recognized on a
straight-line basis through the end of 1994, which was consistent with the
original amortization period.

O. COMMITMENTS AND CONTINGENCIES

LITIGATION. On January 7, 1991, the U.S. Navy terminated for default a
contract with the company and McDonnell Douglas for the full-scale development
of the U.S. Navy's A-12 aircraft. The company and McDonnell Douglas are
actively pursuing litigation against the U.S. government in the U.S. Court of
Federal Claims in connection with the termination (See Note P).







28
<PAGE>   16
                                                    General Dynamics Corporation



       On March 8, 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 the federal securities laws, fraud, negligent
misrepresentation, and breach of fiduciary duty by the defendants with regard to
disclosures made, or omitted with regard to the subsequent divestiture of core
businesses, which disclosures were contained in the company's tender offer
completed in July 1992. The company intends to defend itself vigorously in
connection with this matter, and expects that resolution of this matter will not
have a material impact on the company's financial condition or results of
operations.

       As previously reported, 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, in July 1994,
the company received a Statutory Notice of Deficiency from the IRS which the
company is contesting in the U.S. Tax Court. The company has accrued an amount
which is expected to be adequate to cover any liability arising from this
matter. Also, as part of the Tax Court litigation, the company is contesting the
disallowance by the IRS of a portion of its claims for research and
experimentation tax credits (for further discussion see Note E). The resolution
of the Tax Court litigation is expected to take several years.

       The company is also a defendant in other lawsuits and claims and in other
investigations of varying nature. The company believes its liabilities in these
proceedings, in the aggregate, are not material to the company's financial
condition or results of operations.

       ENVIRONMENTAL. The company is directly or indirectly involved in fifteen
Superfund sites in which the company, along with other major U.S. corporations,
has been designated a potentially responsible party (PRP) by the U.S.
Environmental Protection Agency or a state environmental agency with respect to
past shipments of hazardous waste to sites now requiring environmental cleanup.
Based on a site by site analysis of the estimated quantity of waste contributed
by the company relative to the estimated total quantity of waste, the company
believes it is a small contributor and its liability at any individual site is
not material. The company is also involved in the cleanup and remediation of
various conditions at sites it currently or formerly owned or operated.

       The company measures its environmental exposure based on currently
available facts, existing technologies, and presently enacted laws and
regulations. Where a reasonable basis for apportionment exists with other PRPs,
the company has considered only its share of the liability. The company
considers the solvency of other PRPs, whether responsibility is being disputed,
and its experience in similar matters in determining its share. Based on a site
by site analysis, the company has recorded an amount which it believes will be
adequate to cover any liability arising from the sites.

       OTHER. 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 December 31, 1994. For a discussion of other
financial guarantees, see Note M. The company's rental commitments under
existing leases at December 31, 1994, are not significant.

       In connection with the sale of its defense businesses, the company
remains contingently liable for contract performance by the purchasers of these
businesses under agreements 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 in the
aggregate 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 in Note O, the U.S. Navy terminated the company's A-12 aircraft
contract for default. The 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
(the contractors) were parties to the contract with the U.S.Navy, each had full
responsibility to the U.S. Navy for performance under the contract, and both are
jointly and severally liable for potential liabilities arising from the
termination. As a consequence of the termination for default, the U.S. Navy
demanded that the contractors repay $1,352 in unliquidated progress payments,
but agreed to defer collection of the amount pending a decision by the U.S.
Court of Federal Claims on the contractors' appeal of the termination for
default, or a negotiated settlement.

       The contractors filed a complaint on June 7, 1991, in the U.S. Court of
Federal Claims contesting the default termination. The suit, in effect, seeks to
convert the termination for default to a termination for convenience of the U.S.
government and seeks other legal and equitable relief. In the aggregate, the
contractors seek to recover payment for all costs incurred in the A-12 program
and its termination, including interest. The total amount sought, as updated
through the end of 1994, is approximately $2 billion, over and above amounts
previously received from the U.S. Navy. The company has not recognized any claim
revenue from the U.S. Navy.

       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 1994,
the court issued an order vacating the termination for default, finding that the
A-12 contract was not terminated for contractor default, but because the Office
of the Secretary of Defense withdrew support and funding from the A-12. Besides
Count XVII, six other counts have been tried or are the subject of pending
motions for summary judgment. All remaining counts are set for trial in November
1995, including the amount owed by the parties as a result of the termination.

       The company has fully reserved the contracts in process balance
associated with the A-12 program and has accrued the company's estimated
termination liabilities, and the liability associated with pursuing the
litigation through trial. In the unlikely event the contractors are ultimately
found to be in default of the A-12 contract and are required to repay all
unliquidated progress payments, additional losses of approximately $675 (before
tax), plus interest, may be recognized by the company. This result is considered
remote.






                                                                              29
<PAGE>   17
General Dynamics Corporation

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 1993, the company introduced a new long-term incentive program which granted
Performance Restricted Stock and Performance Stock Options. The terms of the
grants generally provide for the quantity of restricted stock and the
exercisability of the stock options to be tied to the performance of the
company's stock price over a two year period.

       There were 15,590 shares of restricted stock awarded in 1994, and 784,296
shares outstanding at year end. Information with respect to stock options is as
follows:

<TABLE>
<CAPTION>

                                 1994           1993          1992
- - ----------------------------------------------------------------------
<S>                          <C>           <C>            <C>
NUMBER OF SHARES UNDER
    STOCK OPTIONS:
Outstanding at beginning
    of year................     3,610,428     2,937,704      7,575,152
    Granted................       135,810     1,394,190        233,190
    Exercised..............    (1,705,172)     (493,308)    (4,399,730)
    Canceled...............      (220,179)     (228,158)      (470,908)
- - ----------------------------------------------------------------------
Outstanding at end of year.     1,820,887     3,610,428      2,937,704
======================================================================
STOCK OPTIONS EXERCISABLE
    AT END OF YEAR.........       509,866       205,518        324,438
======================================================================
PRICE OF STOCK OPTIONS:
    Granted................  $39.81-46.84  $46.66-50.07   $28.32-39.75
    Exercised..............  $ 7.21-23.56  $ 7.21-39.16   $11.91-39.16
    Canceled...............  $18.06-47.00  $ 7.58-38.19   $12.16-39.16
    Outstanding............  $ 7.21-47.00  $ 7.21-47.00   $12.16-39.75
======================================================================
</TABLE>

       At December 31, 1994, 1,999,717 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.

       Federal income tax benefits of $21, $7 and $54 were credited to
shareholders' equity during 1994, 1993 and 1992, respectively, 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 primarily 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 December 31
- - -------------------------------------------------------------------
                                     1994         1993         1992
- - -------------------------------------------------------------------
<S>                                 <C>          <C>          <C>
Service cost-benefits earned
  during period..................   $  65        $  70        $ 124
Interest cost on projected
  benefit obligation.............     146          164          263
Actual loss (gain) on plan assets     152         (350)        (246)
Net amortization and deferral....    (334)         129          (92)
- - -------------------------------------------------------------------
                                    $  29        $  13        $  49
===================================================================
</TABLE>

       The following table sets forth the plans' funded status:

<TABLE>
<CAPTION>

                                                     December 31
- - --------------------------------------------------------------------
                                                 1994         1993
- - --------------------------------------------------------------------
<S>                                            <C>          <C>
Actuarial present value of
    benefit obligations:
    Vested benefit obligation..............    $ (1,780)    $ (1,891)
====================================================================
    Accumulated benefit obligation.........    $ (1,814)    $ (1,933)
====================================================================
    Projected benefit obligation...........    $ (1,946)    $ (2,138)
Plans' assets at fair value................       2,429        2,674
- - --------------------------------------------------------------------
Plans' assets in excess of projected
    benefit obligation.....................         483          536
Unrecognized net gain......................        (196)        (284)
Unrecognized prior service cost............         315          362
Unrecognized net asset at
    January 1, 1986........................         (56)         (65)
- - --------------------------------------------------------------------
Prepaid pension cost.......................    $    546     $    549
====================================================================
</TABLE>

       Assumptions used in accounting for the plans are as follows:

<TABLE>
<CAPTION>

                                               December 31
- - ------------------------------------------------------------------
                                     1994        1993         1992
- - ------------------------------------------------------------------
<S>                                <C>          <C>         <C>
Discount rate...................        8%           7%          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 recovery in long-term interest rates, the company increased
its discount rate assumption from 7 percent to 8 percent at December 31, 1994,
which decreased the projected benefit obligation approximately $270. The sale of
the company's Tactical Military Aircraft business was the primary reason for the
overall decrease in net periodic pension cost in 1993.





30
<PAGE>   18
                                                    General Dynamics Corporation

       Changes 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.

       In the first quarter of 1992, the company recognized a $40 (before tax)
pension settlement and curtailment gain as part of the gain on disposal of
Cessna. Later in 1992, the company began deferring gains realized by the
commercial plan for the purpose of offsetting any costs associated with its
final disposition, either through reversion or other actions. These deferred
gains have been classified against the prepaid pension cost related to the
commercial plan resulting in a net asset of $115 at December 31, 1994 and 1993,
which is included in other noncurrent assets on the Consolidated Balance Sheet.

       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 December 31, 1994, approximately 67 percent of the plans' assets are
invested in securities of the U.S. government or its agencies, 14 percent in
mortgage-backed securities and 19 percent 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 $30, $43 and
$84 in 1994, 1993 and 1992, respectively. Approximately 6 million shares of the
company's common stock were held by the plans at both December 31, 1994 and
1993.

       OTHER POSTRETIREMENT BENEFITS. Historically, health care and life
insurance benefits have generally been provided to retired employees. During
1993, the company announced a number of changes to the retiree medical programs
for its non-union retirees and employees. Commencing July 1, 1993, the company
discontinued its post-65, self-insured retiree medical program and continued its
pre-65 retiree medical program only for those employees who as of that date were
either a retiree age 55 and older, or an employee who had attained the age of 50
with a certain number of years of service. This change in coverage has
subsequently been negotiated with certain union groups. The coverage provided
and the extent to which retirees share in the cost of the benefits vary.

       Effective January 1, 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 in 1992. 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 Accounting Principles Board Opinion No. 30.

       The net periodic postretirement benefit cost for the total company 
included the following:

<TABLE>
<CAPTION>
                                             Year Ended December 31
- - -------------------------------------------------------------------
                                                  1994         1993
- - -------------------------------------------------------------------
<S>                                              <C>           <C>
Service cost - benefits earned during period...  $  12         $ 13
Interest cost on projected benefit obligation..     51           41
Actual loss (gain) on plan assets..............      1           (6)
Amortization of unrecognized
    transition obligation......................     44           40
Net amortization and deferral..................     (7)           1
- - -------------------------------------------------------------------
...............................................  $ 101         $ 89
===================================================================
</TABLE>

       The following table sets forth the plans' funded status:

<TABLE>
<CAPTION>
                                                     December 31
- - -------------------------------------------------------------------
                                                   1994        1993
- - -------------------------------------------------------------------
<S>                                               <C>         <C>
Accumulated postretirement benefit obligation:
    Retirees...................................   $ 405       $ 368
    Other fully eligible participants..........      73         139
    Other active participants..................     195         285
- - -------------------------------------------------------------------
                                                    673         792
Less plans' assets at fair value...............     134         113
- - -------------------------------------------------------------------
Obligation in excess of plans' assets..........     539         679
Unrecognized transition obligation.............    (428)       (521)
Unrecognized net loss..........................      (2)        (87)
- - -------------------------------------------------------------------
Accrued post retirement benefit obligation.....   $ 109       $  71
===================================================================
</TABLE>






                                                                              31
<PAGE>   19
General Dynamics Corporation


       Assumptions used in accounting for the plans are as follows:

<TABLE>
<CAPTION>
                                                     December 31
- - ------------------------------------------------------------------
                                                  1994        1993
- - ------------------------------------------------------------------
<S>                                            <C>         <C>
Discount rate...............................         8%          7%
Expected long-term rate of return on
       assets...............................         8%          8%
Assumed health care cost trend rate for
    next year:
    Post-65 claim groups....................         8%          9%
    Pre-65 claim groups.....................   10.5-14%    11.5-15%
==================================================================
</TABLE>

       As stated above, the company increased its discount rate assumption from
7 percent to 8 percent at December 31, 1994, which decreased the accumulated
postretirement benefit obligation approximately $70. The obligation also
decreased in 1994 due to a change in coverage in the represented employees of
the company's coal mining operations.

       The health care cost trend rates are assumed to gradually decline to 4.5
percent and 5 percent 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 $65 in the accumulated
postretirement benefit obligation at December 31, 1994, and an increase of $8 in
the aggregate of the service and interest cost components of the 1994 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
December 31, 1994, approximately 35 percent of the trust's assets were invested
in diversified common stocks and 65 percent in securities of the U.S. government
and its agencies and other 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 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
$25 at December 31, 1994. 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 in
accordance with GAAP.

S. BUSINESS SEGMENT INFORMATION

The company's primary business is supplying weapons systems to the U.S.
government. For a discussion of the company's business segments, including their
current business environment, operating results and related uncertainties, see
Management's Discussion and Analysis of the Results of Operations and Financial
Condition.


T. QUARTERLY DATA   (Unaudited)

<TABLE>
<CAPTION>
                                                                                              Common Stock
                                                                                 --------------------------------------------------
                                                                                    Market Price
                                                                                     Range (a)
                            Net     Operating        Net       Net Earnings      ----------------                        Special
                           Sales    Earnings       Earnings    Per Share (d)     High         Low      Dividends      Distributions
- - -----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>         <C>            <C>           <C>         <C>          <C>              <C>
1994
    4th Quarter.........   $ 724       $ 82        $   58         $  .92        $45 1/8     $38 1/4      $.35                --
    3rd Quarter.........     714         77            54            .85         46 5/8      38           .35                --
    2nd Quarter (b).....     820         82            71           1.12         45          39           .35                --
    1st Quarter.........     800         80            55            .86         47 5/8      41 3/16      .35                --
===================================================================================================================================
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 (c).....     858         90           687          10.90         60          47 11/16     .20                10
===================================================================================================================================
</TABLE>

Note: Quarterly data is based on a 13 week period.

(a) 1993 market prices reflect the impact of the company's special 
    distributions to shareholders.

(b) Includes gain from the sale of the Space Launch Systems business which 
    increased net earnings and net earnings per share by $15 and $.24, 
    respectively. See Note B.

(c) 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.

(d) Earnings per share for the four quarters, when totalled, may not equal 
    the earnings per share for the year due to the impact of common stock
    equivalents as described in Note A.


32


<PAGE>   20


                                                    General Dynamics Corporation


 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 by management. An important element of the monitoring process is an
internal audit program that independently assesses the effectiveness of the
control environment.

       The Audit and Corporate Responsibility 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
internal audit to review the activities of each.

       The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose report follows.


       /s/ MICHAEL J. MANCUSO                      /s/ JOHN W. SCHWARTZ
       ------------------------                    ----------------------
       Michael J. Mancuso                          John W. Schwartz
       Vice President and                          Corporate Controller
       Chief Financial Officer




 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 December
31, 1994 and 1993, and the related Consolidated Statements of Earnings,
Shareholders' Equity and Cash Flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

       We conducted our audits in accordance with 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 December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.

       As discussed in Note R to the Consolidated Financial Statements,
effective January 1, 1993, the company changed its method of accounting for
postretirement benefits other than pensions.



                                                /s/ ARTHUR ANDERSEN LLP
                                                -----------------------
                                                ARTHUR ANDERSEN LLP

Washington, D.C.,
January 24, 1995



                                                                           33
<PAGE>   21
General Dynamics Corporation


SELECTED FINANCIAL DATA
(Unaudited)

<TABLE>
<CAPTION>

                                                     1994        1993          1992           1991             1990
 ----------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share and per employee amounts)
<S>                                                <C>          <C>           <C>            <C>              <C>
Summary of Operations

Net sales.......................................   $  3,058     $ 3,187       $ 3,225        $ 3,161          $ 3,051
Operating costs and expenses....................      2,737       2,878         2,970          2,950            2,982
Interest, net...................................         22          36            27             10              (11)
Provision (credit) for income taxes.............        120         143             5(a)         (82)(b)           (2)
Earnings (loss) from continuing operations......        223         270           305(a)         274 (b)           (1)
Earnings (loss) per share from..................
    continuing operations.......................       3.51        4.27          4.03(a)        3.20 (b)         (.01)
Cash dividends on common stock..................       1.40        1.00           .80            .50              .50
Sales per employee..............................    143,900     138,100       121,500        102,800           80,800
- - -----------------------------------------------------------------------------------------------------------------------
Financial Position at December 31

Cash and equivalents and marketable securities..   $  1,059     $   585       $   943        $   812          $    98
Property, plant and equipment, net..............        264         302           339            380              654
Total assets....................................      2,673       2,635         3,530          4,177            3,883
Long-term debt (including current portion)......         40          38           183            613              611
Long-term debt - finance operations
    (including current portion).................        161         175           190            204              216
Shareholders' equity............................      1,316       1,177         1,874          1,980            1,510
    Per share...................................      20.89       18.81         30.30          23.62            18.12
- - -----------------------------------------------------------------------------------------------------------------------
Other Information

Funded backlog..................................   $  4,562     $ 5,487       $ 6,780        $ 8,214          $ 7,995
Total backlog...................................      6,006       7,015         8,488          9,846            9,491
Shares outstanding at December 31
    (in millions)...............................       63.0        62.6          61.8           83.8             83.3
Fully diluted weighted average shares
    outstanding (in millions)...................       63.4        63.3          75.6           85.6             83.4
Common shareholders of record
    at December 31..............................     23,935      24,496        26,158         33,078           34,178
Active employees at December 31:
    Total company...............................     24,200      30,500        56,800         80,600           98,100
    Excluding discontinued operations...........     21,300      23,100        26,500         30,700           37,800
=======================================================================================================================
</TABLE>

(a) Includes a $95 gain ($1.26 per share) from the recognition of research and 
    experimentation and investment tax credits. See Note E.

(b) Includes a $140 gain ($1.64 per share) from an adjustment to the company's 
    deferred income tax liability.

34

