10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number 1-3671

(Exact name of registrant as specified in its charter)

Delaware	13-1673581
State or Other Jurisdiction of Incorporation or Organization	I.R.S. Employer Identification No.
3190 Fairview Park Drive, Falls Church, Virginia Address of principal executive offices	22042-4523 Zip Code

Registrant’s telephone number, including area code

(703) 876-3000

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, Par Value $1.00 Per Share	New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange

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

None

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

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

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

      The aggregate market value of the voting common stock held by non-affiliates of the registrant was $21,471,168,789 as of June 28, 2002.

      217,537,097 shares of the registrant’s common stock were outstanding at March 14, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

      Parts I and II incorporate information from certain portions of the registrant’s Annual Report to security holders for the fiscal year ended December 31, 2002 (the 2002 Annual Report).

      Part III incorporates information from certain portions of the registrant’s definitive proxy statement for the 2003 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

      Certain sections of this Annual Report on Form 10-K contain forward-looking statements, which are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog stability. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: the company’s successful execution of internal performance plans; general U.S. and international political and economic conditions; changing priorities in the U.S. government defense budget; termination of government contracts due to unilateral government action; program performance, including the ability to perform fixed-price contracts within estimated costs and performance issues with key suppliers and subcontractors; changing customer demand or preferences for business aircraft, including the effects of economic conditions on the business aircraft market; reliance on a large fleet customer for a significant portion of the firm aircraft contracts backlog and the majority of the options backlog; the status or outcome of legal and/or regulatory proceedings; and the timing and occurrence (or non-occurrence) of circumstances beyond the company’s control. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the company or any person acting on the company’s behalf are qualified by the cautionary statements in this section. The company does not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

PART I

Item 1.     Business

Business Overview

      General Dynamics is a Delaware corporation formed in 1952 as successor to the Electric Boat Company. In the mid 1990’s, the company began a series of acquisitions that expanded its core businesses in the defense industry, broadened its expertise in systems integration and C4ISR (command and control, communications, computers, intelligence, surveillance and reconnaissance) systems, and added business aviation products and services to the company’s offerings. Since 1995, the company has acquired 26 businesses, including three acquisitions during 2002. In the fourth quarter of 2002, the company entered into a definitive agreement to acquire General Motors Defense of London, Ontario (GM Defense), a business unit of General Motors Corporation. The transaction closed on March 1, 2003. The company’s businesses include mission-critical information technology and communications, land and amphibious combat systems, shipbuilding and marine systems, and business aviation. These are leading-edge technology businesses that provide the highest quality products and capabilities to the company’s customers.

      The company operates in four primary business groups — Information Systems and Technology, Combat Systems, Marine Systems and Aerospace — and a smaller Resources group. Information on revenues, operating profit and identifiable assets attributable to each of the company’s reportable business groups is included in Note S to the Consolidated Financial Statements on page 54 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

      The company’s principal customers are the U.S. military, other government organizations, the armed forces of allied nations, and a diverse base of corporate and industrial buyers. The company’s government-source revenues are significantly linked to trends in the U.S. defense industry, and to a lesser extent, the defense industries of foreign countries. Its business aviation revenues are affected by global economic conditions in general and the market for capital goods in particular.

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      Since taking office in 2001, the Bush administration has increased the U.S. defense budget to levels not seen since the Reagan administration. For fiscal year 2003, Congress appropriated $366 billion to the Department of Defense, an increase of 12 percent from the fiscal year 2002 appropriation, to strengthen the U.S. military as it confronts current threats and transforms to meet future ones. Of this amount, $59 billion was allocated for research and development programs, and $72 billion for procurement — increases of 21 percent and 17 percent over the prior year’s funding levels, respectively. For fiscal year 2004, President Bush has requested that Congress appropriate $380 billion for the Department of Defense, including almost $62 billion for research and development and almost $73 billion for procurement. These two categories of spending drive over 60 percent of the company’s sales, and the fact that these increases have come in spite of increasing budget deficits reflects the Bush administration’s commitment to the military. While Congress will ultimately decide how much to appropriate for the military in 2004, the company expects continued support of its key programs.

      The company’s business aviation segment is subject to overall economic conditions in the United States and has been affected by the economic slowdown in the capital goods sector. However, as a result of aggressive management initiatives, the company is well-positioned to gain market share when the economy improves. The company also markets its aircraft to the U.S. government and international governments for special missions, expanding the reach of this business beyond the individual and corporate customer base.

      Following is a description of the company’s products and services by business group, competition and other related information.

Products and Services

INFORMATION SYSTEMS AND TECHNOLOGY

      The Information Systems and Technology group is a leading integrator of secure communication systems and networks, and command, control and intelligence systems for the U.S. military and its allies.

      Net sales for the Information Systems and Technology group were 27 percent of the company’s consolidated net sales in 2002, 22 percent in 2001 and 23 percent in 2000. Net sales (in millions) by major products and services were as follows:

	Year Ended December 31
	2002		2001		2000
Communications systems	$	1,235	$	701	$	658
Command, control and intelligence systems		943		708		622
Special purpose computing, surveillance and reconnaissance systems		822		723		659
Network infrastructure systems		681		559		398
	$	3,681	$	2,691	$	2,337

      The Information Systems and Technology group provides defense and commercial customers with infrastructure and systems integration capabilities required to process, communicate and manage information effectively. The group has leading market positions in the design and development, integration, deployment, and maintenance of wireline and wireless voice and data networks; C4ISR systems; encryption; ruggedized computing; advanced software and electronics systems development; and lifecycle management and support.

      The group’s expertise in technology, systems design and integration, and key platform subsystems helps the company’s other business groups improve their products. This expertise has also positioned the company as a lead systems integrator, delivering solutions that create decisive communication and information-management advantages for military, government and commercial customers around the world. In pursuit of this vision, the company realigned the group by common expertise and customer groups effective January 1, 2002. This resulted in the creation of five business units: Advanced Information Systems, C4 Systems, Decision Systems, Network Systems and General Dynamics United Kingdom Limited.

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COMBAT SYSTEMS

      The Combat Systems group provides systems integration, design, development, production and support for armored vehicles, armaments, munitions and components. Its product lines include a full spectrum of armored vehicles, turrets and turret drive systems; unmanned systems; suspensions, engines and transmissions; medium-caliber guns; ammunition handling systems; medium-and large-caliber ammunition; reactive armor; and ordnance.

      Net sales for the Combat Systems group were 21 percent of the company’s consolidated net sales in 2002, 19 percent in 2001 and 12 percent in 2000. Net sales (in millions) by major products and services were as follows:

	Year Ended December 31
	2002		2001		2000
Main battle tanks and related products	$	732	$	624	$	515
Engineering and development		590		406		303
Medium armored vehicles and related products		561		336		108
Munitions and propellant		383		339		28
Rockets and missile components		254		278		144
Armament systems		103		97		75
Aerospace components and other		300		130		100
	$	2,923	$	2,210	$	1,273

      The acquisition of GM Defense establishes the company as the sole source provider under a contract with the U.S. Army to complete development, testing, evaluation and production of up to 2,131 eight-wheeled armored vehicles called “Stryker” vehicles. Prior to the acquisition, the company and GM Defense were partners in a joint venture that delivered 356 Stryker vehicles under this contract.

      The company designs and manufactures the M1 Series Abrams Main Battle Tank for the Army and various foreign governments. The company also performs engineering and upgrade work, and provides support for existing armored vehicles. Under an Army contract, the company is upgrading 307 tanks to the M1A2 SEP configuration. As of December 31, 2002, 163 tanks remain to be upgraded, with deliveries scheduled through 2004.

      The company is under contract to the U.S. Marine Corps for the systems development and demonstration phase of the Advanced Amphibious Assault Vehicle (AAAV). Under this phase, the company expects to complete the design and development of the AAAV, manufacture nine new prototypes, refurbish three early development prototypes and prepare for the production phase of the program.

      The company expects a major role in the development of the Army’s Future Combat Systems (FCS) based on the recent signing of a teaming agreement with The Boeing Company and United Defense, L.P. The FCS will be the core of the Army’s transformation into its next-generation fighting force. The agreement forms an integrated design team for the development of the manned ground vehicle elements of the FCS.

      In Spain, the company has a contract to provide to the Spanish army 235 Leopard main battle tanks, built under license from a German company. The company is also scheduled to produce 181 Pizarro tracked infantry fighting vehicles, including 176 vehicles in Phase II of the program, which was awarded in 2002.

      The company provides a total range of armament system capabilities including design, development, production and lifecycle management. Products include a wide range of medium- and large-caliber ammunition and propellant products. The company provides systems management and produces rockets, warheads and motors for the Army’s 2.75-inch Hydra-70 rocket system. The company is the gun system integrator for the F-35 Joint Strike Fighter (JSF) and the systems integrator of the Advanced Precision Kill Weapon System program, the successor to the Hydra-70 rocket system. The company contributes advanced composite structures to numerous aerospace platforms, including the F-16, F-18, F-22, C-17, JSF, and unmanned aerial vehicles such as the Global

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Hawk and the Predator. The company also manufactures single- and multi-barrel medium-caliber gun systems, individual- and crew-served weapons, and reactive armor tiles for the Bradley Fighting Vehicle.

MARINE SYSTEMS

      The Marine Systems group provides the U.S. Navy with combat vessels, including nuclear submarines, surface combatants and auxiliary ships. The group also provides ship management services for the U.S. government and builds large-hulled vessels for commercial customers.

      Net sales for the Marine Systems group were 26 percent of the company’s consolidated net sales in 2002, 30 percent in 2001 and 33 percent in 2000. Net sales (in millions) by major products and services were as follows:

	Year Ended December 31
	2002		2001		2000
Nuclear submarines	$	2,030	$	1,852	$	1,741
Surface combatants		843		927		923
Auxiliary and commercial ships		325		394		364
Repair and other services		452		439		385
	$	3,650	$	3,612	$	3,413

      The company designs, builds and supports nuclear submarines for the Navy. The company has construction contracts for the first four ships of the Virginia-class submarine program and the third of three Seawolf-class attack submarines. Construction work on the Virginia-class submarine is shared equally with Northrop Grumman Newport News (NGNN).

      The company also has design, engineering and construction management responsibilities for the conversion of four Trident-class SSBN nuclear ballistic missile submarines to cruise missile SSGN configuration. As SSGNs, these submarines will be delivery platforms for cruise missiles, special operations forces and advanced payloads and sensors.

      In addition to nuclear submarine design and construction, the company performs a broad range of engineering work, including advanced research and technology development, systems and component design evaluation, prototype development, and logistics support for the operating fleet. The company also serves as ship integrator for certain components and subassemblies of the submarines, such as electronic equipment.

      The company has been awarded contracts to date for the construction of 27 Arleigh Burke-class destroyers (DDG-51) and plays a lead role in providing design, engineering and ongoing lifecycle support services for these ships. The company was also a member of a three-contractor team led by Northrop Grumman Ship Systems (NGSS) that was awarded a contract to design and build the Navy’s new San Antonio-class of amphibious assault ships (LPD). In 2002, the company, the Navy and NGSS agreed to transfer construction of four LPDs from the company to NGSS in exchange for construction of up to four DDGs. As a result of this swap arrangement and a multiyear agreement awarded shortly thereafter, the company received contracts to construct a total of seven DDGs with a total value of $3.7 billion.

      The company was one of six contractors that received a contract from the Navy to explore advanced concepts for a Littoral Combat Ship (LCS). The LCS is an integrated surface combatant capable of operating in coastal areas against terrorist threats, high-speed swarm boats, mines and diesel submarines. The LCS program envisions ship construction beginning in 2005.

      DD(X) is the Navy’s next generation family of surface combatants. The company is a major subcontractor on the design phase of the DD(X) program.

      The company designs and builds ships for the Navy and commercial customers. The company currently has contracts for the design and construction of three dry-cargo combat logistics ships, with options for up to nine additional ships, and has recently completed the last of eight strategic sealift ships for the Navy. Contracts with

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commercial customers include the construction of two roll-on/roll-off cargo ships and four double-hull crude oil tankers.

      The company provides ship repair and other services to the Navy and commercial customers. The company also manages 23 ready-reserve, fast sealift and prepositioning ships for the U.S. government.

AEROSPACE

      The Aerospace group is composed of Gulfstream Aerospace Corporation and General Dynamics Aviation Services. The Aerospace group designs, develops, manufactures, markets, and provides maintenance and support services for technologically advanced business jets. The group also sells special mission aircraft to governments around the world. Gulfstream has delivered nearly 1,400 aircraft to customers since 1958, the year operations began.

      Net sales for the Aerospace group were 24 percent of the company’s consolidated net sales in 2002, 27 percent in 2001 and 29 percent in 2000. Net sales (in millions) by major products and services were as follows:

	Year Ended December 31
	2002		2001		2000
New aircraft	$	2,470	$	2,694	$	2,353
Aircraft services		384		394		421
Pre-owned aircraft		435		177		255
	$	3,289	$	3,265	$	3,029

      During 2002, the company increased its product offering from four aircraft models to seven, priced from $12 million to $46 million. In addition to the G100 and G200 products, added in 2001, the Aerospace group introduced the G150, G300, G400, G500 and G550 in 2002. The Gulfstream GIV-SP, GV and GV-SP brand names will no longer be used for future models. The company increased its product offering to compete vigorously in market segments in which it did not previously participate.

      The Gulfstream G550 and the Gulfstream G500 serve the large-cabin ultra-long-range market. The company believes the G550 and G500 offer the best combination of large cabin size, fast cruising speed and advanced avionics of any large business jet in the ultra-long-range market segment. The Gulfstream G550 received a Provisional Type Certificate from the Federal Aviation Administration in 2002. Initial entry into service for the G550 is scheduled for the third quarter of 2003 and for the G500, the first quarter of 2004. The G400 large-cabin business jet serves the long-range market. The company believes the G400’s large cabin, advanced technology and five-year service and training package make it the leader in its market segment. The G400 is scheduled to enter service in 2003. The company believes the G300 serves an emerging market segment: business travelers seeking an affordable large-cabin business jet with international flight capability. The G300 is also scheduled for entry into service in 2003. The G150, a wide-cabin high-speed aircraft, will replace the G100 when it enters into service in 2005. The company believes the G150 will offer the best range and speed of any aircraft in its market segment.

      This expanded product offering reduced the company’s product pricing separation from a $10 million average to a $5 million average between each aircraft model. This created a new buying opportunity for customers by offering greater value compared with competitors’ products.

      Gulfstream Product Support provides an integrated worldwide network of company-owned service centers, parts depots, and field and technical representatives able to meet customer needs at any time. Gulfstream Airborne Product Support is an industry-exclusive customer service provided to support warranty aircraft. Additional Gulfstream authorized third party service centers provide customers extended product support coverage. General Dynamics Aviation Services provides aircraft maintenance services, spares and technical support for Challengers, Falcons, Gulfstreams, Hawkers and other business jet aircraft. In an effort to grow the service business, five strategically located facilities service and support both Gulfstream aircraft and competitors’ aircraft.

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      The Aerospace group routinely accepts pre-owned aircraft in trade to facilitate the sale of new Gulfstream aircraft. These aircraft are then resold by the company in the pre-owned market.

RESOURCES

      The company’s Resources businesses consist of a coal mining operation, an aggregates operation and a leasing operation for liquefied natural gas tankers. Net sales for these businesses represented approximately 2 percent of the company’s consolidated net sales in 2002 and 2001 and 3 percent of consolidated sales in 2000. Net sales (in millions) were $286 in 2002, $276 in 2001 and $253 in 2000.

Competition

      Virtually all of the products produced and sold by the company are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. Additionally, the product and program needs of the company’s government and commercial customers regularly change and evolve. The company’s ability to successfully compete is highly dependent on the technical excellence and reliability of its products and services, its reputation for integrating complex systems, the ability of its leadership team to successfully manage the company’s businesses and respond to the changing needs of its customers, and the cost competitiveness of its products and services.

DEFENSE CONTRACTS

      The company’s defense businesses are subject to substantial competition from domestic and foreign entities ranging from large defense contractors to smaller companies. A variety of factors determine the results of different competitions including, price, technological capabilities, past performance and customer confidence. The company also is frequently a partner with, or subcontractor to, a defense supplier on one project, with which it is competing for another award. These strategic partnerships and relationships improve the company’s ability to obtain new business, but also make it crucial for the company to distinguish itself from its competitors.

      With respect to the market in which the Information Systems and Technology group participates, the company competes with a broad range of entities ranging in size from large defense industry participants to smaller niche competitors that have specialized technologies. In the market it serves, the Combat Systems group faces a variety of major domestic and foreign competitors in each of its operating units. Additionally, the company is partnered with two large defense contractors on the manned vehicle portion of the Future Combat Systems program. The Marine Systems group has one primary competitor with which the company is also teamed on several programs including the Virginia-class submarine construction contract.

BUSINESS AIRCRAFT

      The business aircraft market generally is divided into segments based on the cabin size and range of the aircraft. The Aerospace group offers a total of seven products in the following market segments: mid-cabin high speed; wide-cabin high-speed; large-cabin mid-range; large-cabin long-range; and large-cabin ultra-long-range.

      The G100 mid-cabin high-speed business jet and the G150 wide-cabin high-speed business jet compete in the $12 million to $14 million pricing segment. The G150 will offer many of the same performance and range features as the G100, but will have a wider and longer cabin. It is scheduled to enter service in 2005. Both the G100 and G150 compete with the Raytheon Hawker 800XP, the Bombardier Learjet 60 and the Cessna Citation Sovereign. The G200 large-cabin mid-range business jet competes in the $16 million to $21 million pricing segment against Bombardier’s Challenger 300, Raytheon’s Hawker Horizon, Dassault’s Falcon 50EX, Cessna’s Citation X and Embraer’s Legacy.

      The G300 large-cabin mid-range business jet, another new entry in the Gulfstream fleet, competes in the $21 million to $27 million pricing segment. The G300 is expected to enter service in 2003 and will compete with Bombardier’s Challenger 604 and Dassault’s Falcon 2000EX. The G400 large-cabin long-range business jet, scheduled to enter service in 2003, competes in the $29 million to $33 million pricing segment against Dassault’s Falcon 900C and Falcon 900EX. The G500 large-cabin ultra-long-range business jet competes in the $35 million

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to $38 million pricing segment. The G500 is expected to enter service in early 2004. The G550 large-cabin ultra-long-range business jet competes in the $43 million to $46 million pricing segment. The G550 is expected to enter service in 2003 and competes with Bombardier’s Global Express and to a large degree the Boeing Business Jet.

      The company believes it competes favorably in its markets on the basis of the performance characteristics of its aircraft, the quality and timeliness of the service it provides, its advanced technology, and its innovative marketing programs.

Customers

      Historically, the majority of the company’s sales have been to U.S. government agencies. In 2002, 64 percent of the company’s net sales were to the U.S. government, either as a prime contractor or as a subcontractor; 23 percent were to U.S. commercial customers; 6 percent were to international commercial customers; and the remaining 7 percent were directly to international defense customers.

U.S. GOVERNMENT

      Net sales to the U.S. government include Foreign Military Sales (FMS), which are sales to foreign governments through the U.S. government, whereby the company contracts with and receives payment from the U.S. government and the U.S. government assumes the risk of collection from the customer. U.S. government sales (in millions) were as follows:

		Year Ended December 31
		2002			2001			2000
Domestic		$	8,385		$	7,138		$	6,056
FMS			421			181			124
	Total U.S. government	$	8,806		$	7,319		$	6,180
Percent of net sales			64	%		61	%		60	%

      The company’s U.S. government products and programs must compete with the products and programs of other defense contractors as well as the non-defense spending priorities of the U.S. government. The funding of government programs is dependent on congressional appropriations and administrative allotment of funds, and may be affected by changes in government policies resulting from various military and political developments. The company’s U.S. government business is sensitive to changes in national and international priorities and the budget of the U.S. government.

      In addition, U.S. government defense contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations, therefore making U.S. government programs subject to uncertain future funding levels.

      The company’s U.S. government business is performed under both cost-reimbursement (sometimes referred to as “cost-type”) and fixed-price contracts. Contracts for research, engineering, prototypes, repair and maintenance are often cost-reimbursement arrangements, under which the customer reimburses the company for allowable costs and pays a predetermined fee. A large percentage of the company’s production contracts are fixed-price arrangements, pursuant to which the company agrees to perform a specific scope of work for a fixed amount. For the year ended December 31, 2002, cost-type and fixed-price contracts accounted for approximately 46 percent and 54 percent, respectively, of the company’s defense business.

      Cost-reimbursement and fixed-price contracts present their own advantages and disadvantages for the company. Cost-type arrangements generally involve lower risk for the company, and sometimes involve fee schedules that allow the company to obtain increased payments for satisfying certain performance criteria. However, not all of the company’s costs are recoverable under these types of contracts, and the government

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typically has the right to object to the company’s costs as not allowable or unreasonable, which can increase the company’s risk. Fixed-price arrangements generally provide the company with greater profit potential if it can complete the work for less than the contract amount. However, fixed-price contracts also put the company at risk for potential cost overruns.

U.S. COMMERCIAL

      Commercial sales (in millions) to domestic customers were $3,235 in 2002, $3,555 in 2001 and $3,158 in 2000. These sales represented approximately 23 percent of the company’s consolidated net sales in 2002, 29 percent in 2001, and 31 percent in 2000. The majority of the company’s commercial sales were for Gulfstream aircraft to national and multinational corporations. These sales are to many of the Fortune 500 public companies, large privately held companies and wealthy individuals. The aircraft are operated by customers in a wide spectrum of industries, including pharmaceuticals, consumer goods, high technology, energy, industrial manufacturing, finance, insurance, real estate, mining, transportation, communications, public utilities and retail.

      The company has an agreement with an unaffiliated customer, NetJets Inc. (NetJets), a unit of Berkshire Hathaway and the leader in the fractional market, for the sale of aircraft for use in its fractional ownership program. Sales to NetJets were approximately 6 percent of the Aerospace group’s sales in 2002 and approximately 9 percent of the group’s sales in both 2001 and 2000.

INTERNATIONAL

      Direct international sales (in millions) to both defense and commercial customers were $1,788 in 2002, $1,180 in 2001 and $967 in 2000. These sales represented approximately 13 percent of the company’s consolidated net sales in 2002, 10 percent in 2001, and 9 percent in 2000. International defense sales were derived primarily from the company’s subsidiaries located abroad. International commercial sales were related primarily to the export of business aircraft. The company owns operations located in Canada, the U.K., Spain and Germany. For the year ended December 31, 2002, sales and operating earnings from international operations were 7 percent and 6 percent of consolidated sales and operating earnings, respectively. Identifiable assets of operations domiciled outside the U.S. were 8 percent of total identifiable assets as of December 31, 2002, 7 percent as of December 31, 2001, and 4 percent as of December 31, 2000. At December 31, 2002, these assets consisted primarily of cash and intangible assets, including goodwill.

      For information regarding sales by geographic region, see Note S to the Consolidated Financial Statements on page 54 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

Suppliers

      The company is dependent upon suppliers and subcontractors for raw materials and a large number of components used in the production of its products. In some instances, the company is dependent on one or a few sources of supply. A disruption in deliveries from its suppliers, therefore, could have an adverse effect on the company’s ability to meet its commitments to customers. The company has not experienced, and does not foresee any, difficulty in obtaining the materials, components or supplies necessary for its business operations.

Research and Development

      The company’s defense and business aviation operations conduct independent research and development activities, which include bid and proposal work. The company’s defense businesses also conduct research and development activities under U.S. government contracts. These research efforts have been and continue to be concerned with developing products for large systems development programs and performing work under research and development technology contracts.

      Research and development activities of the company’s defense businesses represented the majority of company-sponsored expenditures in each of the past three years. A significant portion of these expenditures is recovered through overhead charges pursuant to U.S. government contracts. Research and development activities

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of the Aerospace group are internally funded product enhancement and product development programs for Gulfstream aircraft.

      Research and development expenditures (in millions) were as follows:

	Year Ended December 31
	2002		2001		2000
Company-sponsored	$	253	$	203	$	143
Customer-sponsored		134		83		87
	$	387	$	286	$	230

Backlog

      Summary backlog information (in millions) for each business group is as follows:

	December 31
													2002 Total
	2002						2001						Backlog Not
													Expected to be
	Funded		Unfunded		Total		Funded		Unfunded		Total		Filled in 2003
Information Systems and Technology	$	5,105	$	202	$	5,307	$	4,729	$	226	$	4,955	$	2,757
Combat Systems		4,233		733		4,966		3,434		1,760		5,194		3,670
Marine Systems		7,262		4,351		11,613		6,702		3,358		10,060		8,522
Aerospace		4,498		2,283		6,781		4,198		2,075		6,273		4,945
Resources		240		64		304		305		29		334		157
	$	21,338	$	7,633	$	28,971	$	19,368	$	7,448	$	26,816	$	20,051

      For further discussion of backlog, see Management’s Discussion and Analysis of the Results of Operations and Financial Condition on pages 21 through 35 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

DEFENSE BUSINESSES

      The total backlog represents the estimated remaining sales value of work to be performed under firm contracts. The funded backlog for government programs represents those items that have been authorized and appropriated by Congress and funded by the procuring agency. The unfunded backlog represents firm orders for which funding has not been appropriated. To the extent the backlog has not been funded, there is no assurance that congressional appropriations or agency allotments will be forthcoming.

AEROSPACE

      The Aerospace funded backlog represents orders for which the company has entered into definitive purchase contracts and has received deposits from the customers. The Aerospace unfunded backlog includes options to purchase new aircraft and agreements to provide future aircraft maintenance and support services. Forty-three percent of the Aerospace funded backlog is with commercial customers other than NetJets. The backlog with NetJets represents 53 percent of the Aerospace funded backlog. The remaining 4 percent of the Aerospace funded backlog is with government customers. NetJets represents substantially all of Aerospace option backlog. Deliveries of aircraft to NetJets are scheduled from 2003 through 2010 and represent approximately 7 percent to 15 percent of projected annual new aircraft sales during that period.

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Regulatory Matters

U.S. GOVERNMENT DEFENSE CONTRACTS

      In 2002, over 60 percent of the company’s net sales were to the U.S. government, either as a prime contractor or as a subcontractor. Generally, government contracts are subject to oversight audits by government representatives and contain provisions permitting termination, in whole or in part, at the government’s convenience or for default. If a contract is terminated at the convenience of the U.S. government, a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. Contracts that are terminated for default generally provide that the government only pays for the work it has accepted and may require the contractor to pay for the incremental cost of reprocurement and may hold the contractor liable for damages.

      The company’s government businesses are also subject to a number of procurement laws and regulations. Failure to comply with these regulations and requirements can result in civil, criminal or administrative proceedings involving fines, penalties, suspension of payments, and suspension or debarment from government contracting or subcontracting for a period of time.

BUSINESS AIRCRAFT

      The Aerospace group is subject to regulation by the Federal Aviation Administration in the United States and other similar aviation regulatory authorities throughout the world. For an aircraft to be manufactured and sold, the model must have received a Type Certificate from the appropriate aviation authority, and each individual aircraft must have also received a Certificate of Airworthiness. Maintenance facilities are also required to be licensed by aviation authorities. Aviation authorities have the power to require changes to aircraft if deemed necessary for safety purposes.

ENVIRONMENTAL

      The company’s operations are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. The company continually assesses its compliance status and management of other environmental matters. The company believes that its operations are in substantial compliance with all applicable environmental laws and regulations.

      Operating and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of the company’s operations. These costs are not significant relative to total operating costs or cash flows and often are allowable costs under the company’s contracts with the U.S. government. These costs have not been material in the past and, based on information presently available to the company and U.S. government policies relating to allowable costs in effect at this time, all of which are subject to change, the company does not expect continued compliance to have a material impact on the company’s results of operations, financial condition or cash flows.

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      Under existing U.S. environmental laws, “Potentially Responsible Parties” (PRP) are jointly and severally liable, and therefore, the company is potentially liable to the government or third parties for the full cost of remediating contamination at the company’s facilities or former facilities or at third-party sites where the company has been designated a PRP by the Environmental Protection Agency or a state environmental agency. In the unlikely event that the company is required to fully fund the remediation of a site, the statutory framework would allow the company to pursue rights to contribution from other PRPs. Additional information relating to the impact of environmental controls is included in Item 3, “Legal Proceedings — Environmental” on page 20 of this Annual Report on Form 10-K for the year ended December 31, 2002.

Intellectual Property

      The company is an established leader in the development of innovative products, manufacturing technologies and systems integration practices. In addition to owning a large portfolio of proprietary intellectual property, the company also licenses certain intellectual property rights of third parties, including the U.S. government. Additionally, in many cases, the U.S. government licenses the company’s patents, pursuant to which the government may use or authorize others to use the inventions covered by the patents. Although these intellectual property rights are important to the operation of the company’s business, no existing patent, license or other intellectual property right is of such importance that its loss or termination would, in the opinion of management, have a material impact on the company’s business.

Employees

      As of December 31, 2002, the company had approximately 54,000 employees, of whom 32 percent were covered by collective bargaining agreements with various unions, the most significant of which are the International Association of Machinists and Aerospace Workers, the Marine Draftsmen’s Association, the Metal Trades Council of New London, Connecticut, and the United Auto Workers Union. Agreements covering less than 1 percent of total employees are due to expire during 2003.

Available Information

      The company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the filing has been made with the SEC. Reports may be obtained through the company’s website at GeneralDynamics.com or by calling investor relations at (703) 876-3000.

      These reports may also be obtained at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20599. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (SEC.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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Executive Officers of The Registrant

      All executive officers of the company are elected annually. No executive officer of the company was selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions held for the last five years of the company’s executive officers as of March 14, 2003 were as follows:

Name, Position and Office	Age
David D. Baier — Vice President Taxes since August 1995		49
W.W. Boisture, Jr. — Executive Vice President and Group Executive, Aerospace since July 1999; President, Gulfstream Aerospace Corporation since March 2002; President and Chief Operating Officer, Gulfstream Aerospace Corporation December 1998 — March 2002; Executive Vice President, Gulfstream Aerospace Corporation February 1994 — December 1998		58
Allan C. Cameron — Vice President of the company and President of Bath Iron Works since March 1996		57
Nicholas D. Chabraja — Chairman of the Board of Directors of the company and Chief Executive Officer since June 1997		60
Michael E. Chandler — Vice President of the company and President of General Dynamics Network Systems since August 2001; Vice President of the company and President of General Dynamics Worldwide Telecommunication Systems February 2000 — August 2001; President of General Dynamics Worldwide Telecommunication Systems September 1999 — February 2000; Vice President and General Manager, GTE Government Systems Worldwide Telecommunication Systems Division November 1997 — September 1999		58
Cordis B. Colburn — Vice President Government Relations since May 2002; Staff Vice President February 1996 — May 2002		58
Kenneth C. Dahlberg — Executive Vice President and Group Executive, Information Systems and Technology since March 2001; Executive Vice President for Business Development and President, Raytheon International January 2000 — March 2001; President and Chief Operating Officer, Raytheon Systems Company December 1997 — December 1999		58
Gerard J. DeMuro — Vice President of the company and President of General Dynamics C4 Systems since August 2001; Vice President of the company and President of General Dynamics Communication Systems February 2000 — August 2001; President of General Dynamics Communication Systems September 1999 — February 2000; Vice President and General Manager, GTE Government Systems Communication Systems Division October 1997 — September 1999		47
Larry R. Flynn — Vice President of the company since October 2001; President, Product Support at Gulfstream Aerospace Corporation since May 2002; President of General Dynamics Aviation Services since February 2001; Senior Vice President, Aircraft Services at Gulfstream Aerospace Corporation December 1998 — February 2001; Vice President, Service and Product Support at Gulfstream Aerospace Corporation June 1995 — December 1998		51
David H. Fogg — Vice President and Treasurer since March 1998		47
Mark A. Fried — Vice President of the company and President of General Dynamics Decision Systems since October 2001; Vice President and General Manager of the Integrated Information Systems Group division of Motorola, Inc. January 1997 — October 2001		56

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Name, Position and Office	Age
Mark Haley — Vice President of the company and Deputy General Counsel since October 2002; Deputy General Counsel May 2002 — October 2002; Staff Vice President and Associate General Counsel February 2000 — May 2002; partner of Preti, Flaherty, Beliveau, Pachios & Haley November 1998 — February 2000		54
Charles M. Hall — Vice President of the company and President of General Dynamics Land Systems since September 1999; Vice President, Production and Delivery, General Dynamics Land Systems March 1997 — September 1999		51
David K. Heebner — Senior Vice President Planning and Development since October 2002; Vice President Strategic Planning January 2000 — October 2002; Lieutenant General and Assistant Vice Chief of Staff, U.S. Army, July 1997 — November 1999		58
Preston A. Henne — Vice President of the company since October 2001; Senior Vice President, Programs, Engineering and Test at Gulfstream Aerospace Corporation since May 2002; Senior Vice President, Programs at Gulfstream Aerospace Corporation September 1994 — May 2002		55
Kenneth A. Hill — Vice President Information Technology since April 1997		53
Linda P. Hudson — Vice President of the company and President of General Dynamics Armament and Technical Products since May 1999; Staff Vice President Business Development August 1997 — May 1999		52
Joseph T. Lombardo — Vice President of the company since October 2001; Chief Operating Officer at Gulfstream Aerospace Corporation since May 2002; Senior Vice President, Operations at Gulfstream Aerospace Corporation December 1998 — May 2002; Vice President, Co-Production at Gulfstream Aerospace Corporation June 1996 — December 1998		56
Michael J. Mancuso — Senior Vice President and Chief Financial Officer since March 1997		60
Bryan T. Moss — Vice President of the company since May 2002 and Vice Chairman and Director of Gulfstream Aerospace Corporation since March 1995		63
Phebe N. Novakovic — Vice President Strategic Planning since October 2002; Staff Vice President May 2002 — October 2002; Director of Strategic Planning and Development March 2001 — May 2002; Special Assistant to the Secretary and Deputy Secretary of Defense July 1997 — March 2001		45
Walter M. Oliver — Senior Vice President Human Resources and Administration since March 2002; Vice President Human Resources and Administration January 2001 — March 2002; Senior Vice President Human Resources, Ameritech Corp., April 1994 — December 2000		57
Kendell M. Pease — Vice President Communications since May 1998; Rear Admiral and Chief Information Officer, U.S. Navy, August 1992 — May 1998		57
David A. Savner  — Senior Vice President and General Counsel, Secretary since May 1999; Senior Vice President — Law and Secretary April 1998 — May 1999; Senior Partner of Jenner & Block, LLC May 1987 — April 1998		58
William O. Schmieder — Vice President International since March 2001; Staff Vice President International January 2000 — March 2001; Vice President Business Development, Lockheed Martin Electronics & Missiles June 1997 — December 1999		55

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Name, Position and Office	Age
John W. Schwartz — Vice President and Controller since March 1998		46
John F. Stewart — Vice President of the company and President of General Dynamics Advanced Information Systems since August 2001; Vice President of the company and President of General Dynamics Electronic Systems February 2000 — August 2001; President of General Dynamics Electronic Systems September 1999 — February 2000; Vice President and General Manager, GTE Government Systems Electronic Systems Division November 1997 — September 1999		62
Michael W. Toner  — Executive Vice President and Group Executive, Marine Systems and President of Electric Boat Corporation, since March 2003; Vice President of the company and President of Electric Boat Corporation January 2000 — March 2003; Senior Vice President of Electric Boat Corporation June 1998 — January 2000; Vice President, Innovation at Electric Boat Corporation October 1995 — June 1998		59
Arthur J. Veitch — Executive Vice President and Group Executive, Combat Systems since March 2002; Senior Vice President and Group Executive, Combat Systems September 1999 — March 2002; Vice President of the company and President of General Dynamics Land Systems February 1997 — September 1999		57
Richard H. Vortmann — Vice President of the company and President of National Steel and Shipbuilding Company since February 1999; President, Chief Executive Officer and Chairman of the Board of National Steel and Shipbuilding Company April 1989 — February 1999		58
Michael S. Wilson — Vice President of the company and President of General Dynamics Ordnance and Tactical Systems since October 2001; President of General Dynamics Ordnance and Tactical Systems January 2001 — October 2001; President of Ordnance and Tactical Systems division of Primex Corporation January 1997 — January 2001		56
John K. Welch — Executive Vice President and Group Executive, Marine Systems March 2002 — March 2003; Senior Vice President and Group Executive, Marine Systems January 2000 — March 2002; Vice President of the company and President of Electric Boat Corporation October 1995 — January 2000		53

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Item 2.     Properties

      Principal Business Groups. A summary of floor space (square feet in millions) at the main facilities of the Information Systems and Technology, Combat Systems, Marine Systems and Aerospace business groups as of December 31, 2002, follows:

		Company				Government
		Owned		Leased		Owned
		Facilities		Facilities		Facilities		Total
Information Systems and Technology:
General Dynamics Advanced Information Systems
	Pittsfield, MA (Labs)		—		—		0.9		0.9
	Bloomington, MN (Office)		—		0.5		—		0.5
	Mountain View, CA (Office/ Factory)		0.2		0.1		—		0.3
	Greensboro, NC (Factory/ Office)		—		0.2		—		0.2
	Annapolis Junction, MD (Office/ Lab)		—		0.1		—		0.1
	Arlington, VA (Office/ Lab)		—		0.1		—		0.1
	Florham Park, NJ (Office/ Lab)		—		0.1		—		0.1
General Dynamics C4 Systems
	Taunton, MA (Office/ Factory)		0.1		0.4		—		0.5
	Needham, MA (Office/ Lab)		0.4		—		—		0.4
	Ottawa, Ontario (Office/ Plant)		0.2		0.1		—		0.3
	Calgary, Alberta (Office)		—		0.2		—		0.2
General Dynamics Decision Systems
	Scottsdale, AZ (Office/ Lab/ Factory/ Warehouse)		1.5		—		—		1.5
General Dynamics Network Systems
	Needham, MA (Office/ Lab)		0.1		—		—		0.1
General Dynamics United Kingdom Limited
	East Sussex, U.K. (Office)		0.1		—		—		0.1
	South Wales, U.K. (Office)		0.1		—		—		0.1
Total Information Systems and Technology			2.7		1.8		0.9		5.4
Combat Systems:
General Dynamics Armament and Technical Products
	Marion, IL (Plant/ Office)		0.9		—		—		0.9
	Camden, AK (Plant/ Office)		0.2		0.3		—		0.5
	Saco, ME (Plant/ Office)		0.5		—		—		0.5
	DeLand, FL (Plant/ Office)		0.4		—		—		0.4
	Lincoln, NE (Plant/ Office)		0.2		0.2		—		0.4
	Burlington, VT (Plant/ Office)		—		0.2		—		0.2
General Dynamics Land Systems
	Lima, OH (Plant)		—		—		1.6		1.6
	Muskegon, MI (Plant)		1.0		0.1		—		1.1
	Sterling Heights, MI (Office/ Warehouse)		0.6		—		—		0.6
	Scranton, PA (Plant)		—		0.3		—		0.3
	Anniston, AL (Plant/ Warehouse)		—		—		0.2		0.2
	Woodbridge, VA (Office)		0.1		0.1		—		0.2
	Imperial, CA (Plant/ Warehouse)		—		0.1		—		0.1
	Shelby Township, MI (Plant/ Office)		—		0.1		—		0.1
	Tallahassee, FL (Plant/ Office)		—		0.1		—		0.1
	Westminster, MD (Plant/ Office)		—		0.1		—		0.1

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		Company				Government
		Owned		Leased		Owned
		Facilities		Facilities		Facilities		Total
General Dynamics Ordnance and Tactical Systems
	Marion, IL (Plant/ Office)		—		0.8		—		0.8
	Red Lion, PA (Plant/ Office)		0.3		—		—		0.3
	St. Marks, FL (Plant/ Office)		0.3		—		—		0.3
	Anniston, AL (Plant/ Office)		—		0.1		—		0.1
	St. Petersburg, FL (Office)		—		0.1		—		0.1
Santa Barbara Sistemas, S.A.
	Murcia, Spain (Plant)		—		—		1.0		1.0
	Trubia, Spain (Plant)		—		—		1.0		1.0
	Palencia, Spain (Plant)		—		—		0.9		0.9
	Granada, Spain (Plant)		—		—		0.7		0.7
	Oviedo, Spain (Plant)		—		—		0.5		0.5
	Sevilla, Spain (Office/ Plant)		—		—		0.4		0.4
	La Coruna, Spain (Plant)		—		—		0.2		0.2
Santa Barbara Sistemas GmbH
	Kaiserslautern, Germany (Office/ Plant)		—		—		0.6		0.6
Total Combat Systems			4.5		2.6		7.1		14.2
Marine Systems:
Bath Iron Works Corporation
	Brunswick, ME (Plant/ Warehouse/Office)		1.1		0.2		—		1.3
	Bath, ME (Shipyard)		1.1		—		—		1.1
Electric Boat Corporation
	Groton, CT (Shipyard)		2.8		0.1		—		2.9
	Quonset Point, RI (Plant/ Warehouse)		0.4		1.1		—		1.5
National Steel and Shipbuilding Company
	San Diego, CA (Shipyard)		0.3		0.1		—		0.4
Total Marine Systems			5.7		1.5		—		7.2
Aerospace:
Gulfstream Aerospace Corporation
	Savannah, GA (Factory/ Office)		1.4		0.1		—		1.5
	Long Beach, CA (Service/ Completion Center)		0.3		0.1		—		0.4
	Dallas, TX (Service/ Completion Center)		0.2		0.1		—		0.3
	Appleton, WI (Service/ Completion Center)		0.1		0.1		—		0.2
	Fort Worth, TX (Completion Center)		—		0.2		—		0.2
	Mexicali, Mexico (Factory)		—		0.2		—		0.2
	Brunswick, GA (Service/ Completion Center)		—		0.1		—		0.1
General Dynamics Aviation Systems
	Las Vegas, NV (Service Center)		—		0.1		—		0.1
	Minneapolis, MN (Service Center)		—		0.1		—		0.1
	West Palm Beach, FL (Service Center)		—		0.1		—		0.1
	Westfield, MA (Service Center)		0.1		—		—		0.1
Total Aerospace			2.1		1.2		—		3.3

      Other Properties. Freeman Energy operates two underground coal mines and one surface coal mine in Illinois. Coal preparation facilities and rail loading facilities are located at each mine sufficient for its output.

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Material Service operates several stone quarries, as well as sand and gravel pits and yards in the Chicago, Illinois and Indiana areas for its aggregates business.

      The company owns approximately 225 acres of property in Rancho Cucamonga, California, of which approximately 60 acres is undeveloped.

      General. The company believes that its main facilities are adequate for the present needs of the company and its subsidiaries and, as supplemented by planned improvements and construction, are expected to remain adequate for the foreseeable future.

Item 3.     Legal Proceedings

      The company is subject to litigation and other legal proceedings arising out of the ordinary course of its business or arising under provisions relating to the protection of the environment.

      The company is primarily engaged in providing products and services under contracts with the U.S. government and, to a lesser degree, under direct foreign sales contracts, some of which are funded by the U.S. government. These contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. government investigate whether the company’s operations are being conducted in accordance with these requirements. The company does not believe that the outcome of any such government investigations will have a material impact on the company’s results of operations, financial condition or cash flows.

Termination of A-12 Program

      In January 1991, the 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 Navy’s carrier-based Advanced Tactical Aircraft. Both the company and McDonnell Douglas, now owned by The Boeing Company, (the contractors) were parties to the contract with the Navy; each had full responsibility to the 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 Navy demanded that the contractors repay $1.4 billion 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’ challenge to 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. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following further proceedings, the court issued an order converting the termination for default to a termination for convenience. On March 31, 1998, a final judgment was entered in favor of the contractors for $1.2 billion plus interest.

      On July 1, 1999, the U.S. Court of Appeals for the Federal Circuit found that the Trial Court erred in converting the termination for default to a termination for convenience without first determining whether a default existed. The Court of Appeals remanded the case for determination of whether the government’s default termination was justified. On August 31, 2001, following the trial on remand, the Trial Court issued an opinion upholding the default termination of the A-12 contract. In its opinion, the Trial Court rejected all of the government’s arguments to sustain the default termination except for one: schedule. With respect to the government’s schedule arguments, the Trial Court held that the schedule the government unilaterally imposed

18

was reasonable and enforceable, and that the government had not waived that schedule. On the sole ground that the contractors were not going to deliver the first aircraft on the date provided in the unilateral schedule, the Trial Court upheld the default termination and entered judgment for the government.

      The contractors filed post-trial motions seeking reconsideration by the Trial Court of its opinion and judgment. On October 4, 2001, the Trial Court denied the contractors’ post-trial motions. On November 30, 2001, the company filed its notice of appeal, and during 2002, the contractors and the Navy filed their respective appellate briefs with the Court of Appeals. On January 9, 2003, the appeal was argued before a three-judge panel of the Court of Appeals.

      Following the August 31, 2001, decision of the Trial Court, the Navy and the contractors discussed the continued deferral of the payment of the $1.4 billion in unliquidated progress payments, plus interest, by an extension of the deferment agreement between the parties pursuant to which the Navy had deferred collection since 1991. No agreement was reached concerning this issue, though the contractors do not believe that the Trial Court’s decision triggers their obligation to make payment to the Navy. The Navy took no action to collect this amount from the contractors and settlement negotiations were conducted by the parties. On August 30, 2002, the Navy notified the contractors in writing that unless they paid, within 30 days, these unliquidated progress payments plus interest (approximately $2.3 billion), it would turn the matter over to the Defense Finance and Accounting Service for collection. The contractors have advised the Navy that they would resist collection as improper. In light of the Navy’s collection demand, the contractors requested the Trial Court to enter a stay of its judgment pending the outcome of the appeal. On December 13, 2002, the Trial Court agreed and entered a stay of its judgment pending appeal.

      On March 17, 2003, the Court of Appeals vacated the Trial Court’s judgment and remanded the case to the Trial Court for further proceedings. The Court of Appeals found that the Trial Court misapplied the controlling legal standard in concluding that the termination for default could be sustained solely on the basis of the contractors’ inability to complete the first flight of the first test aircraft by December 1991. Rather, the Court of Appeals held that in order to uphold a termination for default a Trial Court would have to determine that there was no reasonable likelihood that the contractors could perform the entire contract effort within the time remaining for performance. This is a determination the company does not believe is supported by the evidence.

      If, contrary to the company’s expectations, the default termination is ultimately sustained, the contractors could be required to repay the government as much as $1.4 billion for progress payments received for the A-12 contract plus interest (approximately $1 billion at December 31, 2002). This would result in liability of approximately $1.2 billion pretax, $685 million after-tax, to be taken as a charge against discontinued operations. The company has sufficient resources to pay such an obligation if required.

False Claims Act

      On May 7, 1999, a whistleblower suit was filed under seal against the company in the United States Bankruptcy Court for the District of South Carolina. The plaintiff alleges that the company violated the False Claims Act by omitting certain facts when it testified before Congress in 1995 concerning funding for the third Seawolf-attack submarine. The plaintiff sought damages in the amount of the contract award for the third Seawolf, subject to trebling under the False Claims Act. The Department of Justice declined to intervene in the case on the plaintiff’s behalf and the suit was unsealed in December 2000. The complaint was removed to the United States District Court for the District of South Carolina. On October 15, 2002, the District Court entered an order granting the company’s motions for summary judgment and directed the court to enter judgment on behalf of the company. The plaintiff may appeal the judgment. The company believes that any such motion or appeal by the plaintiff is likely to be denied.

Avolar

      Following UAL Corporation’s announcement on March 22, 2002, that it was closing its Avolar subsidiary, which was to engage in a business jet aircraft fractional ownership program, the company terminated its agreements with Avolar. The company retained deposits totaling $50 million related to this transaction. On May 28, 2002, United BizJet Holdings, Inc., a subsidiary of UAL Corporation, filed a claim against the company

19

in the Circuit Court of Cook County, Illinois, seeking the return of the Avolar deposits. On October 11, 2002, the Circuit Court dismissed United BizJet’s complaint without prejudice for failure to engage in mandatory pre-litigation mediation. United BizJet moved for reconsideration, but on January 3, 2003, the Circuit Court denied reconsideration and reaffirmed its order of dismissal. On December 9, 2002, United BizJet filed for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code. The company believes the outcome of this matter will not have a material impact on the company’s results of operations, financial condition or cash flows.

Environmental

      The company’s operations are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. The company is directly or indirectly involved in environmental responses at some of the company’s current and former facilities, and at third-party sites not owned by the company but where the company has been designated a PRP by the EPA or a state environmental agency. The company is also involved in the investigation, cleanup and remediation of various conditions at current and former company sites where the release of hazardous materials may have occurred. Based on historical experience, the company expects that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable costs and, therefore, reimbursed by the U.S. government. Based on a site-by-site review and analyses by outside counsel and environmental consultants, the company believes that its liability at any individual site, or in the aggregate, arising from such sites at which there is a known environmental condition, or Superfund or other multi-party sites at which the company is a PRP, is not material to the company’s results of operations, financial condition or cash flows. Moreover, based on all known facts and expert analyses, the company does not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to the company’s results of operations, financial condition or cash flows.

Other

      Various claims and other legal proceedings generally incidental to the normal course of business are pending or threatened against the company. While the company cannot predict the outcome of these matters, the company believes its potential liabilities in these proceedings, individually or in the aggregate, will not have a material impact on the company’s results of operations, financial condition or cash flows.

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

      No matters were submitted to a vote of the company’s security holders during the fourth quarter of the year ended December 31, 2002.

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PART II

Item 5.      Market for the Company’s Common Equity and Related Stockholder Matters

      The company’s common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange.

      The high and low sales prices of the company’s common stock and the cash dividends declared with respect to the company’s common stock for each quarterly period during the two most recent fiscal years are included in Note T to the Consolidated Financial Statements appearing on page 55 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

Item 6.     Selected Financial Data

      The “Selected Financial Data” appearing on page 60 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference in response to this item.

Item 7.      Management’s Discussion and Analysis of the Results of Operations and Financial Condition

      The “Management’s Discussion and Analysis of the Results of Operations and Financial Condition” appearing on pages 21 through 35 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference in response to this item.

Item 7A.     Quantitative and Qualitative Information about Market Risk

      The information appearing under the caption “Market Risk” on page 33 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference in response to this item.

Item 8.     Financial Statements and Supplementary Data

      The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Auditors’ Report appearing on pages 36 through 59 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, are incorporated herein by reference in response to this item.

21

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      On June 4, 2002 Arthur Andersen LLP informed the company that it would no longer be able to fulfill its services as the company’s independent auditors. As a result, on June 5, 2002, upon the recommendation of the company’s Audit Committee, the Board of Directors appointed KPMG LLP to serve as the company’s independent auditors for the year ended December 31, 2002. The change in auditors was effective immediately.

      Arthur Andersen’s reports on the company’s consolidated financial statements for fiscal years 2000 and 2001 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. During 2000 and 2001 and through the date of Arthur Andersen’s resignation, there were: (i) no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with its report on the company’s consolidated financial statements for such years; and (ii) no “reportable events” (as such term is defined in the regulations to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended).

      During 2000 and 2001 and through the date of Arthur Andersen’s resignation, the company did not consult KPMG with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the company’s consolidated financial statements, or any matter or reportable event.

      There were no disagreements with KPMG on accounting and financial disclosure for the company’s consolidated financial statements for the year ended December 31, 2002.

22

PART III

Item 10.     Directors and Executive Officers of the Registrant

      The information required to be set forth herein, except for a list of the executive officers that is provided in Part I of this report, is included in the sections entitled “Election of the Board of Directors of the Company” and “Other Information — Section 16(a) Beneficial Ownership Reporting Compliance” in the company’s definitive proxy statement for its 2003 shareholders meeting (the Proxy Statement), which sections are incorporated herein by reference.

Item 11.     Executive Compensation

      The information required to be set forth herein is included in the section entitled “Executive Compensation” in the company’s Proxy Statement, which section is incorporated herein by reference.

Item 12.     Security Ownership of Certain Beneficial Owners and Management

      The information required to be set forth herein is included in the sections entitled “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in the company’s Proxy Statement, which sections are incorporated herein by reference.

      The information required to be set forth herein with respect to securities for issuance under the company’s equity compensation plans is included in the section entitled “Equity Compensation Plan Information” in the company’s Proxy Statement, which section is incorporated herein by reference.

Item 13.     Certain Relationships and Related Transactions

      The information required to be set forth herein is included in the section entitled “Election of the Board of Directors of the Company – Transactions Involving Directors and the Company” in the company’s Proxy Statement, which section is incorporated herein by reference.

Item 14.     Controls and Procedures

      The company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). This evaluation was made within 90 days prior to the filing of this Annual Report (the Evaluation Date). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the company’s disclosure controls and procedures are adequate and effective and designed to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to them by others within these entities.

      There were no significant changes in the company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.

23

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

(a) 1. Financial Statements

      The Independent Auditors’ Report and Consolidated Financial Statements appearing in the 2002 Annual Report on the pages listed in the following index are included in this Annual Report on Form 10-K for the year ended December 31, 2002, as Exhibit 13, and are incorporated herein by reference.

		Page of
		2002
		Annual
		Report
Independent Auditors’ Report		59
Consolidated Financial Statements:
	Consolidated Statement of Earnings	36
	Consolidated Balance Sheet	37
	Consolidated Statement of Cash Flows	38
	Consolidated Statement of Shareholders’ Equity	39
	Notes to Consolidated Financial Statements (A to U)	40 - 58

      2. Financial Statement Schedules

      No schedules are submitted because they are either not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto.

      3. Exhibits

      See Index on pages 28 through 29 of this Annual Report on Form 10-K for the year ended 2002.

(b) Reports on Form 8-K

      On December 19, 2002, the company reported to the Securities and Exchange Commission under Item 5, Other Events, that the company had entered into a definitive agreement to acquire General Motors Defense for $1.1 billion in cash. The consummation of the transaction was effective March 1, 2003.

      On December 3, 2002, the company reported to the Securities and Exchange Commission under Item 5, Other Events, that on December 2, 2002, the Department of Defense informed the company and The Boeing Company that it intended to deduct approximately $2.3 billion from payments due the companies for work on various military programs. This payment represents the amount the Department of Defense claims the companies owe in the A-12 aircraft case. The company was granted a stay of that collection effort through the courts.

24

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GENERAL DYNAMICS CORPORATION

By: /s/ JOHN W. SCHWARTZ

John W. Schwartz

Vice President and Controller

March 24, 2003

      Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on March 24, 2003, by the following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors.

/s/ NICHOLAS D. CHABRAJA Nicholas D. Chabraja	Chairman, Chief Executive Officer and Director (Principal Executive Officer)
/s/ MICHAEL J. MANCUSO Michael J. Mancuso	Senior Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ JOHN W. SCHWARTZ John W. Schwartz	Vice President and Controller (Principal Accounting Officer)
* James S. Crown	Director
* Lester Crown	Director
* Charles H. Goodman	Director
* George A. Joulwan	Director
* Paul G. Kaminski	Director
* James R. Mellor	Director
* Carl E. Mundy, Jr.	Director
* Carlisle A. H. Trost	Director

* By David A. Savner pursuant to a Power of Attorney executed by the directors listed above, which Power of Attorney has been filed as an exhibit hereto and incorporated herein by reference thereto.

/s/ DAVID A. SAVNER
_______________________________________
David A. Savner

Secretary

25

CERTIFICATIONS PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Nicholas D. Chabraja, certify that:

1)	I have reviewed this annual report on Form 10-K of General Dynamics Corporation;
2)	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3)	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the registrant and we have:

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

5)  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

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

6)  The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

      Date: March 24, 2003

/s/ NICHOLAS D. CHABRAJA
_______________________________________
Nicholas D. Chabraja

Chairman & Chief Executive Officer

26

I, Michael J. Mancuso, certify that:

1)	I have reviewed this annual report on Form 10-K of General Dynamics Corporation;
2)	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3)	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the registrant and we have:

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

5)  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

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

6)  The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

/s/ MICHAEL J. MANCUSO
_______________________________________
Michael J. Mancuso

Sr. Vice President & Chief Financial Officer

27

INDEX TO EXHIBITS — GENERAL DYNAMICS CORPORATION

COMMISSION FILE NO. 1-3671

      Exhibits listed below, which have been filed with the Commission pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and which were filed as noted below, are hereby incorporated by reference and made a part of this report with the same effect as if filed herewith.

Exhibit
Number			Description
	3.1		Certificate of Amendment of the Restated Certificate of Incorporation (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2002, filed with the Commission May 15, 2002)
	3.2		Amended and Restated By-Laws of the company (as amended effective June 5, 2002) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002, filed with the Commission November 12, 2002)
	4.1		Indenture dated as of August 27, 2001 among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-4 (No. 333-77024) filed with the Commission January 18, 2002)
	4.2		First Supplemental Indenture dated as of August 27, 2001 among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-4 (No. 333-77024) filed with the Commission January 18, 2002)
	10.1*		Employment Agreement between the company and Nicholas D. Chabraja dated August 7, 2002 (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002)
	10.2*		Retirement Benefit Agreement between the company and W. William Boisture, Jr. dated October 2, 2001 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2001, filed with the Commission March 29, 2002)
	10.3*		Employment Agreement between the company and Kenneth C. Dahlberg dated February 13, 2001 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2001, filed with the Commission March 29, 2002)
	10.4*		Successor Retirement Plan for Directors (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2001, filed with the Commission March 29, 2002)
	10.5*		Retirement Benefit Agreement between the company and Michael J. Mancuso dated March 6, 1998 (incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 1997, filed with the Commission March 18, 1998)
	10.6*		General Dynamics Corporation Non-Employee Directors 1999 Stock Plan**
	10.7*		General Dynamics United Kingdom Share Save Plan**
	10.8*		General Dynamics Corporation Supplemental Savings and Stock Investment Plan (incorporated by reference from the company’s annual report on Form 10-K for the year ended December 31, 2000, filed with the Commission March 29, 2001)
	10.9*		Amendment to the Supplemental Savings and Stock Investment Plan effective October 3, 2002**
	10.10	*	General Dynamics Corporation Second Amended and Restated 1997 Incentive Compensation Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002, filed with the Commission November 12, 2002)
	10.11	*	Form of Severance Protection Agreement entered into by substantially all executive officers (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002, filed with the Commission November 12, 2002)
	10.12	*	General Dynamics Supplemental Executive Retirement Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002)

28

Exhibit
Number			Description
	10.13	*	Executive Life Insurance Policy provided by Aetna Life Insurance Company (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002)
	10.14	*	Excess Liability Policy provided by CNA Insurance Company (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002)
	10.15	*	Accidental Death & Dismemberment Policy provided by Lloyd’s, London (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002)
	10.16	*	Split-Dollar Insurance Agreement between the company and Mellor Family Irrevocable Trust, and the Trustees (as defined therein) dated November 21, 1994 (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002)
	10.17	*	Consulting Agreement between General Dynamics Advanced Information Systems and Paul G. Kaminski dated October 30, 2002**
	10.18	*	Modification to Consulting Agreement between General Dynamics Advanced Information Systems and Paul G. Kaminski dated January 1, 2003**
	13		2002 Annual Report (pages 21 through 60)**
	21		Subsidiaries**
	23		Consent of KPMG LLP**
	24		Power of Attorney of the Board of Directors**
	99.1		2000 Annual Report on Form 11-K for the General Dynamics Corporation Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 10-K/A for the year ended December 31, 2000, filed with the Commission June 29, 2001)
	99.2		2000 Annual Report on Form 11-K for the General Dynamics Corporation Hourly Employees’ Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 10-K/A for the year ended December 31, 2000, filed with the Commission June 29, 2001)
	99.3		2001 Annual Report on Form 11-K for the General Dynamics Corporation Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 11-K for the year ended December 31, 2001, filed with the Commission June 28,2002)
	99.4		2001 Annual Report on Form 11-K for the General Dynamics Corporation Hourly Employees’ Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 11-K for the year ended December 31, 2001, filed with the Commission June 28, 2002)
	99.5		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Nicholas D. Chabraja **
	99.6		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Michael J. Mancuso **

* Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(c) of Form 10-K.

**  Filed herewith.

29 EX-10.6 3 w84261exv10w6.htm NON-EMPLOYEE DIRECTORS 1999 STOCK PLAN

Exhibit 10.6

GENERAL DYNAMICS CORPORATION

NON-EMPLOYEE DIRECTORS 1999 STOCK PLAN

(as amended and restated effective December 4, 2002)

1.	Purpose. This plan is an amendment and restatement of the General Dynamics Corporation Non-Employee Directors 1999 Stock Plan (the “Plan”). The purpose of the Plan is to provide General Dynamics Corporation (the “Company”) with an effective means of attracting, retaining, and motivating directors of the Company.
2.	Eligibility. Any member of the Board of Directors of the Company (the “Board”) who is not an employee of the Company (an “Eligible Director”) is eligible to participate in the Plan.
3.	Administration. The Plan shall be administered by the Board. Except as otherwise expressly provided in the Plan, the Board shall have full power and authority to interpret and administer the Plan, to determine the Eligible Directors to receive awards and the amounts, types and terms of the awards, to adopt, amend, and rescind rules and regulations, and to establish terms and conditions, not inconsistent with the provisions of the Plan, for the administration and implementation of the Plan, provided, however, that the Board may not, after the date of any award, make any changes that would adversely affect the rights of a recipient under such award without the consent of the recipient. The determination of the Board on all matters shall be final and conclusive and binding on the Company and all participants.
4.	Awards. Awards may be made by the Board in such amounts as it shall determine in cash, in the Company’s common stock, par value $1.00 per share (“Common Stock”), in options to purchase Common Stock (“Stock Options”), or in shares of Common Stock subject to certain restrictions (“Restricted Stock”), or any combination thereof. Further, an Eligible Director’s annual retainer may also be paid under the Plan in either cash or Common Stock or in a 50 percent and 50 percent combination thereof, as the Eligible Director may elect. There shall be 250,000 shares of Common Stock available for issuance in connection with awards under the Plan. If any award under the Plan shall expire, terminate, or be canceled for any reason without having been vested or exercised in full, the corresponding number of shares which were reserved for issuance in connection therewith shall again be available for the purposes of the Plan. Shares available under the Plan may be authorized and unissued shares or may be treasury shares.
5.	Common Stock. In the case of awards or payments of retainers in Common Stock, the number of shares shall be determined by dividing the amount of the award or retainer elected to be received in Common Stock by the average of the highest and lowest quoted selling prices of the Company’s Common Stock on the New York Stock Exchange on the date of the award or retainer. The average is referred to throughout this Plan as the “fair market value.”

Page: 1 of 7

6. Dividend Equivalents and Interest.

a.

Dividends. If any award in Common Stock or Restricted Stock is to be paid on a deferred basis, the recipient may be entitled, on terms and conditions to be established by the Board, to receive a payment of, or credit equivalent to, any dividend payable with respect to the number of shares of Common Stock or Restricted Stock which, as of the record date for the dividend, has been awarded or made payable to the recipient but not delivered.

b.

Interest. If any award in cash is to be paid on a deferred basis, the recipient may be entitled, on terms and conditions to be established by the Board, to accrue interest on the unpaid amount.

7. Restricted Stock Awards.

a.

General. Restricted Stock represents awards made in Common Stock in which the shares granted may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated except upon passage of time, or upon satisfaction of other conditions, or both, in every case as provided by the Board. The recipient of an award of Restricted Stock shall be entitled to vote the shares awarded and to the payment of dividends on the shares from the date the award of shares is made; and, in addition, all Special Distributions (as defined in Section 9 hereof) thereon shall be credited to an account similar to the Account described in Section 9. The recipient of an award of Restricted Stock shall have a nonforfeitable interest in amounts credited to such account in proportion to the lapse of restrictions on the Restricted Stock to which such amounts relate. For example, when restrictions lapse on 50 percent of the Restricted Stock granted in an award, the holder of such Restricted Stock shall have a nonforfeitable interest in 50 percent of the amount credited to his account which is attributable to such Restricted Stock. The holder of Restricted Stock shall receive a payment in cash of any amount in his account as soon as practicable after the lapse of restrictions relating thereto.

b.

Restricted Stock Performance Formula. Awards of Restricted Stock may be granted pursuant to the formula described in this Section, referred to herein as the “Restricted Stock Performance Formula.” The Board shall make an initial grant of shares of Restricted Stock (the “Initial Grant”). At the end of a specified performance period (determined by the Board), the number of shares in the Initial Grant shall be increased or decreased, based on the increase or decrease in the fair market value of a share of Common Stock during the performance period, by a number of shares equal to (a) the excess of the fair market value of a share of Common Stock on the last day of the performance period over the fair market value of a share of Common Stock on the grant date multiplied by (b) the number of shares of Restricted Stock subject to the Initial Grant and divided by (c) the fair market value of a share of Common Stock on the last day of the performance period. The number of shares of Common Stock so determined is added to (in the case of a higher fair market value) or subtracted from (in the case of a lower fair market value) the number of shares of Restricted Stock to be earned at that time. Once the number of shares of Restricted Stock has been adjusted, restrictions will continue to be imposed for a period of time determined by the Board.

8. Stock Option Awards.

a. Type of Options. Options shall be in the form of options which do not qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.

Page: 2 of 7

b.	Purchase Price. The purchase price of the Common Stock under each option shall be determined by the Board, but shall not be less than 100 percent of the fair market value of the Common Stock on the date of the award of the option.
c.	Terms and Conditions. The Board shall establish (i) the term of each option, (ii) the terms and conditions upon which and the times when each option shall be exercised, and (iii) the terms and conditions under which options may be exercised after termination as an Eligible Director for any reason for periods not to exceed three years after such termination.
d.	Purchase by Cash or Stock. The purchase price of shares purchased upon the exercise of any stock option shall be paid (i) in full in cash, (ii) in whole or in part (in combination with cash) in full shares of Common Stock owned by the optionee and valued at fair market value on the date of exercise, or (iii) as otherwise as the Board may approve, all pursuant to procedures approved by the Board.
e.	Transferability. Options shall not be transferable other than by will or pursuant to the laws of descent and distribution. During the lifetime of the person to whom an option has been awarded, it may be exercisable only by such person or one acting in his stead or in a representative capacity. Upon or after the death of the person to whom an option is awarded, an option may be exercised by the optionee’s legatee or legatees under his last will, or by the option holder’s personal representative or distributee’s executive, administrator, or personal representative or designee in accordance with the terms of the option.

9.	Adjustments for Special Distributions. The Board shall have the authority to change all Stock Options granted under this Plan to adjust equitably the purchase price thereof and the number and kind of shares or other property subject thereto to reflect a special distribution to shareholders or other extraordinary corporate action involving distributions or payments to shareholders (collectively referred to as “Special Distributions”). In the event of any Special Distribution, the Board may cause to be created a Special Distribution account (the “Account”) in the name of the individual to whom Stock Options have been granted hereunder (sometimes herein referred to as a “Grantee”) to which shall be credited an amount determined by the Board, or, in the case of non-cash Special Distributions, make appropriate comparable adjustments for, or payments to or for the benefit of, the Grantee.
	Amounts credited to the Account in accordance with the preceding rules shall be credited with interest, accrued monthly, at an annual rate equal to the higher of Moody’s Corporate Bond Yield Average or the prime rate in effect from time to time, and such interest shall be credited in accordance with rules to be established by the Board. Notwithstanding the foregoing, at no time shall the Board permit the amount credited to the Grantee’s Account to exceed 90 percent of the purchase price of the Grantee’s outstanding Stock Options to which such amount relates. To the extent that any credit would cause the Account to exceed that limitation, such excess shall be distributed to the Grantee in cash.
	Amounts credited to the Grantee’s Account shall be paid to the Grantee or, if the Grantee is deceased, his or her beneficiary at the time that the Stock Options to which it relates are exercised or expire, whichever occurs first.

Page: 3 of 7

	The Account shall for all purposes be deemed to be an unfunded promise to pay money in the future in certain specified circumstances. As to amounts credited to the Account, a Grantee shall have no rights greater than the rights of a general unsecured creditor of the Company, and amounts credited to the Grantee’s Account shall not be assignable or transferable other than by will or the laws of descent and distribution, and such amounts shall not be subject to the claims of the Grantee’s creditors.
10.	Adjustments and Reorganizations. The Board may make such adjustments to awards granted under the Plan (including the terms, exercise price, and otherwise) as it deems appropriate in the event of changes that impact the Company, the Company’s share price, or share status.
	In the event of any merger, reorganization, consolidation, Change of Control (as defined in Section 11 below), recapitalization, separation, liquidation, stock dividend, stock split, extraordinary dividend, spin-off, split-up, rights offering, share combination, or other change in the corporate structure of the Company affecting the Common Stock, the number and kind of shares that may be delivered under the Plan shall be subject to such equitable adjustment as the Board, in its sole discretion, may deem appropriate. The determination of the Board on these matters shall be final and conclusive and binding on the Company and all Eligible Directors. Except as otherwise provided by the Board, all authorized shares, share limitations, and awards under the Plan shall be proportionately adjusted to account for any increase or decrease in the number of issued shares of Common Stock resulting from any stock split, stock dividend, reverse stock split, or any similar reorganization or event.
11.	Change of Control. Notwithstanding any provision of the Plan to the contrary, immediately prior to the occurrence of a Change of Control (as defined below), (a) each Option granted under the Plan and outstanding at such time shall become fully vested and immediately exercisable, (b) all restrictions on outstanding shares of Restricted Stock shall immediately lapse and such shares shall become nonforfeitable and (c) each Eligible Director shall become fully vested in, and entitled to a payment or distribution in respect of, any cash or shares, whether vested or unvested, that may be credited under the Plan to his or her account (including, but not limited to, his or her Account as defined in Section 9 above). For purposes of applying the Restricted Stock Performance Formula applicable to awards of Restricted Stock, each uncompleted performance period shall be deemed fully completed on the third business day preceding the date upon which the Change of Control occurs.
	“Change of Control” means any of the following events:

a. An acquisition (other than directly from the Company) of any voting securities of the Company by any Person (as used in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and including any “group” as such term is used in such sections) who immediately after such acquisition is the Beneficial Owner (as used in Rule 13d-3 promulgated under the Exchange Act) of 40 percent or more of the combined voting power of the Company’s then outstanding voting securities; provided that, in determining whether a Change of Control has occurred, voting securities which are acquired by (i) an employee benefit plan (or a trust forming a part thereof) maintained by the Company or any Subsidiary of the Company (as defined below), (ii) the Company or any Subsidiary of the Company, (iii) any Person that, pursuant to Rule 13d-1 promulgated under the Exchange Act, is permitted to, and actually does, report its beneficial ownership of voting securities of the Company on Schedule 13G (or any successor Schedule) (a “13G Filer”) provided that, if any 13G Filer

Page: 4 of 7

subsequently becomes required to or does report its Beneficial Ownership of voting securities of the Company on Schedule 13D (or any successor Schedule) then such Person shall be deemed to have first acquired, on the first date on which such Person becomes required to or does so file, Beneficial Ownership of all voting securities of the Company Beneficially Owned by it on such date, (iv) any Person in connection with a Non-Control Transaction (as hereinafter defined), or (v) any acquisition by an underwriter temporarily holding Company securities pursuant to an offering of such securities, will not constitute an acquisition which results in a Change of Control.

b.

Consummation of:

(i) a merger, consolidation, or reorganization involving the Company or any direct or indirect Subsidiary of the Company, unless:

(A)	the stockholders of the Company immediately before such merger, consolidation, or reorganization will own, directly or indirectly, immediately following such merger, consolidation, or reorganization, at least 50 percent of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation, or reorganization (the “Surviving Company”) or any parent thereof in substantially the same proportion as their ownership of the voting securities of the Company immediately before such merger, consolidation, or reorganization; and
(B)	the individuals who were members of the Board immediately prior to the execution of the agreement providing for such merger, consolidation, or reorganization constitute a majority of the members of the Board of Directors of the Surviving Company or any parent thereof; and
(C)	no Person (other than the Company, any Subsidiary of the Company, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, any Schedule 13G Filer, the Surviving Company, any Subsidiary or parent of the Surviving Company, or any Person who, immediately prior to such merger, consolidation, or reorganization, was the Beneficial Owner of 40 percent or more of the then outstanding voting securities of the Company) is the Beneficial Owner of 40 percent or more of the combined voting power of the Surviving Company’s then outstanding voting securities.

	A transaction described in clauses (A) through (C) above is referred to herein as a “Non Control Transaction;”
(ii)	the complete liquidation or dissolution of the Company; or
(iii)	a sale or other disposition of all or substantially all of the assets of the Company to an entity (other than to an entity (A) of which at least 50 percent of the combined voting power of the outstanding voting securities are owned, directly or indirectly, by stockholders of the Company in substantially the same proportion as their ownership of the voting securities of the Company, (B) a majority of whose board of directors is comprised of individuals who were members of the Board immediately prior to the

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execution of the agreement providing for such sale or other disposition and (C) of which no Person (other than the Company, any Subsidiary of the Company, any employee benefit plan (or any trust forming a part thereof) maintained by the Company or any of its Subsidiaries, any Schedule 13G Filer, the Surviving Corporation, any Subsidiary or parent of the Surviving Corporation, or any Person who, immediately prior to such merger, consolidation or reorganization, was the Beneficial Owner of 40 percent or more of the then outstanding voting securities of the Company) has Beneficial Ownership of 40 percent or more of the combined voting power of the entity’s outstanding voting securities).

c.

Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by Company stockholders, was approved by a vote of two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (including, but not limited to, a consent solicitation).

d.

Notwithstanding the foregoing, a Change of Control will not be deemed to occur solely because any Person (a “Subject Person”) acquires Beneficial Ownership of more than the permitted amount of the outstanding voting securities of the Company as a result of the acquisition of voting securities by the Company which, by reducing the number of voting securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional voting securities which increases the percentage of the then outstanding voting securities Beneficially Owned by the Subject Person, then a Change of Control will be deemed to have occurred.

	“Subsidiary” means any corporation with respect to which another specified corporation has the power under ordinary circumstances to vote or direct the voting of sufficient securities to elect a majority of the directors.
12.	Tax Withholding. In the event that federal, state or local tax laws provide withholding requirements that apply to Eligible Directors, the Company shall withhold amounts paid under the Plan as required by any such law.
13.	Expenses. The expenses of administering the Plan shall be borne by the Company.
14.	Amendments. The Board shall have complete power and authority to amend the Plan, provided that the Board shall not amend the Plan in any manner that requires shareholder approval under applicable law or the listing requirements of the New York Stock Exchange without such approval. No amendment to the Plan may, without the consent of the individual to whom the award shall theretofore have been awarded, adversely affect the rights of an individual under the award.

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15.	Effective Date of the Plan. The Plan became effective on December 1, 1999, the date of its adoption by the Board. This amended and restated Plan became effective on December 4, 2002, the date of its adoption by the Board, and applies to all Awards outstanding hereunder as of such date.
16.	Termination. The Board may terminate the Plan or any part thereof at any time, provided that no termination may, without the consent of the individual to whom any award shall theretofore have been made, adversely affect the rights of an individual under the award.
17.	Other Actions. Nothing contained in the Plan shall be deemed to preclude other compensation plans which may be in effect from time to time or be construed to limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Company (a) to award options for proper corporate purposes otherwise than under the Plan to an employee or other person, firm, corporation, or association, or (b) to award options to, or assume the option of, any person in connection with the acquisition, by purchase, lease, merger, consolidation, or otherwise, of the business and assets (in whole or in part) of any person, firm, corporation, or association.

Page: 7 of 7 EX-10.7 4 w84261exv10w7.htm GENERAL DYNAMICS UNITED KINGDOM SHARE SAVE PLAN

Exhibit 10.7

GENERAL DYNAMICS UNITED KINGDOM

SHARE SAVE PLAN

Inland Revenue Reference: SRS2411

Adopted by the Company on 6 October 1999

Approved by the Inland Revenue on 15 October 1999

Contents
1	Definitions	1
2	Invitation to apply for Options	8
3	Scaling Down	10
4	Grant of Options	11
5	Limitations on Grant	12
6	Exercise of Options	12
7	Take-overs, Reconstructions and Liquidations	14
8	Variation of Share Capital	16
9	Manner of Exercise of Options	17
10	Administration and Amendment	18

1    Definitions

In these Rules the following words and expressions shall have, where the context so admits, the following meanings:

“Accounting Period”	- -	an accounting reference period of the Company;
“Act”	- -	the Income and Corporation Taxes Act 1988;
“Acquiring Company”	- -	where the conditions of paragraph 15 of Schedule 9 are met, such company as shall be at any time the “acquiring company” as defined in that paragraph;
“Adoption Date”	- -	the date on which the Plan is adopted by a resolution of the Board;
“Announcement Date”	- -	the date on which the results of the Company are announced for any period;
“Application”	- -	an application for an Option in the form as approved by the Committee from time to time;
“Approval Date”	- -	the date upon which the Board of Inland Revenue approves the Plan;
“Associated Company”	- -	has the same meaning as the expression bears in paragraph 23 of Schedule 9 by virtue of section 187(2) of the Act;
“Auditors”	- -	the auditors for the time being of the Company (acting as experts and not as arbitrators);
“Board”	- -	the board of directors of the Company or a duly constituted committee thereof at which a quorum is present;

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“Bonus Date”	- -	where repayments under the relevant Savings Contract are taken as including the Maximum Bonus, the earliest date on which the Maximum Bonus is payable and in any other case the earliest date on which a bonus is payable under the relevant Savings Contract;
“Committee”	- -	the Compensation Committee of the Board of Directors of the Company comprising two or more members of the Board of Directors, all of whom shall be “non-employee directors” or the Board of Directors of any Participating Company to which such authority is delegated by the Compensation Committee;
“Company”	- -	General Dynamics Corporation or save for Rules 2,3,4,5 and 10.2
	(i)	the Acquiring Company; or
	(ii)	some other company falling within sub-paragraph (b) or sub-paragraph (c) of paragraph 10 of Schedule 9 over whose shares a New Option has been granted;
“General Dynamics United
Kingdom”	- -	General Dynamics United Kingdom Limited company number 1911653;
“Common Stock”	- -	General Dynamics Corporation Common Stock;
“Control”	- -	has the same meaning as in section 840 of the Act;
“Date of Grant”	- -	the date on which an Option is, was or is to be granted under the Plan, pursuant to Rule 4.1, or on

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		which an Option is or was treated as being granted pursuant to Rule 4.3;
“Dealing Day”	- -	a day on which The New York Stock Exchange is open for the transaction of business;
“Eligible Employee”	- -	any employee or director of any Participating Company who:
(a)	(i)	in the case of a director, normally devotes more than 25 hours per week to his duties (exclusive of meal breaks);
	(ii)	is chargeable to tax in respect of his employment or office under Case I of Schedule E; and
	(iii)	is employed by any Participating Company on the date on which the Committee grants an Option pursuant to Rule 4.1 below;
(b)		has been nominated by the Committee either individually or as a member of a category of directors or employees for participation in the Plan;
(c)		is not prohibited from participating by the provisions of Paragraph 8 of Schedule 9 (whether falling within (a) or (b) above);
“Exercise Price”	- -	the amount as determined by the Board and expressed in dollars, which a Participant shall pay to acquire Common Stock on the exercise of an Option being, subject to Rule 4.3 and Rule 8 not less than 80% or other such percentage as is for the time being permitted by statute or other statutory provision of Fair Market Value of Common Stock on the day the Invitation was issued pursuant to

3

		Rule 2 if the Exercise Price is specified in the Invitation or, if the Exercise Price is notified to the Eligible Employees after the Invitations are issued but before the Options are granted in accordance with rule 2,2, on the date the Eligible Employees are so notified;
“Fair Market Value”	- -	on any day an amount equal to the closing middle market quotation of Common Stock on the New York Stock Exchange for the immediately preceding Dealing Day or if on that day the Shares are not so listed, the market value of Common Stock determined in accordance with the provisions of Part VIII of the Taxation of Chargeable Gains Act 1992 and agreed with Shares Valuation Division on or before that day;
“Group”	- -	the Company and its Subsidiary companies and the phrase “Group Company” shall be construed accordingly;
“Group Employee”	- -	a director or employee of any Group Company;
“Injury or Disability”	- -	the cessation of employment or office by reason of injury or disability provided the Committee are satisfied, on production of such evidence as it may reasonably require:
	(i)	that the individual has ceased to exercise and, by reason of injury or disability, is incapable of exercising that office or employment; and
	(ii)	that the individual is likely to remain so incapable for the foreseeable future;

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“Invitation”	-	a letter of invitation to participate in the Plan in a form approved by the Committee from time to time;
“Invitation Period”	-	subject to Rule 10.6 any time following the Approval Date;
	-
“Maximum Bonus”	- -	the bonus payable to the Participant at the maturity of a Savings Contract which matures after seven years;
“New Option”	- -	an option over shares meeting the requirements of sub-paragraphs 15(3)(a) to (d) of Schedule 9, granted in consideration for the release of a Subsisting Option within the “appropriate period” (as defined by paragraph 15(2) of Schedule 9);
“Nominated Savings	- -	the savings authority or the savings authorities (as
Authority”		the case may be) nominated by the Company for the purposes of the Plan;
“Option”	- -	a right to purchase Common Stock granted or to be granted pursuant to Rules 4.1, 4.2 or 4.3;
“Option Certificate”	- -	an option certificate in a form approved by the Committee from time to time;
“Participant”	- -	a person who has been granted an Option or (where the context admits) his legal personal representative(s);
“Participating Company”	- -	any Group Company nominated by the Committee to participate in the Scheme from time to time;

5

“Recognised Exchange”	- -	a recognised stock exchange within the meaning of section 841 of the Act or a recognised investment exchange within the meaning of the Financial Services Act 1986;
“this Plan”	- -	the General Dynamics United Kingdom Share Save Plan constituted and governed by the Rules with, and subject to any amendments thereto properly effected;
“Redundancy”	- -	the cessation of employment or office by reason of redundancy within the meaning of the Employment Rights Act 1996;
“Retirement”	- -	the cessation of employment or office by reason of retirement either at the Specified Age or any other age at which the individual is bound to retire in accordance with the terms of his contract of employment;
“Rules”	- -	the rules of the Plan as the same may be amended from time to time and “Rule” shall be construed accordingly;
“Savings Contract”	- -	a 3 or 5 or 7 year contract under a certified contractual savings scheme (within the meaning of section 326 of the Act) entered into by an Eligible Employee with a Nominated Savings Authority and which has been approved by the Board of Inland Revenue for the purposes of Schedule 9;
“Schedule 9”	- -	Schedule 9 to the Act;
“Specified Age”	- -	age 65;

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“Standard 3 Year Bonus”	- -	the bonus payable to the Participant under a Savings Contract which matures after three years;
“Standard 5 Year Bonus”	- -	the bonus payable to the Participant under a Savings Contract which matures after five years;
“Subsidiary”	- -	a company which is under the Control of the Company and which is a subsidiary of the Company within the meaning of section 736 of the Companies Act 1985;
“Subsisting Option”	- -	an Option which has been granted and which has not lapsed, been surrendered, renounced or been exercised in full.

In these Rules, except insofar as the context otherwise requires:

(i)	words denoting the singular shall include the plural and vice versa;
(ii)	words importing a gender shall include every gender and references to a person shall include bodies corporate and unincorporated and vice versa;
(iii)	reference to any enactment shall be construed as a reference to that enactment as from time to time amended, modified, extended or re-enacted and shall include any orders, regulations, instruments or other sub-ordinate legislation made under the relevant enactment;
(iv)	words have the same meanings as in Schedule 9 unless the context otherwise requires; and
(v)	headings and captions are provided for reference only and shall not be considered as part of the Plan.

7

2    Invitation to apply for Options

The Committee may during any Invitation Period but not later than the tenth anniversary of the Adoption Date invite every Eligible Employee by issuing an Invitation to apply for the grant of an Option, providing that at the intended Date of Grant the Common Stock satisfies the conditions of paragraphs 10 to 14 inclusive of Schedule 9.

Each Invitation shall specify:

	(i)	the date, being not less than 14 days after the issue of the Invitation, by which an application must be made;
	(ii)	whether or not the Eligible Employee may take out a 3 or 5 year Savings Contract;
	(iii)	the Exercise Price or that the Exercise Price will be notified to Eligible Employees at a reasonable time prior to the closing date for Applications;
	(iv)	whether or not for the purpose of determining the number of shares of Common Stock over which an Option may be exercised, the repayment under the Savings Contract is to be taken:
(a) as including the Maximum Bonus;
(b) as including only the Standard 5 Year Bonus or the Standard 3 Year Bonus;
(c) as not including a bonus;
	(v)	the maximum permitted aggregate monthly savings contribution being the lesser of the maximum amount specified in Paragraph 24 of Schedule 9 or such other maximum as may be determined by the Committee, and be permitted by the Board of the Inland Revenue pursuant to Schedule 9 and by the Nominated Savings Authority;

and the Committee may determine and include in the Invitations details of the maximum value on the date of the issue of the Invitation of shares of Common Stock over which Options may be granted on that occasion and a statement that in the

8

event of excess Applications, each Application may be scaled down in accordance with the Rules.

Each Invitation shall be accompanied by an Application which shall provide for the applicant to state:

(i)	the monthly savings contribution being a multiple of £1 and not less than £5 which he wishes to make under the related Savings Contract;
(ii)	whether or not he wishes to take out a 3 or 5 year Savings Contract;
(iii)	that his proposed monthly savings contribution, when added to any monthly savings contributions then being made under any other Savings Contract will not exceed the maximum permitted aggregate monthly savings contribution specified in the Invitation;
(iv)	his election as to whether for the purpose of determining the maximum value of shares of Common Stock over which an Option is to be granted, the repayment under the Savings Contract is to be taken as including the Maximum Bonus, the Standard 5 Year Bonus, or the Standard 3 Year Bonus or as not including a bonus;

and shall authorise the Committee to enter on the Savings Contract such monthly savings contributions, not exceeding the maximum stated on the Application, as shall be determined pursuant to Rule 3 below.

Each Application shall be deemed to be for an Option to acquire such number of shares of Common Stock as can be bought at the Exercise Price with the repayment under the related Savings Contract.

9

3    Scaling Down

If the Committee receives valid Applications over an aggregate value of Common Stock which exceeds the amount stated pursuant to Rule 2.2 or any limitation determined pursuant to Rule 5 below in respect of Invitations issued on any day, then the following steps shall be carried out successively to the extent necessary to eliminate the excess:

(i)	the excess over £5 of the monthly savings contribution chosen by each applicant shall be reduced pro rata to the extent necessary;
(ii)	each election for a Maximum Bonus to be included in the repayment under the Savings Contract shall be deemed to be an election for the Standard 5 Year Bonus to be included;
(iii)	each election for a Standard 5 Year Bonus or a Standard 3 Year Bonus to be included in the repayment under the Savings Contract shall be deemed to be an election for the bonus to be excluded;
(iv)	applications will be selected by lot, each based on a monthly savings contribution of £5 and the inclusion of no bonus in the repayment under the Savings Contract.

If after applying the provisions of Rule 3.1(i) to (iii) inclusive the value of Common Stock available is still insufficient to enable an Option based on monthly savings contributions of £5 to be granted to each Eligible Employee who made a valid Application the Committee may, as an alternative to selecting by lot as in (iv) above, determine in its absolute discretion that no Options shall be granted.

If the Committee so determines the provision in Rule 3.1(i) to (iv) inclusive may be modified or applied in any manner as may be agreed in advance with the Inland Revenue.

Each Application shall be deemed to have been modified or withdrawn in accordance with the application of the foregoing provisions and the Committee shall complete each Savings Contract proposal form to reflect any reduction in monthly savings contributions resulting therefrom.

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4    Grant of Options

Within 30 days of the first day by reference to which the Fair Market Value of the Common Stock is determined (or within 42 days of that day when Rule 3 applies and Options cannot be granted within the 30 day period), the Committee shall grant to each applicant who is still an Eligible Employee and is not precluded from participation in the Plan by virtue of Paragraph 8 of Schedule 9 an Option over such number of shares of Common Stock as can be purchased on the date of exercise of that Option with the repayment under the relevant Savings Contract.

If the Company is prevented by statute, order, regulation or government directive from granting Options within any such periods, then the Committee may grant Options within twenty one days of the lifting of such restrictions providing the grant takes place not more than 30 days following the date on which Fair Market Value was determined for the purposes of the Option grant in question or not later than 42 days following the date Fair Market Value was determined if Applications have been scaled down pursuant to Rule 3.1.

Where the circumstances noted in Rule 7.4 apply New Options may be granted within the terms of paragraph 15(1) Schedule 9 in consideration for the release of Options previously granted under this Plan. Such New Options are deemed to be equivalent to the old Options and to have been granted within the terms of this Plan.

No Option may be transferred, assigned or charged and any purported transfer, assignment or charge shall be void ab initio. Each Option Certificate shall carry a statement to this effect. For the avoidance of doubt, this Rule 4.4 shall not prevent the Option of a deceased Participant being exercised by his personal representative(s) within the terms of these Rules.

As soon as possible after Options have been granted the Committee shall issue an Option Certificate specifying the Date of Grant and the Exercise Price.

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5    Limitations on Grant

Before Invitations are issued on any occasion, the Committee may determine a limit on the value of shares of Common Stock which are to be available in respect of that issue of Invitations.

6    Exercise of Options

Subject to each of the succeeding sections of this Rule 6 and Rule 9 any Subsisting Option may be exercised by the Participant or, if deceased, by his personal representatives in whole or in part at the time of or at any time following the occurrence of the earliest of the following events:

(i)	the Bonus Date;
(ii)	the death of the Participant;
(iii)	upon the Participant ceasing to be a Group Employee where that cessation was by reason of Injury, Disability, Redundancy or Retirement;
(iv)	an opportunity to exercise the Option pursuant to Rule 7;
(v)	upon the Participant ceasing to be a Group Employee, where that cessation was by reason only that the Company has ceased to have Control of such company, or that the office or employment relates to a business or part of a business which is transferred to a person who is neither an Associated Company of the Company nor a company of which the Company has Control.

12

No Option may be exercised by a Participant at any time when he is, or by the personal representatives of an individual who at the date of his death was, precluded by paragraph 8 of Schedule 9 from participating in the Plan.

An Option shall lapse and become thereafter incapable of exercise on the earliest of the following events:

(i)	except where the Participant has died, the expiry of six months following the Bonus Date;
(ii)	where the Participant has died within six months following the Bonus Date, the first anniversary of the Bonus Date;
(iii)	where the Participant has died before the Bonus Date, the first anniversary of his death;
(iv)	unless the Participant has died, on the expiry of six months after the Option has become exercisable by virtue of Paragraph (iii) or (v) of Rule 6.1;
(v)	immediately following the Participant ceasing to be a Group Employee save when the Participant ceases to be a Group Employee in the circumstances in Rule 6.1 (ii), (iii), (iv) and (v) above, and save when the Participant ceases to be a Group Employee but continues to be an employee or director of any Associated Company or company of which the Company has Control;
(vi)	the expiry of six months after the Option has first become exercisable in accordance with Rule 7;
(vii)	the Participant being adjudicated bankrupt;
(viii)	upon the Participant giving notice, (or under the terms of his Savings Contract being deemed to have given notice), to the Nominated Savings Authority that he intends to stop paying monthly contributions under his Savings Contract prior to the date upon which a right to exercise the Option shall arise;
(ix)	on the winding up other than a voluntary winding up of the Company; and

13

(x) six months following a voluntary winding up of the Company.

If a Participant continues to be employed by a Group Company after the date on which he reaches the Specified Age he may exercise any Subsisting Option within six months following that date.

No person shall be treated for the purposes of this Rule 6 as ceasing to be a Group Employee until he is no longer a director or employee of the Company, and Associated Company of the Company or a company of which the Company has Control.

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7    Take-overs, Reconstructions and Liquidations

If any person obtains Control of the Company as a result of making:

(i)	a general offer to acquire the whole of the issued share capital of the Company (other than that which is already owned by him) which is unconditional or which is made on a condition such that if it is satisfied the person making the offer will have Control of the Company; or
(ii)	a general offer to acquire all the shares (other than shares which are already owned by him) in the Company which are of the same class as Common Stock subject to a Subsisting Option

then the Committee shall notify all Participants as soon as is practicable of the offer in accordance with Rule 10.4. Any Subsisting Option may be exercised from the date of the receipt of that notification up to the expiry of a period ending six months from the time when the person making the offer has obtained Control of the Company and any condition subject to which the offer is made has been satisfied.

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If under Section 425 of the Companies Act 1985 it is proposed that the Court sanctions a compromise or arrangement likely to affect or apply to Common Stock (or similar circumstances occur which are acceptable to the Inland Revenue) then the Company shall give notice thereof to all Participants at the same time as it sends notices to members of the Company calling the meeting to consider such a compromise or arrangement. Any Subsisting Option may be exercised by a Participant subject to the terms of this Rule before the expiry of six months from the date on which the Court sanctions such compromise or arrangement. Subject to Rule 7.6, at the end of the relevant period an unexercised Option shall lapse.

If any person becomes bound or entitled to acquire Common Stock under sections 428 to 430 of the Companies Act 1985 (or similar circumstances occur which are acceptable to the Inland Revenue) any Subsisting Option may be exercised at any time when that person remains so bound or entitled.

If as a result of the events specified in Rules 7.1 or 7.2 an Acquiring Company has obtained Control of the Company, or if an Acquiring Company has become bound or entitled as mentioned in Rule 7.3, the Participant may, if the Acquiring Company so agrees, release any Subsisting Option he holds in consideration for the grant of a New Option.

A New Option issued in consideration of the release of an Option shall be evidenced by an Option Certificate which shall import the relevant provisions of these Rules.

A New Option shall, for all other purposes of this Plan, be treated as having been acquired at the same time as the corresponding released Option.

If a resolution is passed at a general meeting for the voluntary winding-up of the Company, an Option shall notwithstanding Rule 6.1(i) be exercisable in whole or in part for a period of six months after which the Option shall to the extent unexercised thereupon lapse.

An Option whether or not exercisable prior to or as a result of the occurrence of an event specified in Rules 7.1,7.2,7.3 or 7.5 shall if an event so specified occurs lapse in accordance with the relevant sub-rule of Rule 7, or if earlier, as determined by Rule 6.3 (i) to (x). Where prior to the date an Option lapses there occurs one or more further events

16

specified in Rules 7.1,7.2,7.3 or 7.5 an Option shall lapse on the earlier of the date determined by the preceding part of this Rule 7.6 and the date of lapse relevant to the further event or events.

For the purpose of this Rule 7 other than Rule 7.4 a person shall be deemed to have obtained Control of a Company if he and others acting in concert with him have together obtained Control of it.

The exercise of an Option pursuant to the preceding provisions of this Rule 7 shall be subject to the provisions of Rule 9.

A New Option shall not be exercisable by virtue of the event pursuant to which it was granted.

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8    Variation of Share Capital

In the event of any variation of the share capital of the Company affecting the Common Stock, including, but without prejudice to the generality of the preceding words, any capitalisation or rights issue or any consolidation, sub-division or reduction of capital by the Company, the number and nominal amount of Common Stock subject to any Option and the Exercise Price may be adjusted by the Committee in such manner as the Auditors confirm in writing to be, in their opinion, fair and reasonable provided that:

(i)	the aggregate amount payable on the exercise of an Option in full is neither materially changed nor increased beyond the expected repayment under the Saving Contract at the Bonus Date;
(ii)	at any time when the Plan remains approved by the Inland Revenue no adjustment shall take effect without the prior approval of the Board of Inland Revenue; and
(iii)	at any time when the Plan remains approved by the Inland Revenue following the adjustment the Common Stock shall continue to satisfy the conditions specified in paragraphs 10 to 14 inclusive of Schedule 9.
	Such variation shall be deemed to be effective, once Inland Revenue approval has been given, from the record date at which the respective variation applied to other stock of the same class as Common Stock. Any Options exercised within that period shall be treated as exercised with the benefit of the variation confirmed by the Auditors.

If an adjustment is made pursuant to Rule 8.1 above with the intention that the Plan shall cease to be approved by the Inland Revenue, the Company shall immediately notify the Inland Revenue.

The Committee shall take such steps as it considers necessary to notify Participants of any adjustment made under Rule 8.1 and may call in, cancel, endorse, issue or reissue any Option Certificate consequent upon such adjustment.

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9    Manner of Exercise of Options

No Option may be exercised whilst the Plan is approved by the Inland Revenue unless the Common Stock satisfies the conditions specified in paragraphs 10 to 14 inclusive of Schedule 9.

An Option may only be exercised over as a maximum, the number of shares of Common Stock which may be acquired with the sum obtained by way of payment under the related Savings Contract converted into US dollars at the exchange rate prevailing on the day preceding the date on which the Option is exercised.

An Option shall be exercised by the Participant, or as the case may be by his personal representatives, delivering notice in writing to the Committee, detailing the number of shares of Common Stock in respect of which he wishes to exercise the Option accompanied by the appropriate payment (which shall not exceed the sum obtained by way of repayment under the related Savings Contract) or authority to the Company to withdraw and apply monies from the Savings Contract to acquire the Common Stock over which the Option is to be exercised and the relevant Option Certificate and shall be effective on the date of its receipt by the Committee. The Group Company which employs the Participant shall meet or procure the meeting of any stamp duty liability on the exercise of an Option.

Where an Option is exercised, the number of shares of Common Stock specified in the notice of exercise given in accordance with Rule 9.3 shall be transferred to the participant within 30 days of the date of exercise and the Company shall arrange for the delivery of evidence of title thereof. Save for any rights determined by reference to a record date preceding the date of transfer, such Common Stock shall rank pari passu with the other Common Stock of the same class in issue.

When an Option is exercised only in part, it shall lapse to the extent of the unexercised balance.

For the purpose of Rules 9.2 and 9.3 above, any repayment under the Savings Contract shall exclude the repayment of any contribution the due date for payment of which falls after the date on which repayment is made unless provided for in the terms of the Savings Contract.

19

For so long as Common Stock is quoted on The New York Stock Exchange, the Company shall apply for Common Stock in respect of which an Option has been exercised to be quoted if it were not so quoted already.

Where Common Stock is listed or dealt in or any Recognised Exchange no Option may be exercised in contravention of any securities transactions rules of the Recognised Exchange as may from time to time be in force.

20

10    Administration and Amendment

The Plan shall be administered by the Committee whose decision on all disputes shall be final save where the Rules require the concurrence of the Auditors.

The Committee may from time to time amend these Rules provided that:

(i)	no amendment shall have effect until approved by the Board of Inland Revenue whilst the Plan is and is intended to remain approved by the Inland Revenue pursuant to Schedule 9; and
(ii)	no amendment made with the intention that the Plan shall cease to be approved by the Inland Revenue shall take effect unless at the same time the Inland Revenue is notified of such amendment.

The cost of establishing and operating the Plan shall be borne by the Group Companies in such proportions as the Board shall determine.

Any notice or other communication under or in connection with the Plan may be given by the Committee either personally or by post, and to the Committee either personally or by post to the Secretary of the Committee; items sent by post shall be pre-paid and shall be deemed to have been received 72 hours after posting.

The Company shall at all times keep available sufficient Common Stock to satisfy the exercise to the full extent still possible of all Subsisting Options.

The Plan shall terminate upon the tenth anniversary of the Adoption Date or at any earlier time by the passing of a resolution of the Committee. Termination of the Plan shall be without prejudice to the subsisting rights of Participants.

The rights and obligations of any individual under terms of his office or employment with any Group Company shall not be affected by his participation in the Plan or any right which he may have to participate therein, and an individual who participates therein shall waive any and all rights to compensation or damages in consequence of the termination of his office or employment for any reason whatsoever insofar as those rights arise or may

21

arise from his ceasing to have rights under or be entitled to exercise any Option under the Plan as a result of such termination.

Neither the grant of an Option nor any benefit which may accrue to a Participant on the exercise of an Option shall form part of that Participant’s pensionable remuneration for the purposes of any pension scheme or similar arrangement which may be operated by any Group Company.

22 EX-10.9 5 w84261exv10w9.htm AMENDMENT TO SUPPLEMENTAL SAVINGS & STOCK PLAN

Exhibit 10.9

Amendment to the General Dynamics
Supplemental Savings and Stock Investment Plan

1. The General Dynamics Supplemental Savings and Stock Investment Plan (the “Plan”) is hereby amended by the addition of a new Section 4.8 to read as follows:

4.8 Change of Control. Notwithstanding any provision herein to the contrary, immediately prior to the occurrence of a Change of Control (as defined in the Corporation’s Second Amended and Restated 1997 Incentive Compensation Plan, as amended), all allocations made to Member accounts, whether or not vested, shall become fully vested and nonforfeitable.

2.     Section 5.1 of the Plan is hereby amended and restated in its entirety as follows:

5.1 Amendment. The Chairman of the Board of Directors of the Corporation reserves the right to modify or amend this Plan in whole or in part, effective as of any specified date; provided, however, that the Chairman shall have no authority to modify or amend the Plan to:

(a) reduce any benefit accrued hereunder based on service and compensation to the date of the amendment unless such action is necessary to prevent this Plan from being subject to any provision of Title I, Subtitle B, Parts 2, 3 or 4 of ERISA;

(b) permit the accrual, holding or payment of actual shares of General Dynamics Common Stock under the Plan; or

(c) adversely affect any accrued benefits hereunder (and any benefits that will accrue upon a Change of Control) and any rights attaching thereto after or in anticipation of the occurrence of a Change of Control (as defined in the Corporation’s Second Amended and Restated 1997 Incentive Compensation Plan, as amended).

3.	The preceding amendments shall be effective as of the date first written below.
4.	Except as amended herein, the Plan shall remain in full force and effect.

* Bold text indicates new text.

Dated this 3rd day of October, 2002.
	/s/ Nicholas D. Chabraja Nicholas D. Chabraja Chairman and Chief Executive Officer General Dynamics Corporation

EX-10.17 6 w84261exv10w17.htm CONSULTING AGREEMENT DATED OCTOBER 30, 2002

Exhibit 10.17

GENERAL DYNAMICS
Advanced information Systems

Dr. Paul G. Kaminski
Technovation, Inc.
6691 Rutledge Drive
Fairfax Station, VA 22039

Re: Consulting Agreement EYC0406; Project No.0997-0050

Dear Dr. Kaminski:

This letter confirms the Consultant Agreement between us as outlined below:

1.     Services to be Rendered

General Dynamics Advanced Information Systems, acting through General Dynamics Government Systems Corporation, a Delaware corporation, with offices at 100 Ferguson Drive, Mountain View, California 94043 (“GDAIS”) retains you to render, and you agree to render to GDAIS, your services as an independent consultant subject to the terms and conditions of this agreement. GDAIS will request from you the services described in the Statement of Work, dated 7 October 2002 (enclosed as Attachment A), through our Technical Monitor, Philippe Wiener, or his designee.

2.     Place of Work

You agree to render your services under our agreement at times and place(s) that are mutually agreeable.

3.     Terms of Agreement

This agreement is effective as of 4 October 2002, and will end on 31 December 2002, with the exception that either you or GDAIS may terminate this agreement at an earlier date, as long as the other party is given 30 days prior written notice of the intended termination. Your obligations, as outlined in paragraphs 6, 7, and 10 below, will survive any termination of this agreement.

4.     Fees and Expenses

GDAIS will pay you Twenty Thousand Dollars ($20,000) as a retainer for your labor during the period 4 October 2002 through 31 December 2002. GDAIS also will reimburse you no more than Five Thousand Dollars ($5,000) for travel expenses during that same period. GDAIS will pay you the retainer upon full execution of this agreement. The retainer will cover up to 4 days of your labor.

Upon expiration of this agreement, you will submit an invoice quarter detailing the following:

(a)	days of service performed;
(b)	nature and scope of services provided; and
(c)	a breakdown of travel expenses. (Documentation, including receipts, in support of travel expenses will be retained by you and will be available for our review upon request.)

5.     Services for Others

During the term of this agreement, or during any extension of this agreement, you may render services as a consultant to your existing clients (i.e., Boeing and Raytheon). You will not be expected to render services to GDAIS in any area that you believe would lead to conflicts with assignments you have already undertaken with your existing clients. In those specific business areas where you agree to assignments in support of GDAIS, you will not serve any business or organization, or engage in any business on your own behalf that conflicts with GDAIS’ without our express, written permission. You agree to provide us with a full and complete list of your current clients and the names of your principal contact with your clients and to notify us in writing whenever you add new clients, delete clients, or change principal contact with your clients. GDAIS may terminate this agreement immediately if you breach any part of this covenant.

6.     Confidential Nature of Work

You will not, during or after the term of this agreement, divulge without GDAIS’ approval, any information or knowledge relating to (i) any project on which we shall have worked or shall be working, or (ii) our business or that of our subsidiaries or suppliers, which you shall have obtained during the term of this agreement and which are not generally known or recognized.

7.     Inventions and Intellectual Property Rights

The provisions governing inventions and intellectual property rights are as follows:

(a)	All inventions, discoveries, improvements, devices, designs, apparatus, practices, processes, methods, or products (hereinafter individually or collectively called “inventions”), whether patentable or not, trade secrets, technical and other data, and all copyrightable material made, developed, perfected, devised, conceived or first reduced to practice by you, either solely or jointly with others, or your employees (if any) during the term of this agreement and in the course of or in any way connected with your work for us shall be our sole and exclusive property, except as may otherwise be required as provided in subparagraph (c) below. All such intellectual property developed will be considered “works for hire” in invention or work in a fiduciary capacity for our benefit and you shall grant, and do hereby grant and assign to us all right, title, and interest in and to, each and every such invention. You shall promptly disclose to us in writing complete information relative to any such invention or work.
(b)	At our request during and after the term of this agreement, and without further compensation, you agree to (i) assist us, our attorneys and nominees in preparing and prosecuting the United States and all foreign countries applications for patents covering all such inventions or copyrights of such works, (ii) execute, acknowledge and deliver any and all instruments deemed by us, our attorneys or nominees to be necessary or helpful to make, file or prosecute all such applications or in connection with continuations, renewals or reissues thereof or in the conduct of all proceedings or litigations in regard thereto, (iii) execute any and all instruments deemed by us, our attorneys or nominees to be necessary to transfer, confirm, evidence or protect title in and to all patents covering inventions and copyrights to us or our nominees, and (iv) cooperate and assist us or our nominees in any legal proceeding or controversy or in connection with any contractual obligation relating to any and all such inventions and/or copyrights.
	Any expenses incurred by you in discharging your obligations pursuant to this subparagraph 7(b) shall be paid or reimbursed by us or our nominees.
(c)	You understand that we have entered into, or from time to time in the future may enter into, agreements with agencies of the United States Government (including, but not limited to, the Department of Defense) and that we may be subject to laws and regulations which impose obligations, restrictions and limitations on us with respect to inventions and patents which may be acquired by us or which may be conceived or developed by consultants, employees and others rendering services to us. You agree to be bound by all such obligations, restrictions and limitations on us with respect to inventions and patents which may be acquired

	by us or which may be conceived or developed by consultants, employees and others rendering services to us. You agree to be bound by all such obligations, restrictions and limitations applicable to inventions conceived or developed by you in the course of, or in any way connected with your work under this agreement, and to take any and all further action which may be required to discharge such obligations and to comply with such restrictions and limitations.
(d)	You will keep complete, accurate and authentic accounts, notes, data and records of all inventions and other works in the manner and form requested by us. Such accounts, notes, data and records shall be our property and, upon request by us, you shall promptly surrender them to us or, if not theretofore surrendered upon our request or otherwise, you shall surrender the same to us upon the termination of this agreement.
(e)	You represent that you have no agreement with any other party that would preclude your compliance with your obligations set forth in this paragraph.

8.     Activity Reports

You agree to submit written reports that fully disclose all services performed pursuant to this agreement and the results thereof, in the manner, at the times and to the extent required by us. This shall normally include:

(a)	a brief written statement of the nature and scope of the service accompanying each quarterly invoice submitted for payment; periodic activity reports, as appropriate;
(b)	year-end activity reports; and
(c)	a final written report at the expiration of this agreement.

You will from time to time, at our request, and in any event, upon termination of this agreement, deliver to us all working papers, plant or engineering data, and other documents and materials that have been made available to you in connection with your performance of services under this agreement.

9.     Nature of Relationship

It is understood that in performing any services pursuant to this agreement, you are acting as an independent contractor and not as an employee, agent or representative of GDAIS. You will be responsible for reporting and paying any federal and state taxes owing on the consulting income received.

You will not act as our agent or enter into any agreements or incur any obligations on our behalf, or commit us in any other manner, without our prior written consent. You shall indemnify and hold us harmless from any liability, loss or damage whatsoever for injuries (including death) to you or any of your assistants, representatives and employees arising out of performance under this agreement or otherwise.

You agree to conduct your performance under this consultant agreement in accordance with the General Dynamics Standards of Business Ethics and Conduct and the General Dynamics’ policies and procedures relating to accounting and expense reporting and travel.

You understand that Federal law on procurement integrity places restrictions on obtaining and handling competition sensitive, proprietary and source selection information. This law also requires contractors’ consultants to certify their compliance.

You will not be expected to furnish advice, information, direction or assistance in support of the preparation or submission of an offer for a government contract, that would cause you to be a “marketing consultant” and covered by rules and regulations contained in 48 CFR Subpart 9.5 and Office of Federal Procurement Policy 89-1. Prior to accepting this engagement, you have disclosed any potential organizational conflict of interest and have determined that your performance under this agreement would not provide the Company with an unfair competitive

advantage. Further, should you discover subsequent to the execution of this agreement that a conflict of interest or unfair competition advantage situation exists, you agree to promptly disclose to the Company the facts relating to the situation.

The Federal Government has placed restrictions on the allowability of costs incurred in certain lobbying and consulting activities. These restrictions apply to you and are found in the “Byrd Amendment” (31 U.S.C. 1352) and restrict the allowability of certain costs incurred while lobbying congress or contacting executive agencies in connection with Federal contracts.

10.     Publicity

Except as required by law, neither you nor any of your employees, officers, agents or advisors shall issue any press release or make any other public statement relating to this Agreement, any work done under this Agreement or any of the transactions contemplated by this Agreement without obtaining the prior written approval of GDAIS and General Dynamics Corporation as to the contents and the manner of presentation and publication of such press release or public statement.

11.     Indemnification

You shall release us from any liability, loss or damage whatsoever for injuries (including death) to you arising out of your performance under this agreement or otherwise. General Dynamics shall indemnify you for any reasonable amount that you become legally obligated to pay in connection with any claim made against you by a third party or on behalf of General Dynamics because of any act, omission or neglect or breach of duty which you commit or suffer or permit to occur while acting in any authorized capacity as a consultant pursuant to this agreement, provided that you are either wholly successful with respect thereto, or acted in good faith in what you reasonably believed to be the best interests of General Dynamics, and with respect to any criminal action or proceeding, had no reasonable cause to believe that your conduct was unlawful. The term “claim” shall include any claim, action, suit or proceeding, civil, criminal, administrative or investigative, whether such claim is alleged action or inaction in, or is otherwise based upon your capacity as a consultant, and whether or not you are acting or serving in such capacity at the date hereof, at the time liability is incurred, or at the time the claim is asserted. The term “wholly successful” shall mean termination, withdrawal or dismissal of any claim against you without any finding of liability or guilt against you, or the expiration of a reasonable period of time after the making of any claim without the institution of the same, without any payment or promise make to induce a settlement.

12.     Security

You shall abide by all applicable security laws and regulations of the United States of America and GDAIS and shall take or refrain from taking any action that may be required for compliance therewith.

The following guidelines apply:

(a)	Except in connection to authorized visits:
	1.   The consultant shall not possess classified material away from the premises of the GDAIS.
	2.   GDAIS shall not furnish classified material to the consultant at any location other than the premises of the using contractor.
(b)	GDAIS shall provide classification guidance to the consultant, and shall brief the consultant as to the security controls and procedures applicable to the consultant’s performance.
(c)	The consultant shall not disclose classified information to any unauthorized person.
(d)	The consultant is the owner of the consulting firm and is the only official/employee of the consulting firm who may provide consulting services pursuant to this agreement.

It is understood that a security clearance up to the level of Top Secret may be required to perform services requested under this agreement. Our Security Department will contact you concerning the execution of appropriate government clearance forms.

13.     Assignment

Neither party may assign or transfer its rights or obligations under this Agreement without the prior written consent of the other party, which shall not be unreasonably withheld. Any impermissible assignment will be void and will not relieve the assigning party of its obligations under this Agreement. Notwithstanding the foregoing, either party may assign or transfer its rights and obligations under this Agreement to an affiliated entity that acquires a substantial portion of its assets. This Agreement inures to the benefit of, and is binding upon, the successors, permitted assigns and personal representatives of the parties hereto.

14.     Successors

This agreement shall inure to the benefit of and be binding upon (a) our successors and assigns and (b) your heirs, executors and administrators.

15.     Entire Agreement

This contains the entire agreement between us with respect to the consulting services to be rendered by you to GDAIS and supersedes all prior agreements, arrangements, and or understandings regarding the subject matter hereof.

If the foregoing clearly sets forth our understanding, will you please sign and return to us the enclosed duplicate copy of this agreement, which shall thereupon constitute an agreement between us.

Very Truly Yours,

GENERAL DYNAMICS ADVANCED
INFORMATION SYSTEMS, acting
through GENERAL DYNAMICS
GOVERNMENT SYSTEMS
CORPORATION

/s/ Arie Moses
Arie Moses
Manager, Subcontracts

Confirmed and accepted this 30th day of October 2002, by:

/s/ Paul G. Kaminski
Paul G. Kaminski
Chairman & CEO
Technovation, Inc 54 1860609
Social Security Number or
Employer Identification Number

EX-10.18 7 w84261exv10w18.htm CONSULTING AGREEMENT DATED JANUARY 1, 2003

Exhibit 10.18

GENERAL DYNAMICS
Advanced information Systems

Dr. Paul G. Kaminski
Technovation, Inc.
6691 Rutledge Drive
Fairfax Station, VA 22039

Re: Modification 1 to Consulting Agreement EYC0406

Dear Dr. Kaminski:

This letter confirms the Modification to the Consulting Agreement between us as outlined below:

This Modification is made effective the 1st day of January 2003.

1.     Terms of Agreement

This agreement is extended through 31 March 2003, and subject to be renewed every quarter throughout calendar year 2003, with the exception that either you or GDAIS may terminate this agreement at an earlier date, as long as the other party is given 30 days prior written notice of the intended termination. Your obligations, as outlined in paragraphs 6, 7, and 10 of the basic agreement, will survive any termination of this agreement.

2.     Fees and Expenses

GDAIS will pay you Thirty Five Thousand Dollars ($35,000) incrementally as a retainer for your labor during the period 1 January 2003 through 31 December 2003. GDAIS also will reimburse you no more than Five Thousand Dollars ($5,000) for travel expenses during that same period. The retainer shall be invoiced and GDAIS will pay you the retainer on a quarterly basis, at Eight Thousand Seven Hundred Fifty Dollars ($8750) per quarter, with the 1st installment due upon full execution of this modification. The full amount of the retainer will cover up to 7 days of your labor in calendar year 2003.

At the end of each quarter, you will submit an invoice detailing the following:

(a)	days of service performed;
(b)	nature and scope of services provided; and
(c)	a breakdown of travel expenses. (Documentation, including receipts, in support of travel expenses will be retained by you and will be available for our review upon request.)

3.     Assignment

This agreement has been assigned from “General Dynamics Advanced Information Systems, acting through General Dynamics Government Systems Corporation,” to “General Dynamics Advanced Information Systems, Inc.,” effective 1 January 2003.

4.     Terms Unchanged

Except as herein amended, all other terms and conditions remain unchanged.

IN WITNESS WHEREOF: Duly authorized representatives of the parties hereto have executed this Modification No. 1 to Consulting Agreement No. EYC0406 as of the day and year so indicated.

Very Truly Yours,

GENERAL DYNAMICS ADVANCED
INFORMATION SYSTEMS, INC.

/s/ Arie Moses
Arie Moses
Manager, Subcontracts

Confirmed and accepted this 1st day of January 2003, by:

/s/ Paul G. Kaminski
Paul G. Kaminski
Chairman & CEO
Technovation, Inc 54 1860609
Social Security Number or
Employer Identification Number

EX-13 8 w84261exv13.htm 2002 ANNUAL REPORT FOR GENERAL DYNAMICS

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

(Dollars in millions, except per share amounts or unless otherwise noted)

General Dynamics’ businesses include mission-critical information technology and communications, land and amphibious combat systems, shipbuilding and marine systems, and business aviation. These are leading-edge technology businesses that provide the highest quality products and capabilities to the company’s primary customers: the U.S. military, other government organizations, the armed forces of allied nations, and a diverse base of corporate and industrial buyers. The company has four primary business groups — Information Systems and Technology, Combat Systems, Marine Systems and Aerospace — and a smaller Resources group.

     Since taking office in 2001, the Bush administration has increased the U.S. defense budget to levels not seen since the Reagan administration. For fiscal year 2003, Congress appropriated $366 billion to the Department of Defense, an increase of 12 percent from the appropriation in fiscal 2002, to strengthen the U.S. military as it confronts current threats and transforms to meet future ones. Of this amount, $59 billion was allocated for research and development programs, and $72 billion for procurement — increases of 21 percent and 17 percent over the prior year’s funding levels, respectively. For fiscal year 2004, President Bush has requested that Congress appropriate $380 billion for defense, including almost $62 billion for research and development and almost $73 billion for procurement. These two categories of spending drive more than 60 percent of the company’s sales. The focus of this spending is on the transformation of the U.S. military to a lighter, more mobile, more lethal force. The company’s key programs and emerging technologies are directly aligned with this transformation and are fully supported in the president’s 2004 budget. In addition, because many of the company’s core defense programs are long-term initiatives, with a high probability of follow-on work, the company is well positioned to benefit from the projected long-term increase in defense spending.

     The company also anticipates strong international sales growth with the integration of strategic acquisitions, including General Motors Defense, and new, significant contract awards in Europe. The company’s business aviation group operated profitably and increased its backlog in a difficult economic environment. It expanded its product line and is well positioned to increase market share when the business aircraft market recovers. While the company has taken steps to minimize its risk in the business aircraft market, including modifying rates of production and adjusting inventory levels, the economic pressures experienced in 2002 will continue in 2003.

     The company’s management is dedicated to creating shareholder value by continuous process improvements that drive cost out of the business and through disciplined capital deployment. The company generates strong cash flows by focusing on return on invested capital. The company uses its free cash in a disciplined capital deployment process to invest internally, make strategic acquisitions and repurchase the company’s shares in the open market.

General Dynamics 2002 Annual Report 21

CONSOLIDATED OVERVIEW

Results of Operations

The company’s 2002 net sales increased 15 percent over 2001 to $13.8 billion. Organic revenue growth exceeded 6 percent — a noteworthy achievement given essentially flat revenue in the Marine Systems, Aerospace and Resources groups. The remainder of the revenue growth came from acquisitions. For 2001, net sales were $12.1 billion, an increase of 17 percent over 2000 net sales of $10.3 billion. Organic revenue growth was approximately 7 percent in 2001.

     Operating earnings for 2002 were $1.6 billion, an increase of 6 percent over 2001. Earnings from acquisitions and strong organic revenue growth in the Information Systems and Technology and Combat Systems groups contributed to this increase. These increases were partially offset by decreases in operating earnings from the Marine Systems and Aerospace groups. Operating earnings for 2001 were $1.5 billion, an increase of 12 percent over 2000 operating earnings of $1.3 billion.

     Earnings from continuing operations increased 15 percent over 2001 from $915 to $1.1 billion, excluding favorable tax settlements. This increase resulted from organic growth in Information Systems and Technology and Combat Systems, from acquired businesses and from a gain on an asset sale in 2002. Earnings from continuing operations in 2001 grew 13 percent from $809 in 2000, before favorable tax events in both years.

     For the fourth straight year, cash provided by operating activities exceeded $1 billion, totaling $1.1 billion in 2002. The company used some of these funds to reduce debt, as evidenced by a decrease in net debt from $1.5 billion at year-end 2001 to $1.1 billion at year-end 2002. It also used its cash to pay dividends, to repurchase the company’s common shares and to fund acquisitions and capital expenditures. The company ended 2002 with a cash balance of $328, compared with $439 at year-end 2001. With adequate funds on hand and the capacity for additional debt, management has the financial capability to execute its operating and financial strategy.

     General and administrative (G&A) expenses as a percentage of sales have remained consistent year over year, at around 6.5 percent. In 2002, G&A was $903, compared with $808 in 2001 and $642 in 2000.

     Income from non-operating items was $47 in 2002, of which $36 was from the sale of certain assets in the Space Propulsion operation of Combat Systems. In 2001 and 2000, the company incurred expense from non-operating items of $5 and $7, respectively. Net interest expense was $45 in 2002, $56 in 2001 and $60 in 2000. Net interest expense continues to decrease because of lower average borrowing rates.

22 General Dynamics 2002 Annual Report

     The company’s effective tax rate was 33.6 percent in 2002, 33.8 percent in 2001 and 28.5 percent in 2000. Settlements with the Internal Revenue Service favorably impacted the company’s tax rate in 2001 and 2000. These settlements, which included refund claims for research and experimentation tax credits, totaled $28 in 2001 and $90 in 2000.

     The company exited its undersea fiber optic cable-laying business in the fourth quarter of 2002 because of substantial overcapacity in the market and a lack of contract backlog. The results of this business’s operations are included as discontinued operations, net of income taxes, for all periods presented. The company recognized a total after-tax loss of $134 in 2002, including an after-tax charge of $109 for ship lease obligations and the write-down of assets to net realizable value. In 2001, the business operated at a break-even level. In 2000, the business generated operating earnings of $4. Operating results from this business had been included in Information Systems and Technology since 1998.

The total backlog for the company was $29 billion at year-end 2002, 8 percent more than the 2001 total backlog of $26.8 billion. This increase reflects growth across all of the company’s business groups. The funded backlog rose 10 percent from $19.4 billion in 2001 to $21.3 billion in 2002.

     The total backlog for the defense businesses was $21.9 billion as of December 31, 2002, and represents the estimated remaining sales value of work to be performed under firm contracts. The funded backlog for government programs was $16.6 billion at the end of 2002 and represents those items that have been authorized and appropriated by Congress and funded by the procuring agency.

     Of the Aerospace total backlog of $6.8 billion, $4.5 billion was funded. Funded backlog represents orders for which the company has entered into definitive purchase contracts and has received deposits from the customers. Backlog also includes options to purchase new aircraft and agreements to provide future aircraft maintenance and support services, which totaled $2.3 billion at year-end 2002. A significant portion of the Aerospace backlog consists of an agreement with an unaffiliated customer, NetJets Inc. (NetJets), a unit of Berkshire Hathaway and the leader in the fractional aircraft market. NetJets purchases the aircraft for use in its fractional ownership program.

     The Resources group added $300 to the year-end 2002 backlog, including approximately $200 of funded backlog.

General Dynamics 2002 Annual Report 23

REVIEW OF OPERATING SEGMENTS

INFORMATION SYSTEMS AND TECHNOLOGY

Results of Operations and Outlook

Year Ended December 31	2002			2001			2000
Net Sales	$	3,681		$	2,691		$	2,337
Operating Earnings		436			261			217
Operating Margin		11.8	%		9.7	%		9.3	%

In 2002, net sales increased 37 percent to $3.7 billion and operating earnings rose 67 percent to $436. Strong organic growth fueled half of the increase in sales and a quarter of the increase in earnings. Most of the organic growth came from Information Systems and Technology’s core government programs, including the start-up of the BOWMAN program. Awarded in July 2001, BOWMAN is a secure digital voice and data communications system for the United Kingdom’s (U.K.) armed forces. Other than BOWMAN, which generated 10 percent of Information Systems and Technology’s net sales in 2002, no contract accounted for more than 10 percent of the group’s revenue in 2002, 2001 or 2000. The Decision Systems business unit, acquired at the end of September 2001, also provided a substantial contribution to the group’s sales and operating earnings.

     In 2001, net sales increased 15 percent to $2.7 billion and operating earnings increased 20 percent to $261. Excluding the acquisition of Decision Systems, organic revenue and operating earnings growth were 7 percent and 5 percent, respectively, in 2001.

     Information Systems and Technology operating margins in 2002 were significantly higher than historical averages because of a shift in the product mix that included accelerated deliveries of encryption products, the acquisition of Decision Systems, and reduced exposure in commercial programs. The company’s adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” also contributed a margin increase of about 1 percent.

     The company expects operating margins to decrease slightly on solid revenue growth in 2003 as new contracts phase into the group’s production mix.

The Information Systems and Technology backlog grew to $5.3 billion in 2002, an increase of $350 from 2001. Of the group’s year-end 2002 total backlog, 96 percent was funded. The backlog includes numerous programs that support the U.S. government’s force transformation and homeland security initiatives, as well as numerous overseas programs that underscore the growing international market for the company’s products and services.

     Several major international programs constitute a large portion of the Information Systems and Technology backlog, including the U.K.’s BOWMAN and Combat, Infrastructure and Platform (CIP) programs. In December 2002, the U.K. Ministry of Defence selected the company for its CIP program that, in conjunction with the BOWMAN program, is key to deploying a new digital command and control communication system throughout the U.K.’s ground-based and joint forces. The company expects this contract to add $450 to the $2.4 billion BOWMAN program.

     Also in 2002, the company won a $128 contract from the Canadian Department of National Defence to supply and integrate a new data management system for the CP-140 Aurora, Canada’s long-range maritime patrol aircraft. Other significant contracts in the backlog are for the design, integration, installation and maintenance of telecommunications systems for the U.S. military, federal agencies and commercial customers. These include a Navy/Marine Corps Intranet subcontract, the Army Installation Information Infrastructure Modernization program, the Pentagon renovation program, and the U.S. Navy’s digital modular radio. Also included are contracts that provide processing and mission computing systems for many U.S. avionics platforms (including the F-18 and JSTARS production programs); strategic fire control development and production, guidance engineering services, and training services for the Trident-class submarine; and command and control, information assurance, and space and terrestrial communications products.

24 General Dynamics 2002 Annual Report

     The backlog does not include potentially significant work that has been awarded under indefinite delivery, indefinite quantity (IDIQ) contracts. These contracts are recognized in the backlog only when funded. These contracts include the U.S. Marine Corps contract to build and deploy digital combat operations centers, with a potential value of $522. In addition, the U.S. Army recently selected the company for a contract that, including options, could be worth over $790 to develop and produce a portion of the Land Warrior soldier modernization system. This system provides the individual soldier with personal electronics, communications, global navigation and other integrated equipment. The program, which will be integrated with the Stryker Brigade Combat Team and Future Combat Systems programs, will increase the soldier’s awareness, lethality and survivability.

     Another significant IDIQ contract awarded during the year is a U.S. Coast Guard contract with a potential value of $611 to modernize its search and rescue communications system (Rescue 21). The company also received a U.S. Air Force contract with a potential value of $260 for manufacturing and integrating Theater Deployable Communications Integrated Communications Access Packages (TDC ICAP).

     In August 2002, the Army awarded the company one of two contracts for a two-phase development effort for the Warfighter Information Network — Tactical (WIN-T), the Army’s next generation warfighting communications system. WIN-T will be the high-speed, high-capacity, integrating communications network for the Objective Force — the Army’s transformational vision for a fighting force that is more responsive, agile, lethal and survivable. While the company’s role beyond this initial development contract cannot be assured, this contract is the first award in a program with a total estimated value of $6 billion.

COMBAT SYSTEMS

Results of Operations and Outlook

Year Ended December 31	2002			2001			2000
Net Sales	$	2,923		$	2,210		$	1,273
Operating Earnings		323			238			156
Operating Margin		11.1	%		10.8	%		12.3	%

Combat Systems’ net sales rose $713 and operating earnings increased $85 in 2002. Organic growth was the primary driver, increasing net sales and operating earnings 25 percent above last year’s levels. This growth was the result of higher production on the Stryker and Leopard programs, volume on various munitions programs and additional systems development and demonstration work on the Marine Corps Advanced Amphibious Assault Vehicle (AAAV). Operating margins increased over 2001 as several vehicle programs moved to full-scale production.

     In 2001, net sales increased $937 and operating earnings increased $82 over 2000, because of the initiation of the Stryker program, organic growth in the AAAV and armament programs and the acquisition of two businesses, Ordnance and Tactical Systems and Santa Barbara Sistemas. Initial operating margin rates from the acquisitions were slightly lower than the historical segment performance and accounted for the lower overall margin rate in 2001 compared to 2000.

     In 2002, the company acquired Advanced Technical Products, Inc. (ATP) and entered into a definitive agreement to acquire General Motors Defense (GM Defense), the company’s joint venture partner on the Stryker program. The acquisition of GM Defense closed on March 1, 2003. GM Defense manufactures wheeled armored vehicles and turrets. ATP manufactures chemical and biological detection equipment and advanced composite-based products that are used on many U.S. fighter aircraft, helicopters and unmanned aerial vehicles. The company believes these acquisitions enhance the company’s product offerings, expand its global reach and further align the company with Department of Defense transformational initiatives.

     As a result of these acquisitions and recent contract awards, the company expects Combat Systems to be its fastest growing business group, with revenues and operating earnings growing substantially throughout 2003. Operating margins should moderate slightly, however, as GM Defense becomes fully integrated and production shifts from mature programs with higher earnings rates to development and early-stage programs with lower rates.

General Dynamics 2002 Annual Report 25

The Combat Systems funded backlog increased almost 25 percent to $4.2 billion at the end of 2002, with total backlog reaching $5 billion at year end. Most of the programs in the backlog represent long-term production work with deliveries scheduled through 2008. The backlog also includes design work for transformational systems, such as AAAV and Objective Force Warrior, for which management believes production awards are likely.

     Transformational Systems. The backlog at year-end 2002 included approximately $260 for the company’s share of the production of 308 Stryker vehicles, part of the first two Stryker combat brigades. The company expects to sign a contract for the third brigade shortly. The Bush administration’s 2004 budget provides funding through 2008 for three additional Stryker brigades. The six-brigade program contemplates the production of approximately 2,100 vehicles.

     The company is developing potential additional system enhancements for the Stryker program, including robotics, that are aimed at increasing the value and effectiveness of the fifth and sixth brigades. With the completion of the acquisition of GM Defense, the company has consolidated its lead role in this $4 billion key transformational initiative for the Army.

     In January 2003, the company entered into an agreement to become one of two members of the Integrated Design Team for the manned ground vehicle portion of the Future Combat Systems (FCS) program. FCS, the Army’s flagship transformation program, is a networked “system of systems” that uses advanced communications and technologies to integrate the soldier of the future with families of manned and unmanned platforms and sensors. The agreement gives the company and another contractor the responsibility for manned ground vehicles through the systems development and demonstration and low-rate initial production phases.

     During 2002, the company won one of two lead technology integration contracts for the Army’s Objective Force Warrior (OFW) program. This contract is the first phase in the Army’s plan to develop a more lethal, survivable and network-capable ground soldier of the future.

     In January 2003, the Army awarded the company a sole-source systems integration contract for the development and production of the Advanced Precision Kill Weapon System (APKWS) program, the successor to the Hydra-70 rocket system.

     The company continued its work on the systems design and development phase of the AAAV program in 2002 and completed the first of nine new prototype units. The Marine Corps plans for low-rate initial production to begin in 2006 with full-scale production of approximately 1,000 vehicles starting in 2008.

     Armored Systems. The backlog at the end of 2002 included approximately $1.4 billion for the production of 235 Leopard main battle tanks, built for the Spanish army under license from a German company. The company expects to deliver these tanks beginning in 2003 and continuing through 2008. In 2002, the Spanish army selected the company to manufacture 176 infantry fighting vehicles and 22 command vehicles in the second phase of the Pizzaro Advanced Infantry Fighting Vehicle program. The company anticipates completion of negotiations to determine the scope, timing and value of the program early in 2003, with work on the program to begin shortly thereafter. The potential value of this phase of the program is $540, approximately $400 of which was included in backlog at year-end 2002.

     The year-end backlog also included $170 for the upgrade of 163 Abrams tanks with the System Enhancement Package. Deliveries are scheduled through 2004. In 2002, the company won a $141 contract modification for 100 M1A1 hardware kits for the Egyptian tank co-production program, bringing the total program, which began in 1991, to 755 M1A1 tank kits. The year-end backlog included 140 units.

     Armament, Munitions and Other. The Combat Systems backlog included approximately $1.2 billion in armament, munitions and other programs at the end of 2002. These include production and development contracts for medium- and large-caliber ammunition and propellant programs. The backlog also includes systems management and production of over 300,000 rockets, warheads and motors for the Army’s 2.75-inch Hydra-70 rocket system, single- and multi-barrel medium-caliber gun systems and reactive armor tiles for the Bradley Fighting Vehicle. The company is the gun system integrator for the F-35 Joint Strike Fighter (JSF). This involves the design, development and production of potentially several thousand units over the life of the program. The company’s acquisition of ATP contributed to the backlog, with contracts involving work on advanced composite structures for numerous aerospace platforms, including the F-16, F-18, F-22, C-17, JSF and unmanned aerial vehicles such as the Global Hawk and the Predator. In addition, the company is a subcontractor on various precision guided munitions initiatives.

26 General Dynamics 2002 Annual Report

MARINE SYSTEMS

Results of Operations and Outlook

Year Ended December 31	2002			2001			2000
Net Sales	$	3,650		$	3,612		$	3,413
Operating Earnings		287			310			324
Operating Margin		7.9	%		8.6	%		9.5	%

In 2002, Marine Systems net sales remained essentially flat while operating earnings decreased slightly. Increased volume on the Virginia-class submarine program and new commercial ship design work offset lower volume on the company’s mature defense programs. Operating margins in the group dropped because of design-to-production transition problems on TOTE, a commercial shipbuilding contract. The company expects to deliver the two TOTE ships under this contract by mid-2003.

     In 2001, volume decreased slightly on mature programs and increased on design and early-stage production programs. This shift increased net sales in 2001 by $199, but also caused a moderate decrease in operating earnings, reflecting the lower margins on design and cost-reimbursable work.

     The company projects a slight increase in Marine Systems revenue and operating earnings in 2003 as the group begins to capitalize on the significant backlog generated in 2002. Operating margins in the group are likely to improve somewhat over 2002 results, however, any additional cost growth on the TOTE contract could affect 2003 operating results, particularly in the first half of the year. Further margin improvement over the next several years is possible given the group’s substantial backlog of long-term production programs.

Marine Systems won several significant awards in 2002 that extended key platform programs and introduced new efforts in Navy transformation. The Marine Systems total backlog reached record levels during 2002 on the strength of these awards, ending the year at $11.6 billion, $7.3 billion of which was funded. This backlog primarily includes long-term production programs scheduled for delivery through 2010, with likely follow-on work beyond the end of the decade. The company expects the growth of the Marine Systems backlog over the next several years to be consistent with trends in the Navy’s shipbuilding plan that projects an accelerated build rate to sustain the Navy’s desired fleet size.

     Surface Combatants. In 2002, the company, the Navy and Northrop Grumman Ship Systems (NGSS) agreed to transfer construction of four LPD 17-class amphibious transport dock ships from the company to NGSS in exchange for the construction of up to four Arleigh Burke-class (DDG-51) destroyers. As a result of this swap arrangement and a multiyear agreement awarded shortly thereafter, the company received contracts to construct a total of seven DDGs with a value of $3.7 billion. The backlog also included $1 billion to complete construction of six previously awarded DDGs. Delivery of these vessels is scheduled through 2010.

     DD(X) is the Navy’s next-generation family of surface combatants. In 2002, the company signed an agreement with the prime contractor on the design phase of the DD(X) program and is participating in this phase of the program as a major subcontractor.

     The company was one of six contractors that received a contract from the Navy in 2002 to explore advanced concepts for a Littoral Combat Ship (LCS). The LCS is an integrated surface combatant capable of operating in coastal areas against terrorist

General Dynamics 2002 Annual Report 27

threats, high-speed swarm boats, mines and diesel submarines. The LCS program envisions ship construction beginning in 2005.

     Nuclear Submarines. The backlog included $2.4 billion for a contract to construct the first four Virginia-class submarines. The Navy awarded the company this contract in 1998 for an initial value of $4.2 billion. Delivery of the submarines is scheduled at one per year, from 2004 through 2007. Construction work is shared equally between the company as prime contractor and Northrop Grumman Newport News as subcontractor, in accordance with the terms of a teaming agreement. Congress provided full funding for the fifth Virginia-class submarine and advance procurement funding for the sixth and seventh ships in the 2003 budget. Full funding for the sixth ship and advance procurement funding for the following four ships of this 30-ship program was requested in the administration’s 2004 budget.

     In 2002, the Navy awarded the company a five-year, $443 contract for the design of the Trident SSGN, a multimission submarine optimized for conventional strike and special operations support. Under this program, considered a prime example of military transformation initiatives, the company will perform the detailed design and related support work to convert the first four Ohio-class nuclear ballistic missile submarines, also known as Tridents, to SSGN configuration.

     The year-end backlog also included $400 associated with the third and final Seawolf submarine, scheduled to be delivered in 2004, as well as contracts for submarine logistics support services.

     Auxiliary and Commercial Ships. In October 2001, the Navy awarded the company a $709 contract for the design and construction of the first two T-AKE ships, a new class of dry-cargo combat logistics ships. The original award included options for 10 additional ships over six years for a total contract value of $3.7 billion. In 2002, the Navy exercised an option to build a third ship and awarded the company a $290 contract. The year-end 2002 backlog included approximately $950 for the design and construction of these ships. The first two ships are scheduled for delivery in 2005, and the third is scheduled in 2006. Congress has appropriated funding for a fourth ship. Ships five and six are included in the Bush administration’s 2004 budget request.

     In September 2000, BP Oil Shipping Company, USA (BP), awarded the company a $630 contract to design and build three double-hull crude oil tankers, with options for three additional vessels. In September 2001, BP exercised an option for a fourth ship with a value of approximately $200. Construction of the first ship began in late 2002. Delivery of the first two ships is scheduled for 2004, with the remaining two ships scheduled for delivery in 2005 and 2006.

     The backlog also includes repair contracts for naval vessels.

AEROSPACE

Results of Operations and Outlook

Year Ended December 31	2002			2001			2000
Net Sales	$	3,289		$	3,265		$	3,029
Operating Earnings		447			625			592
Operating Margin		13.6	%		19.1	%		19.5	%
Aircraft Deliveries (in units)
Green		85			84			71
Completion		94			98			70

Net sales in 2002 were essentially flat compared with 2001, while operating earnings decreased approximately 28 percent to $447. The reduction in operating earnings resulted from losses incurred on pre-owned aircraft sales and charges recorded to write down the company’s pre-owned aircraft inventory to fair market value. During the fourth quarter of 2002, the company aggressively liquidated $262 of pre-owned aircraft at a loss of $37, bringing pre-owned aircraft sales for the year to $435 at a loss of $81, including write-downs of inventory to fair market value. In 2001, the company sold $177 of pre-owned inventory at about a break-even level.

     The decrease in earnings also was the result of fewer deliveries of large aircraft. The company delivered 61 large aircraft in 2002 compared with 71 in 2001. The introduction of less expensive mid-size aircraft to the company’s product line offset the decrease in deliveries of large aircraft in 2002, but the lower margins on these mid-size aircraft were not sufficient to offset the reduced earnings on the large aircraft.

     Finally, earnings were affected by lower pricing to meet competitive pressures created by an availability of product, both new and pre-owned, in excess of market demand. Continuous cost improvements in both the company’s production and completion processes partially offset the impact of the pricing pressure on the large aircraft models.

     In 2001, net sales increased $236 primarily because of the Galaxy Aerospace acquisition in June 2001, which added the Gulfstream G100 and Gulfstream G200 aircraft to the product line. Operating earnings increased $33 in 2001 as a result of higher sales and improved cost performance. Slightly higher research and development expenses for new product development, expenses from acquisitions and severance costs partially offset this increase. Operating margins were slightly lower in 2001 compared with 2000 because of

28 General Dynamics 2002 Annual Report

the introduction of the less expensive, lower margin aircraft acquired in the Galaxy Aerospace transaction.

     The company expects Aerospace margins in 2003 to be somewhat lower than 2002, with lower revenue, continued pricing pressures and a shift to a slightly less favorable mix of aircraft deliveries. This expectation assumes elevated levels of pre-owned aircraft on the market, an oversupply of new aircraft already manufactured by several of the company’s competitors, and a weak capital goods sector as a result of depressed world-wide economic markets and unstable geopolitical environments of the Middle East and Korea. (See Notes F and O to the Consolidated Financial Statements for additional information regarding the Aerospace group’s aircraft inventories and trade-in commitments.)

Summary of Aircraft Statistical Information

Aircraft contracts usually provide for two major milestones: the manufacture of the green aircraft and its completion, which includes exterior painting and installation of customer-selected interiors and optional avionics. The company initially records revenues when green aircraft are delivered to and accepted by the customer and subsequently when the customer accepts final delivery of the fully outfitted aircraft.

     The following summarizes certain key unit data for the Aerospace group’s orders and backlog:

		2002		2001		2000
New Orders			126		121		62
Options Exercised			7		2		20
	Total Firm Orders		133		123		82
New Options			50		54		1
Firm Contracts in Backlog			173		131		87
Options in Backlog			103		63		18
	Total Aircraft in Backlog		276		194		105
Completions in Backlog(a)			38		49		47

(a) Represents aircraft that have moved from green production to the completion process as of year end. Backlog includes only the value of the completion effort on these aircraft.

The Aerospace group’s backlog increased $500 in 2002 to $6.8 billion with aircraft deliveries expected through 2010. This increase is attributable primarily to an order placed by NetJets in 2002 for 50 G150 aircraft with options for an additional 50. The potential value of this order is $1.5 billion. The company expects deliveries under this order to begin in 2005 and continue through 2010. The year-end funded backlog with NetJets was about $2.4 billion, including firm contracts for 121 aircraft. These contracts represented 53 percent of the Aerospace funded backlog. Options from NetJets totaled $1.4 billion for 100 aircraft and constituted 94 percent of the options backlog. Over 70 percent of the maintenance and support services backlog was also with NetJets. Deliveries of aircraft to NetJets are scheduled from 2003 through 2010 and represent approximately 7 percent to 15 percent of projected annual new aircraft sales during that period.

     Approximately $2 billion, or 43 percent, of the funded backlog at the end of 2002 was with commercial customers other than NetJets covering a wide spectrum of industries and customers. The funded backlog also included approximately $200 with government customers.

General Dynamics 2002 Annual Report 29

RESOURCES

The company operates three businesses in its Resources group: Freeman Energy, a coal mining company; Material Service, an aggregates company that primarily supplies the construction industry; and a natural gas tanker leasing business.

Results of Operations

Year Ended December 31	2002		2001		2000
Net Sales	$	286	$	276	$	253
Operating Earnings		89		52		36

Earnings for 2002 improved because of increased volume and better performance in the aggregates business. In addition, the company reversed some contingency reserves established in prior periods for the coal business because of the improved long-term outlook of certain of its contractual relationships. Earnings for 2001 reflected higher volume and profits in the aggregates and coal mining operations over 2000. Sales and earnings in 2003 are expected to be comparable with 2001.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash flow from business operations totaled $915 for 2002. The company ended the year with a cash balance of $328, net debt of $1.1 billion and a debt-to-capital ratio of 22 percent, down from 30 percent in 2001. Management defines cash flow from business operations, an internal performance measurement, as after-tax cash provided by business unit operating activities net of capital expenditures and before corporate items. Management believes cash flow from business operations is a measurement that is useful to investors, because it portrays the company’s ability to generate cash from its core businesses. The following is a reconciliation of the cash flow from business operations with the cash flow from operating activities, as classified on the Consolidated Statement of Cash Flows:

Year Ended December 31	2002			2001			2000
Cash flow from business operations	$	915		$	1,003		$	917
Business unit capital expenditures		258			264			271
Net interest		(53	)		(61	)		(71	)
Other corporate operating cash flows		5			(105	)		(47	)
Cash flow from operating activities	$	1,125		$	1,101		$	1,070

Since 1995, the company has completed 26 acquisitions, at a total cost of more than $10 billion. Throughout these acquisitions, the company has maintained a strong balance sheet, which has provided sustained financial flexibility. With annual cash flows from business operations projected to be in excess of $1 billion, the company expects to generate funds in excess of its short- and long-term liquidity needs. Management believes that the company has adequate funds on hand and substantial borrowing capacity to provide strategic flexibility.

     The following is a discussion of the company’s major operating, investing and financing activities for each of the three years in the period ended December 31, 2002, as classified on the Consolidated Statement of Cash Flows.

30 General Dynamics 2002 Annual Report

Cash Provided by Operating Activities

In 2002, net cash provided by operating activities was $1.13 billion. This compares to cash provided of $1.10 billion in 2001 and $1.07 billion in 2000.

     Income Taxes. In 2001, the company reduced its liabilities for tax contingencies and recognized a non-cash benefit of $28, or $.14 per diluted share, as a result of the tax adjustment. During 2000, the company settled outstanding tax issues with the IRS, including refund claims for research and experimentation tax credits for tax years 1990 through 1993. The company received $43 of cash refunds from these settlements in 2000.

     Income tax payments were $377 in 2002, $326 in 2001 and $280 in 2000.

     Interest Expense. Cash paid for interest was $55 in 2002, $70 in 2001 and $78 in 2000.

     Termination of A-12 Program. As discussed further in Note P to the Consolidated Financial Statements, litigation on the A-12 program termination has been ongoing since 1991. If the default termination is ultimately sustained, contrary to the company’s expectations, the company and The Boeing Company could be required to repay the U.S. government as much as $1.4 billion for progress payments received for the A-12 contract plus interest which was approximately $1 billion at December 31, 2002. In this outcome, the government contends the company’s liability would be approximately $1.2 billion pretax, or $685 after-tax. The company believes that it has sufficient resources under current borrowing arrangements to pay such an obligation, if required, while still retaining ample liquidity.

Cash Used for Investing Activities

Cash used in investing activities was $400 in 2002, $1.7 billion in 2001 and $329 in 2000. The primary uses of cash in investing activities were business acquisitions and capital expenditures offset by cash received from the sale of assets.

     Business Acquisitions. On June 14, 2002, the company acquired the outstanding stock of Advanced Technical Products, Inc. for $214 in cash, plus the assumption of $43 in outstanding debt, which was repaid at the time of the acquisition. Also in 2002, the company acquired the assets of Command System Incorporated, a privately held company in Fort Wayne, Indiana, and Eisenwerke Kaiserslautern GmbH i.I. of Kaiserslautern, Germany.

     On September 28, 2001, the company acquired Integrated Information Systems Group from Motorola, Inc. for $825 in cash.

     On June 5, 2001, the company acquired substantially all of the assets of Galaxy Aerospace Company LP, for $330 in cash, after a purchase price adjustment received during the first quarter of 2002. The company may be required to make additional payments to the selling parties, up to a maximum of approximately $300 through 2006, contingent on the achievement of specific revenue targets.

     On January 26, 2001, the company acquired Primex Technologies, Inc. for $334 in cash plus the assumption of $204 in outstanding debt, $149 of which was repaid at the time of the acquisition.

     Also during 2001, the company acquired four aircraft service and maintenance facilities from BBA North America, which now conduct business within the Aerospace group as General Dynamics Aviation Services; and Spain’s leading defense manufacturer, renamed Santa Barbara Sistemas by the company.

     The company acquired several other businesses during 2000 in the Information Systems and Technology and Combat Systems groups, totaling approximately $75.

     The company financed the above acquisitions by issuing commercial paper.

     On December 19, 2002, the company entered into a definitive agreement to acquire GM Defense of London, Ontario, a business unit of General Motors Corporation, for $1.1 billion in cash. The company completed the acquisition on March 1, 2003. GM Defense manufactures wheeled armored vehicles and turrets and, prior to the acquisition, was the company’s partner in the joint venture for the Stryker family of combat vehicles for the Army. The company issued commercial paper to finance this acquisition. However, the company intends to refinance this debt in the first half of 2003 to take advantage of attractive rates for medium-term debt.

     Capital Expenditures. In 2002, capital expenditures decreased approximately 25 percent to $264 from the $356 spent in 2001. The decrease reflected the completion in 2001 of a facility modernization project at the company’s Bath Iron Works shipyard. The company expects capital expenditures to decrease approximately 10 percent in 2003. The company had no material commitments for capital expenditures as of December 31, 2002.

     Sale of Assets. On October 2, 2002, the company sold certain assets of its Space Propulsion operation for $90. The remainder of the Space Propulsion operation is included in the Combat Systems group.

     On February 15, 2001, the Aerospace group sold its engine overhaul business for $55.

     The company received approximately $45 in cash during the three-year period ended December 31, 2002, from the sale of certain vacant real estate located in southern California.

Cash Used for Financing Activities

In 2002, cash used for financing activities was $836, consisting primarily of repayment of outstanding debt and payment of dividends. This compares to cash provided of $908 in 2001 and cash used of $835 in 2000.

General Dynamics 2002 Annual Report 31

     Debt Proceeds, Net. The company made net payments of $451 to reduce the outstanding commercial paper balances during 2002. As of December 31, 2002, the company had $714 of commercial paper outstanding with an average yield of approximately 1.56 percent and an average term of 34 days. The company expects to reissue commercial paper as it matures and has the option to extend the term up to 270 days. The company has approximately $3.5 billion in bank credit facilities, which serve as back-up liquidity facilities to the commercial paper program.

     On August 27, 2001, the company issued $500 of three-year floating rate notes due September 1, 2004. The notes are registered under the Securities Act of 1933, as amended. Interest on the notes resets quarterly at three-month LIBOR plus 0.22 percent, and is payable each March, June, September and December. The notes are redeemable in whole or in part at any time prior to their maturity at 100 percent of the principal amount plus any accrued but unpaid interest on the date the notes are redeemed. The company used the net proceeds of the issuance to repay a portion of the borrowings under its commercial paper program. These floating rate notes are guaranteed by certain of the company’s 100-percent owned subsidiaries.

     Share Repurchases. On March 7, 2000, the company’s board of directors authorized management to repurchase up to 10 million shares of the company’s issued and outstanding common stock in the open market. The company repurchased approximately 1.3 million shares for $100 in 2002, 1.5 million shares for $113 in 2001, and 4 million shares for $208 in 2000. During the first month of 2003, the company repurchased an additional 3.2 million shares for approximately $210, which completely utilized the March 2000 authorization. On February 5, 2003, the company’s board of directors authorized management to repurchase up to six million additional shares.

     Dividends. On March 5, 2003, the company’s board of directors declared an increased regular quarterly dividend of $.32 per share — the sixth consecutive annual increase. The board had previously increased the quarterly dividend to $.30 per share in March 2002, to $.28 per share in March 2001, and to $.26 per share in March 2000.

ADDITIONAL FINANCIAL INFORMATION

Contractual Obligations and Commercial Commitments

The following table shows information about the company’s contractual obligations and commercial commitments as of December 31, 2002:

	Payments Due by Period
			Less Than		1-3		4-5		After
	Total		1 Year		Years		Years		5 Years
Contractual Obligations
Commercial paper, net	$	714	$	714	$	—	$	—	$	—
Floating rate notes		500		—		500		—		—
Operating leases		440		76		132		77		155
Senior notes		150		—		—		—		150
Term debt		45		5		10		10		20
Finance operations debt		21		18		3		—		—
Capital lease obligation		27		2		7		7		11
Note payable (Spanish gov’t)		14		2		11		1		—
Drawn line of credit		10		10		—		—		—
	$	1,921	$	827	$	663	$	95	$	336

	Amount of Commitment Expiration Per Period
	Total
	Amount		Less Than		1-3		4-5		After
	Committed		1 Year		Years		Years		5 Years
Other Commercial Commitments
Letters of credit	$	780	$	576	$	125	$	58	$	21
Trade-in options		551		233		318		—		—
	$	1,331	$	809	$	443	$	58	$	21

32 General Dynamics 2002 Annual Report

In the ordinary course of business, the company has entered into letters of credit and other similar arrangements with financial institutions and insurance carriers totaling approximately $780. The company, from time to time, guarantees the payment or performance obligations of its subsidiaries arising under certain of their contracts. The company is not aware of any default that would require it to satisfy these guarantees. (See Notes J and O to the Consolidated Financial Statements for further discussion.)

Market Risk

The company has no material market risk-sensitive instruments, positions or transactions. The estimated fair value of the company’s financial instruments approximates carrying value. The company’s investment securities carry fixed rates of interest over their respective maturity terms. The company does not use derivatives to alter the interest characteristics of these instruments.

     The company is exposed to the effects of foreign currency fluctuations on the U.S. dollar value of earnings from its international operations. The company attempts to minimize the effects of currency risk by borrowing externally in the local currency or by hedging its foreign currency purchases when practical. The company periodically enters into foreign currency derivatives, including forward exchange and currency swap contracts, to hedge its exposure to fluctuations in foreign currency exchange rates. As a matter of policy, the company does not engage in currency speculation.

     One of the company’s Canadian subsidiaries holds privately placed U.S. dollar denominated senior notes of $150, which mature in September 2008. The subsidiary also has a currency swap that fixes its foreign currency variability on both the principal and interest portions of these notes. As of December 31, 2002, the fair value of this cash flow hedge was a $19 asset, which offset the effect of changes in the currency exchange rate on the related debt.

     There were no material derivative instruments designated as fair value or net investment hedges during the year ended December 31, 2002.

Application of Critical Accounting Policies

Management’s Discussion and Analysis of the company’s Financial Condition and Results of Operations is based on the company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. On an ongoing basis, management evaluates its estimates, including those related to long-term contracts and programs, pre-owned aircraft inventory, goodwill and other intangible assets, income taxes, pensions and other postretirement benefits, workers’ compensation, warranty obligations, and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     The policies that management believes are critical and require the use of significant business judgment in their application are as follows:

     Revenue Recognition — Government Contracts. The company accounts for sales and earnings under long-term defense contracts and programs using the percentage-of-completion method of accounting. The company follows the guidelines of AICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” except that revisions of estimated profits on contracts are included in earnings under the reallocation method, in accordance with Accounting Principles Board Opinion No. 20, “Accounting Changes,” rather than the cumulative catch-up method. Under the reallocation method, the impact of revisions in estimates is recognized prospectively over the remaining life of the contract, while under the cumulative catch-up method such impact would be recognized immediately.

     The company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes that profit evenly over the remaining life of the contract based on either input or output measures, as appropriate to the circumstances. The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion and in some cases includes estimates of recoveries asserted against the customer for changes in specifications. These estimates involve various assumptions and projections relative to the outcome of future events over a period of several years, including future labor productivity and availability, the nature and complexity of the work to be performed, availability of materials, the impact of delayed performance, availability and timing of funding from the customer, and the timing of product deliveries. These estimates require the use of judgment. A significant change in one or more of these estimates could affect the profitability of one or more of

General Dynamics 2002 Annual Report 33

the company’s contracts. The company reviews its contract estimates periodically to assess revisions in contract values and estimated costs at completion and reflects changes in estimates in the current and future periods under the reallocation method.

     Revenue Recognition — Business Aircraft. The company accounts for contracts for aircraft certified by the Federal Aviation Administration in accordance with Statement of Position 81-1. These contracts usually provide for two major milestones: the manufacture of the “green” aircraft (i.e., before exterior painting and installation of customer-selected interiors and optional avionics) and its completion. The company records revenues at two points: when green aircraft are delivered to and accepted by the customer and when the customer accepts final delivery of the fully outfitted aircraft.

     The company does not recognize revenue at green delivery unless (1) a contract has been executed with the customer and (2) the customer can be expected to satisfy its obligations under the contract, as evidenced by the receipt of significant deposits from the customer.

     Pre-owned Aircraft Inventories. In connection with orders for new aircraft, the company routinely offers customers trade-in options. Under these options, if exercised, the company will accept trade-in aircraft at a predetermined trade-in price based on estimated fair value. Once acquired in connection with a sale of new aircraft, the company records pre-owned aircraft at the lower of trade-in value or estimated net realizable value. The company treats any excess of the trade-in price above the net realizable value as a reduction of revenue upon the recording of the new aircraft sales transaction. The company also regularly assesses the carrying value of pre-owned aircraft in inventory and adjusts the carrying value to net realizable value when appropriate. The company determines net realizable value by using both internal and external aircraft valuation information. These valuations involve estimates and assumptions about many factors including current market conditions, future market conditions, the age and condition of the aircraft and the availability of the aircraft in the market, and these estimates require the use of judgment. Gross margins on sales of pre-owned aircraft can vary from quarter to quarter depending on the mix of aircraft sold and current market conditions.

     Commitments and Contingencies. The company is subject to litigation and other legal proceedings arising out of the ordinary course of its business or arising under provisions relating to the protection of the environment. Estimating liabilities and costs associated with these matters requires judgment. When estimates of the company’s exposure from claims or pending or threatened litigation matters meet the criteria for accrual in Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies,” amounts are recorded as charges against earnings. The ultimate resolution of any exposure to the company may change as further facts and circumstances become known.

     Deferred Contract Costs. Certain costs incurred in the performance of the company’s government contracts are required to be recorded under GAAP but are not currently allocable to contracts. Such costs include a portion of the company’s estimated workers’ compensation, other insurance-related assessments, retirement benefits and environmental expenses. These costs become allocable to contracts when they are paid. The company defers these costs in contracts in process until they are paid, at which time they are charged to contracts and recovered from the government. The company expects to recover these costs through on-going business, including both existing backlog and probable follow-on contracts. These efforts consist of numerous contracts for which the company is the sole source or one of two suppliers on long-term defense programs. The company regularly assesses the probability of recovery of these costs under its current and probable follow-on contracts. This assessment requires the company to make assumptions about future contract costs, the extent of cost recovery under the company’s contracts and the amount of future contract activity. These estimates require the use of judgment. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company’s remaining contracts could be adversely affected.

     Pension Plans. The company makes assumptions about discount rates and long-term rates of return on plan assets to determine its net periodic pension cost in accordance with SFAS 87, “Employers’ Accounting for Pensions.” These estimates require the use of judgment. The company consults with outside experts to determine the appropriate assumptions to be used. In the event a change in any of the assumptions is warranted, future pension cost as determined under SFAS 87 could increase or decrease. The company’s contractual arrangements with the U.S. government provide for the recovery of contributions to the company’s government plans. The company has deferred recognition of the cumulative earnings in its government plans to provide a better matching of revenues and expenses. As such, the company’s future income is not subject to the consequences of changes in the assumptions associated with these plans.

     Management believes that the application of judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented.

34 General Dynamics 2002 Annual Report

New Accounting Standards

The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” in January 2003. FIN 46 provides guidance on the consolidation of certain entities. The interpretation requires variable interest entities to be consolidated if the equity interest at risk is not sufficient to permit an entity to finance its activities without support from other parties or if the equity investors lack certain specified characteristics. FIN 46 is effective immediately for variable interests created after January 31, 2003, and is effective in the third quarter of 2003 to variable interests acquired before February 1, 2003. The company currently is assessing the application of FIN 46 to determine its impact and does not expect the adoption of this interpretation to have a material effect on the company’s results of operations, financial condition or cash flows.

     The FASB issued FIN 45, “Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” in November 2002. FIN 45 clarifies the requirements of SFAS 5 relating to a guarantor’s disclosures of certain guarantees issued and the requirement to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 is effective for guarantees issued or modified after December 31, 2002. The company does not expect the adoption of this interpretation to have a material effect on its results of operations, financial condition or cash flows.

     The FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” in June 2002. SFAS 146 nullifies previous guidance on this issue and requires a liability for a cost associated with an exit or disposal activity to be recognized and measured at its fair value in the period in which the liability is incurred. The company adopted the provisions of this statement on January 1, 2003. The company does not expect the adoption of this standard to have a material impact on its results of operations, financial condition or cash flows.

     The FASB issued SFAS 143, “Accounting for Asset Retirement Obligations,” in June 2001. SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, and capitalize the cost by increasing the carrying amount of the related long-lived asset. The company adopted SFAS 143 on January 1, 2003. The company does not expect the adoption of this standard to have a material impact on its results of operations, financial condition or cash flows.

General Dynamics 2002 Annual Report 35

Consolidated Statement of Earnings

			Year Ended December 31
(Dollars in millions, except per share amounts)			2002			2001			2000
Net Sales			$	13,829		$	12,054		$	10,305
Operating costs and expenses				12,247			10,568			8,980
Operating Earnings				1,582			1,486			1,325
Interest expense, net				(45	)		(56	)		(60	)
Other income (expense), net				47			(5	)		(7	)
Earnings from Continuing Operations before Income Taxes				1,584			1,425			1,258
Provision for income taxes, net				533			482			359
Earnings from Continuing Operations				1,051			943			899
Discontinued operations, net of tax				(134	)		—			2
Net Earnings			$	917		$	943		$	901
Earnings per share
	Basic:
		Continuing operations	$	5.22		$	4.69		$	4.50
		Discontinued operations	$	(0.67	)	$	—		$	0.01
		Net earnings	$	4.55		$	4.69		$	4.51
	Diluted:
		Continuing operations	$	5.18		$	4.65		$	4.47
		Discontinued operations	$	(0.66	)	$	—		$	0.01
		Net earnings	$	4.52		$	4.65		$	4.48

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

36 General Dynamics 2002 Annual Report

Consolidated Balance Sheet

	December 31
(Dollars in millions)	2002			2001
ASSETS
Current Assets:
Cash and equivalents	$	328		$	439
Accounts receivable		1,074			968
Contracts in process		1,914			1,732
Inventories		1,405			1,289
Assets of discontinued operations		69			85
Other current assets		308			432
Total Current Assets		5,098			4,945
Noncurrent Assets:
Property, plant and equipment, net		1,856			1,718
Intangible assets, net		560			648
Goodwill, net		3,510			3,110
Other assets		707			648
Total Noncurrent Assets		6,633			6,124
	$	11,731		$	11,069
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-term debt and current portion of long-term debt	$	732		$	1,211
Accounts payable		1,056			890
Liabilities of discontinued operations		125			14
Other current liabilities		2,669			2,464
Total Current Liabilities		4,582			4,579
Noncurrent Liabilities:
Long-term debt		718			724
Other liabilities		1,232			1,238
Commitments and contingencies (see Note O)
Total Noncurrent Liabilities		1,950			1,962
Shareholders’ Equity:
Common stock, including surplus		757			694
Retained earnings		5,455			4,778
Treasury stock		(1,016	)		(930	)
Accumulated other comprehensive income		3			(14	)
Total Shareholders’ Equity		5,199			4,528
	$	11,731		$	11,069

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

General Dynamics 2002 Annual Report 37

Consolidated Statement of Cash Flows

		Year Ended December 31
(Dollars in millions)			2002			2001			2000
Cash Flows from Operating Activities:
Income from continuing operations		$	1,051		$	943		$	899
Adjustments to reconcile income from continuing operations to net cash provided by operating activities- Depreciation, depletion and amortization of property, plant and equipment			179			164			143
	Amortization of intangible assets and goodwill		34			100			81
	Deferred income tax provision		179			114			128
(Increase) decrease in assets, net of effects of business acquisitions- Accounts receivable			(90	)		(25	)		(27	)
	Contracts in process		(202	)		(225	)		(78	)
	Inventories		(141	)		(223	)		11
Increase (decrease) in liabilities, net of effects of business acquisitions- Accounts payable			137			53			57
	Billings in excess of costs and estimated profits		109			256			(99	)
	Income taxes payable		(19	)		27			(35	)
	Other current liabilities		(41	)		(140	)		72
Other, net			(70	)		55			(83	)
Net Cash Provided by Operating Activities from Continuing Operations			1,126			1,099			1,069
Net Cash (Used) Provided by Discontinued Operations			(1	)		2			1
Net Cash Provided by Operating Activities			1,125			1,101			1,070
Cash Flows from Investing Activites:
Business acquisitions, net of cash acquired			(275	)		(1,451	)		(71	)
Purchases of available-for-sale securities			(41	)		(45	)		(23	)
Sales/maturities of available-for-sale securities			39			42			29
Capital expenditures			(264	)		(356	)		(288	)
Proceeds from sale of assets			133			96			33
Other, net			8			(32	)		(9	)
Net Cash Used by Investing Activities			(400	)		(1,746	)		(329	)
Cash Flows from Financing Activities:
Net (repayments of) proceeds from commercial paper			(451	)		825			(508	)
Proceeds from issuance of floating rate notes			—			500			—
Repayment of finance operations debt			(22	)		(20	)		(18	)
Net repayments of other debt			(76	)		(133	)		(10	)
Dividends paid			(236	)		(219	)		(202	)
Purchases of common stock			(100	)		(113	)		(208	)
Proceeds from option exercises			49			68			111
Net Cash (Used) Provided by Financing Activities			(836	)		908			(835	)
Net (Decrease) Increase in Cash and Equivalents			(111	)		263			(94	)
Cash and Equivalents at Beginning of Year			439			176			270
Cash and Equivalents at End of Year		$	328		$	439		$	176

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

38 General Dynamics 2002 Annual Report

Consolidated Statement of Shareholders’ Equity

	Common Stock									Treasury Stock
							Retained									Comprehensive
(Dollars in millions, except share amounts)	Shares		Par		Surplus		Earnings			Shares			Amount			Income
Balance, December 31, 1999		240,940,317	$	241	$	246	$	3,363			(39,926,750	)	$	(673	)
Net earnings								901								$	901
Cash dividends declared								(205	)
Shares issued under compensation plans						97					3,542,282			48
Tax benefit of exercised stock options						35
Shares purchased											(4,054,200	)		(208	)
Unrealized gains on securities																	1
Minimum pension liability adjustment																	2
Foreign currency translation adjustments																	(21	)
Balance, December 31, 2000		240,940,317		241		378		4,059			(40,438,668	)		(833	)	$	883
Net earnings								943								$	943
Cash dividends declared								(224	)
Shares issued under compensation plans						54					1,710,198			16
Tax benefit of exercised stock options						21
Shares purchased											(1,466,300	)		(113	)
Foreign currency translation adjustments																	11
Balance, December 31, 2001		240,940,317		241		453		4,778			(40,194,770	)	$	(930	)	$	954
Net earnings								917								$	917
Cash dividends declared								(240	)
Shares issued under compensation plans						38					1,538,355			14
Tax benefit of exercised stock options						25
Shares purchased											(1,290,800	)		(100	)
Gain on cash flow hedge																	7
Unrealized gains on securities																	1
Foreign currency translation adjustments																	9
Balance, December 31, 2002		240,940,317	$	241	$	516	$	5,455			(39,947,215	)	$	(1,016	)	$	934
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

General Dynamics 2002 Annual Report 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share amounts or unless otherwise noted)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization. The company’s businesses include mission-critical information technology and communications, land and amphibious combat systems, shipbuilding and marine systems, and business aviation. The company also owns a coal mining operation, an aggregates operation and a leasing operation for liquefied natural gas (LNG) tankers. The company’s primary customers are the U.S. military, other government organizations, the armed forces of allied nations, and a diverse base of corporate and industrial buyers.

     Basis of Consolidation and Use of Estimates. The Consolidated Financial Statements include the accounts of all wholly-owned and majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The financial statements for all periods presented have been restated to present the results of operations of the company’s undersea fiber optic cable-laying business in discontinued operations, as discussed in Note B. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (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. Actual results could differ from these estimates.

     Revenue Recognition. The company accounts for sales and earnings under long-term defense contracts and programs using the percentage-of-completion method of accounting in accordance with AICPA, Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The company applies earnings rates to all contract costs, including general and administrative expenses, to determine sales and operating earnings. The company reviews earnings rates periodically to assess revisions in contract values and estimated costs at completion. Based on these assessments, any changes in earnings rates are made prospectively.

     The company charges any anticipated losses on contracts and programs to earnings when identified. Such losses encompass all costs, including general and administrative expenses, allocable to the contracts. The company recognizes revenue arising from a claims process either as income or as an offset against a potential loss only when the claim can be reliably estimated and its realization is probable.

     The company accounts for contracts for aircraft certified by the Federal Aviation Administration in accordance with Statement of Position 81-1. These contracts usually provide for two major milestones: the manufacture of the “green” aircraft and its completion, which includes exterior painting and installation of customer-selected interiors and optional avionics. The company records revenue at two points: when green aircraft are delivered to and accepted by the customer and when the customer accepts final delivery of the fully outfitted aircraft. The company recognizes sales of all other aircraft products and services when the product is delivered or the service is performed.

     General and Administrative Expenses. General and administrative expenses were $903 in 2002, $808 in 2001 and $642 in 2000, and are included in operating costs and expenses on the Consolidated Statement of Earnings.

     Interest Expense, Net. Interest expense was $58 in 2002, $68 in 2001 and $72 in 2000. Interest payments, including interest on finance operations debt, were $55 in 2002, $70 in 2001 and $78 in 2000.

     Other Expense, Net. Net other income in 2002 included a $36 pretax gain on the sale of certain assets of the company’s Space Propulsion operations which were sold during the fourth quarter of 2002.

     Cash and Equivalents and Investments in Debt and Equity Securities. The company classifies its securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The company considers securities with a maturity of three months or less to be cash equivalents. The company adjusts all investments in debt and equity securities to fair value. The company recognizes market adjustments in the statement of earnings for trading securities and as a component of accumulated other comprehensive income for available-for-sale securities. The company had $50 and $47 in available-for-sale investments at December 31, 2002 and 2001, respectively. The company had no investments classified as trading securities at the end of either period.

     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 defense contracts and programs on which revenue has been recognized, but billings have not yet been presented to the customer (unbilled receivables), are included in contracts in process.

     Inventories. Work-in-process inventories represent aircraft components and are stated at the lower of cost (based on estimated average unit cost of the number of units in a production lot, or specific identification) or market. Raw materials are stated at the lower of cost (first-in, first-out method) or market. The company records pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value (determined at the time of trade and based on estimated fair value) or estimated net realizable value.

40 General Dynamics 2002 Annual Report

     Property, Plant and Equipment, Net. Property, plant and equipment are carried at historical cost, net of accumulated depreciation, depletion and amortization. Most of the company’s assets are depreciated using accelerated methods, with the remainder using the straight-line method. Buildings and improvements are depreciated over periods up to 50 years. Machinery and equipment are depreciated over periods up to 28 years. Depletion of mineral reserves is computed using the units-of-production method.

     Impairment of Long-Lived Assets. The company reviews long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The company assesses the recoverability of the cost of the asset based on a review of projected undiscounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset. If an asset is held for sale, the company reviews its estimated fair value less cost to sell.

     Environmental Liabilities. The company accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The company recorded cleanup and other environmental exit costs related to sold businesses at the time of disposal. 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, the company treats these costs as contract costs and recognizes the costs as paid.

     Stock-Based Compensation. The company measures compensation cost for stock options as the excess, if any, of the quoted market price of the company’s stock at the measurement date over the exercise price. The company records stock awards at fair value at the date of award.

     Translation of Foreign Currencies. The functional currencies for the company’s international operations are the respective local currencies. The company translates foreign currency balance sheets at the end-of-period exchange rates and earnings statements at the average exchange rates for each period. The company includes the resulting foreign currency translation adjustments in the calculation of accumulated other comprehensive income, which is included in shareholders’ equity on the Consolidated Balance Sheet.

     Classification. Consistent with defense industry practice, the company classifies assets and liabilities related to long-term production contracts 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 company exited its undersea fiber optic cable-laying business in the fourth quarter of 2002 because of substantial overcapacity in the market and a lack of contract backlog. The results of this business’s operations had been included in the Information Systems and Technology group since 1998. The company recognized a total after-tax loss of $134 in 2002, including an after-tax charge of $109 for ship lease obligations and the write-down of assets to net realizable value.

     The summary of operating results from discontinued operations is as follows:

	Year Ended December 31
	2002			2001			2000
Net sales	$	34		$	109		$	51
Operating expenses		72			110			47
Operating loss		(38	)		(1	)		4
Loss on disposal		167			—			—
Loss before taxes		(205	)		(1	)		4
Tax benefit		71			1			(2	)
Loss from discontinued operations	$	(134	)	$	—		$	2

Assets and liabilities of discontinued operations consisted of the following:

December 31		2002		2001
Current assets		$	68	$	33
Noncurrent assets			1		52
	Assets of discontinued operations	$	69	$	85
Current liabilities			125		14
	Liabilities of discontinued operations	$	125	$	14

General Dynamics 2002 Annual Report 41

C. EARNINGS PER SHARE

Basic and diluted weighted average shares outstanding were as follows (in thousands):

Year Ended December 31		2002		2001		2000
Basic weighted average shares outstanding			201,357		201,142		199,840
	Assumed exercise of options		1,467		1,608		1,200
	Contingently issuable shares		28		157		222
Diluted weighted average shares outstanding			202,852		202,907		201,262

D. INCOME TAXES

The net provision for income taxes for continuing operations is summarized as follows:

Year Ended December 31		2002			2001			2000
Current:
	U.S. federal	$	369		$	378		$	297
	State		3			16			18
	Foreign		(18	)		2			6
	Total current		354			396			321
Deferred:
	U.S. federal		164			115			134
	State		2			(1	)		(5	)
	Foreign		13			—			(1	)
	Total deferred		179			114			128
Tax adjustments and credits			—			(28	)		(90	)
		$	533		$	482		$	359

The provision for state and local income taxes that is allocable to U.S. government contracts is included in operating costs and expenses on the Consolidated Statement of Earnings and therefore not included in the provision above.

     During the first quarter of 2001, the company reduced its liabilities for tax contingencies. The company recognized a non-cash benefit of $28, or $.14 per share, as a result of this adjustment.

     During the third quarter of 2000, the company and the Internal Revenue Service (IRS) settled outstanding tax issues, including the company’s remaining refund claim for research and experimentation tax credits, for the years 1990 through 1993. The company recognized a benefit of $90, or $.45 per share, as a result of this settlement.

     The reconciliation from the statutory federal income tax rate to the company’s effective income tax rate is as follows:

Year Ended December 31	2002			2001			2000
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Tax adjustments and credits		—			(2.0	)		(7.1	)
State tax on commercial operations, net of federal benefits		0.3			1.1			1.0
Qualified export sales exemption		(0.9	)		(0.6	)		(0.5	)
Other, net		(0.8	)		0.3			0.1
Effective income tax rate		33.6	%		33.8	%		28.5	%

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

December 31		2002		2001
Postretirement and postemployment liabilities		$	127	$	117
A-12 termination			90		90
Accrued costs on disposed businesses			23		30
Other			395		357
	Deferred assets	$	635	$	594
Capital Construction Fund			131		124
Commercial pension asset			112		103
Intangible assets			123		78
Property basis differences			71		61
Long-term contract costing methods			56		3
Lease income			47		52
Other			38		27
	Deferred liabilities	$	578	$	448
Net deferred tax asset		$	57	$	146

The Capital Construction Fund (CCF) is a program established by the U.S. government and administered by the Maritime Administration. The purpose of the program is to support the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. It provides for the deferral of federal and state income taxes on earnings derived from eligible programs as long as the funds are deposited and used for qualified activities. Unqualified withdrawals are subject to taxation plus interest. The CCF must be collateralized by qualified assets defined by the Maritime Administration. At December 31,

42 General Dynamics 2002 Annual Report

2002, the company had assigned approximately $17 in U.S. government accounts receivable to the CCF.

     Based on the company’s projected earnings and current backlog, no material valuation allowance was required for the company’s deferred tax assets at December 31, 2002 and 2001. The current portion of the net deferred tax asset was $194 at December 31, 2002, and $334 at December 31, 2001, and is included in other current assets on the Consolidated Balance Sheet.

     Income tax payments were $377 in 2002, $326 in 2001 and $280 in 2000.

     The company has completed its protest to the IRS Appeals Division for the years 1994 and 1995 with no material impact to the company’s results of operations, financial condition or cash flows. During the first quarter of 2000, the company resolved with the IRS all matters related to Gulfstream’s consolidated federal income tax returns for the years up to and including 1994 with no material impact on the company’s results of operations, financial condition or cash flows. During the third quarter of 2002, the company resolved all matters relating to Gulfstream’s consolidated federal income tax returns for the years up to and including 1998 with no material impact on the company’s results of operations, financial condition or cash flows. The IRS has commenced its examination of the company’s 1996 through 1998 income tax returns. On November 27, 2001, the company filed a refund suit, titled General Dynamics v. United States, for the years 1991 to 1993 in the U.S. Court of Federal Claims. The company anticipates that the years 1994 and 1995 will be added to this suit. The suit seeks recovery of refund claims that were disallowed by the IRS at the administrative level. If the court awards a full recovery to the company, the non-temporary amount of the refund could exceed $100 (including after-tax interest). The company expects the litigation to take several years to resolve. The company has recognized no income from this matter.

     The company has recorded liabilities for tax contingencies for open years. The company does not expect the resolution of tax matters for these years to have a material impact on the company’s results of operations, financial condition or cash flows.

E. CONTRACTS IN PROCESS

Contracts in process primarily represent costs and accrued profit related to defense contracts and programs, and consisted of the following:

December 31	2002		2001
Contract costs and estimated profits	$	15,301	$	13,568
Other contract costs		711		639
		16,012		14,207
Less advances and progress payments		14,098		12,475
	$	1,914	$	1,732

Contract costs include production costs and related overhead, such as general and administrative expenses, as well as contract recoveries for such issues as contract changes, negotiated settlements and claims for unanticipated contract costs, which totaled $29 and $9 as of December 31, 2002 and 2001, respectively. The company records revenue associated with these issues as either income or as an offset against a potential loss only when recovery can be reliably estimated and its realization is probable. Other contract costs primarily represent amounts required to be recorded under GAAP that are not currently allocable to contracts, such as a portion of the company’s estimated workers’ compensation, other insurance-related assessments, retirement benefits and environmental expenses. These costs will become allocable to contracts when they are paid. The company expects to recover these costs through on-going business, including both existing backlog and probable follow-on contracts. These efforts consist of numerous contracts for which the company is the sole source or one of two suppliers on long-term defense programs. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company’s remaining contracts could be adversely affected.

General Dynamics 2002 Annual Report 43

F. INVENTORIES

Inventories consisted primarily of commercial aircraft components, as follows:

December 31	2002		2001
Work in process	$	750	$	643
Raw materials		396		361
Pre-owned aircraft		230		254
Other		29		31
	$	1,405	$	1,289

Work-in-process inventories as of December 31, 2002, included four unsold large green aircraft and 15 unsold mid-size green aircraft. This compares with three large and 14 mid-size aircraft as of December 31, 2001. With respect to the mid-size aircraft, the company carries a corresponding payable to its revenue sharing partner who bears the risk of the carrying value of this inventory. Other inventories consisted primarily of coal and aggregates, which are stated at the lower of average cost or estimated net realizable value.

G. PROPERTY, PLANT AND EQUIPMENT, NET

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

December 31	2002		2001
Land and improvements	$	192	$	159
Mineral reserves		77		76
Buildings and improvements		1,096		1,086
Machinery and equipment		2,013		2,009
Construction in process		91		148
		3,469		3,478
Less accumulated depreciation, depletion and amortization		1,613		1,760
	$	1,856	$	1,718

The U.S. government provides certain of the company’s plant facilities. Therefore, the company does not include these facilities above.

H. INTANGIBLE ASSETS AND GOODWILL, NET

Intangible assets consisted of the following:

		2002							2001
		Gross					Net		Gross					Net
		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
December 31		Amount		Amortization			Amount		Amount		Amortization			Amount
Amortized intangible assets:
	Contract and program intangible assets	$	481	$	(104	)	$	377	$	606	$	(98	)	$	508
	Other intangible assets		252		(88	)		164		195		(74	)		121
		$	733	$	(192	)	$	541	$	801	$	(172	)	$	629
Unamortized intangible assets:
	Trademarks	$	19	$	—		$	19	$	19	$	—		$	19

The company amortizes contract and program intangible assets on a straight-line basis over periods ranging from eight to 40 years. Other intangible assets consist primarily of aircraft product design, customer lists, software and licenses, which are amortized over periods ranging from three to 21 years.

     Amortization expense was $34 in 2002, $100 in 2001 and $81 in 2000. The company expects to record annual amortization expense of approximately $40 in each of the next five years related to these intangible assets.

     The company adopted SFAS 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. The provisions of SFAS 142 eliminate amortization of goodwill and identifiable intangible assets with indefinite lives. Intangible assets with a finite life continue to be amortized over their useful life. The standard also requires an impairment assessment of goodwill and indefinite-lived intangible assets at least annually by applying a fair-value-based test. The company completed the required annual impairment test during the fourth quarter of 2002, and did not identify any impairment.

44 General Dynamics 2002 Annual Report

     The following table presents comparative earnings data as if SFAS 142 had been adopted January 1, 2000:

				2001		2000
Year Ended December 31		2002		(Adjusted)		(Adjusted)
Reported net earnings		$	917	$	943	$	901
Add back: Amortization, net of tax effect			—		45		46
Adjusted net earnings		$	917	$	988	$	947
Basic earnings per share:
Reported basic net earnings per share		$	4.55	$	4.69	$	4.51
	Adjusted for amortization		—		0.22		0.23
	Adjusted basic net earnings per share	$	4.55	$	4.91	$	4.74
Diluted earnings per share:
	Reported diluted net earnings per share	$	4.52	$	4.65	$	4.48
	Adjusted for amortization		—		0.22		0.23
	Adjusted diluted net earnings per share	$	4.52	$	4.87	$	4.71

The purchase prices of acquired businesses have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess recorded as goodwill. During the year, the company acquired the outstanding stock of Advanced Technical Products, Inc. and the assets of Command System Incorporated and Eisenwerke Kaiserslautern GmbH i.I. The company completed the allocation of purchase price for these acquisitions as of December 31, 2002.

     Upon adoption of SFAS 142, the company reclassified certain previously recognized identifiable intangible assets to goodwill in accordance with the definitions provided in the statement. The changes in the carrying amount of goodwill by business group for the year ended December 31, 2002, were as follows:

			Adoption of
December 31	2001		SFAS 142		Acquisitions(a)		2002
Information Systems and Technology	$	2,064	$	81	$	68	$	2,213
Combat Systems		514		–		242		756
Marine Systems		193		–		–		193
Aerospace		338		–		9		347
Resources		1		–		–		1
	$	3,110	$	81	$	319	$	3,510
(a) Includes adjustments to preliminary assignment of fair value to net assets acquired.

I. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:

December 31	2002		2001
Billings in excess of costs and estimated profits	$	516	$	407
Workers’ compensation		509		473
Customer deposits on commercial contracts		384		358
Retirement benefits		274		264
Salaries and wages		222		225
Other		764		737
	$	2,669	$	2,464

Other consisted primarily of contract-related costs assumed in business acquisitions, dividends payable, environmental remediation reserves, warranty reserves and the current portion of the company’s finance operation debt (see Note M).

J. DEBT

Debt (excluding the finance operation discussed in Note M) consisted of the following:

December 31	2002		2001
Commercial paper,net of unamortized discount	$	714	$	1,165
Floating rate notes		500		500
Senior notes		150		150
Term debt		45		50
Industrial development bonds		–		15
Other		41		55
		1,450		1,935
Less current portion		732		1,211
	$	718	$	724

The company’s primary source of funding is commercial paper which, as a short-term borrowing instrument, subjects the company to changes in interest rates. As of December 31, 2002, the company had $715 par value discounted commercial paper outstanding at an average yield of approximately 1.56 percent with an average maturity of approximately 34 days. The company has approximately $3.5 billion in bank credit facilities, which serve as back-up liquidity facilities to the commercial paper program. These credit facilities consist of a $975 364-day facility expiring in July 2003, with provision to extend

General Dynamics 2002 Annual Report 45

for one year at the company’s option when drawn; a $1 billion multi-year facility expiring in July 2006; and a $1.5 billion interim credit facility (ICF) expiring not later than July 2003. The company intends to term out a portion of its commercial paper in the first half of 2003, which would, by its terms, reduce the ICF by an equivalent amount. The company’s commercial paper issuances and the bank credit facilities are guaranteed by certain of the company’s 100-percent owned subsidiaries.

     As of December 31, 2002, the company had outstanding $500 of three-year floating rate notes due September 1, 2004. The notes are registered under the Securities Act of 1933, as amended. Interest on the notes resets quarterly at three-month LIBOR plus 0.22 percent, and is payable each March, June, September and December. The notes had an average interest rate of 1.98 percent for the year ended December 31, 2002. The notes are redeemable at the company’s option in whole or in part at any time prior to their maturity at 100 percent of the principal amount of the notes to be redeemed plus any accrued but unpaid interest on the date the notes are redeemed. These floating rate notes are guaranteed by certain of the company’s 100-percent owned subsidiaries. See Note U for condensed consolidating financial statements.

     The senior notes are privately-placed U.S. dollar-denominated notes held by one of the company’s Canadian subsidiaries. Interest is payable semi-annually at an annual rate of 6.32 percent, until maturity in September 2008. The subsidiary has a currency swap, which fixes its foreign currency variability on both the principal and interest components of these notes. See Note N for the fair value discussion of the currency swap. The senior notes are guaranteed by General Dynamics Corporation.

     The company assumed the term debt in connection with its acquisition of Primex Technologies, Inc. Sinking fund payments of $5 are required in December of each of the years 2003 through 2007, with the remaining $20 payable in December 2008. Interest is payable in June and December at the rate of 7.5 percent annually. The term debt is guaranteed by General Dynamics Corporation.

     The industrial development bonds were fully retired on April 12, 2002.

     As of December 31, 2002, other debt consisted of $3 related to a leasehold interest, $10 drawn under a $76 line of credit, a $14 note payable to a Spanish insurance company and two capital lease arrangements totaling $14. Annual principal payments on the note payable are $2 in 2003, $10 in 2004, $1 in 2005, with the balance due in 2006. Interest is payable each December at a rate of 3.85 percent annually. The capital leases extend through 2010.

K. OTHER LIABILITIES

Other liabilities consisted of the following:

December 31	2002		2001
Retirement benefits	$	350	$	340
Deferred U.S.federal income taxes		197		215
Customer deposits on commercial contracts		87		100
Accrued costs on disposed businesses		67		85
Other		531		498
	$	1,232	$	1,238

The company has recorded liabilities for contingencies related to disposed businesses. These liabilities include postretirement benefits, environmental, legal and other costs.

     Other consisted primarily of liabilities for tax contingencies for open years, warranty reserves, long-term debt for the company’s finance operation (see Note M), and workers’ compensation.

L. SHAREHOLDERS’ EQUITY

Authorized Stock. On May 1, 2002, the company’s shareholders approved an amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock from 300 million shares to 500 million shares of $1 per share par value common stock. Other authorized capital stock of the company consists of 50 million shares of $1 per share par value preferred stock issuable in series, with the rights, preferences and limitations of each series to be determined by the board of directors.

     Dividends per Share. Dividends per share were $1.20 in 2002, $1.12 in 2001 and $1.04 in 2000.

     Shares Outstanding. The company had 200,993,102 shares of common stock outstanding as of December 31, 2002, and 200,745,547 shares outstanding as of December 31, 2001. No shares of the company’s preferred stock were outstanding as of either date.

M. FINANCE OPERATION

The company owns three LNG tankers, which are leased to a nonrelated company. The leases are financed by privately placed bonds, which are secured by the LNG tankers. The bonds are callable under certain conditions and are nonrecourse to the company. Accordingly, the company is not obligated to repay the debt in the event the lessee

46 General Dynamics 2002 Annual Report

defaults on the lease payments. Outstanding debt was $21 at December 31, 2002, and $43 at December 31, 2001. Principal payments on the debt are made semi-annually and are scheduled as follows: $18 in 2003 and $3 at maturity in 2004. The weighted average interest rate on the debt is 6.2 percent.

     The leases are classified as direct financing leases and extend through 2009. The components of the company’s net investment in the leases receivable were as follows:

December 31	2002			2001
Aggregate future minimum lease payments	$	164		$	195
Unguaranteed residual value		38			38
Unearned interest income		(64	)		(79	)
	$	138		$	154

The company is scheduled to receive minimum lease payments of $31 in 2003, $24 in 2004 and $21 in 2005, 2006 and 2007.

N. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the company’s financial instruments approximates carrying value. Fair value is generally based on quoted market prices, except the finance operation debt, where fair value is based on risk-adjusted discount rates.

     The company attempts to minimize the effects of currency risk by borrowing externally in the local currency or by hedging its purchases made in foreign currencies, when practical. The company is exposed to the effects of foreign currency fluctuations on the U.S. dollar value of earnings from its international operations. As a matter of policy, the company does not engage in currency speculation. The company periodically enters into foreign currency derivatives, including forward exchange and currency swap contracts, to hedge its exposure to fluctuations in foreign currency exchange rates.

     As of December 31, 2002, the company’s sole cash flow hedge was the currency swap discussed in Note J. Fair value of this currency swap was a $19 asset, which offset the effect of changes in the currency exchange rate on the related debt. There were no material derivative instruments designated as fair value or net investment hedges during the year ended December 31, 2002.

O. COMMITMENTS AND CONTINGENCIES

Litigation

The company is subject to litigation and other legal proceedings arising out of the ordinary course of its business or arising under provisions relating to the protection of the environment. Claims made by and against the company regarding the development of the Navy’s A-12 aircraft are discussed in Note P.

     On May 7, 1999, a whistleblower suit was filed under seal against the company in the United States Bankruptcy Court for the District of South Carolina. The plaintiff alleges that the company violated the False Claims Act by omitting certain facts when it testified before Congress in 1995 concerning funding for the third Seawolf-attack submarine. The plaintiff sought damages in the amount of the contract award for the third Seawolf, subject to trebling under the False Claims Act. The Department of Justice declined to intervene in the case on the plaintiff’s behalf and the suit was unsealed in December 2000. The complaint was removed to the United States District Court for the District of South Carolina. On October 15, 2002, the District Court entered an order granting the company’s motions for summary judgment and directed the court to enter judgment on behalf of the company. The plaintiff may appeal the judgment. The company believes that any such motion or appeal by the plaintiff is likely to be denied.

     Following UAL Corporation’s announcement on March 22, 2002, that it was closing its Avolar subsidiary, which was to engage in a business jet aircraft fractional ownership program, the company terminated its agreements with Avolar. The company retained deposits totaling $50 related to this transaction. On May 28, 2002, United BizJet Holdings, Inc., a subsidiary of UAL Corporation, filed a claim against the company in the Circuit Court of Cook County, Illinois, seeking the return of the Avolar deposits. On October 11, 2002, the Circuit Court dismissed United BizJet’s complaint without prejudice for failure to engage in mandatory pre-litigation mediation. United BizJet moved for reconsideration, but on January 3, 2003, the Circuit Court denied reconsideration and reaffirmed its order of dismissal. On December 9, 2002, United BizJet filed for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code. The company believes the outcome of this matter will not have a material impact on the company’s results of operations, financial condition or cash flows.

     Various claims and other legal proceedings generally incidental to the normal course of business are pending or threatened against the company. While the company cannot predict the outcome of these matters, the company believes its potential liabilities in these proceedings, individually or in the aggregate, will not have a material impact on the company’s results of operations, financial condition or cash flows.

Environmental

The company is subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. The company is directly or indirectly involved in environmental responses at some of the company’s current and former facilities, and at third-party sites not

General Dynamics 2002 Annual Report 47

owned by the company but where the company has been designated a “Potentially Responsible Party” (PRP) by the Environmental Protection Agency or a state environmental agency. The company is also involved in the investigation, cleanup and remediation of various conditions at current and former company sites where the release of hazardous materials may have occurred. Based on historical experience, the company expects that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable costs and, therefore, reimbursed by the U.S. government. Based on a site-by-site review and analyses by outside counsel and environmental consultants, the company believes that its liability at any individual site, or in the aggregate, arising from such sites at which there is a known environmental condition, or Superfund or other multi-party sites at which the company is a PRP, is not material to the company’s results of operations, financial condition or cash flows. Moreover, based on all known facts and expert analyses, the company does not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to the company’s results of operations, financial condition or cash flows.

Minimum Lease Payments

Total rental expense under operating leases was $98 in 2002, $93 in 2001 and $44 in 2000. Future minimum lease payments due during the next five years are as follows:

2003	$	76
2004		68
2005		64
2006		43
2007		34
2008 and therafter		155
	$	440

Operating leases are primarily for facilities and equipment.

Other

In the ordinary course of business, the company has entered into letters of credit and other similar arrangements with financial institutions and insurance carriers aggregating approximately $780 at December 31, 2002. The company, from time to time in the ordinary course of business, guarantees the payment or performance obligations of its subsidiaries arising under certain of their contracts. The company is aware of no event of default that would require it to satisfy these guarantees.

     On June 5, 2001, the company acquired substantially all of the assets of Galaxy Aerospace Company LP. The selling parties may receive additional payments, up to a maximum of approximately $300 through 2006, contingent on the achievement of specific revenue targets.

     As of December 31, 2002, in connection with orders for 14 Gulfstream G550s (initially designated the Gulfstream V-SP) and four Gulfstream G200 aircraft in firm contract backlog, the company had offered customers trade-in options, which may or may not be exercised by the customers. If these options are exercised, the company will accept trade-in aircraft, primarily Gulfstream IV-SPs and Gulfstream Vs, at a predetermined minimum trade-in price as partial consideration in the new aircraft transaction. Any excess of the trade-in price above the fair market value is treated as a reduction of revenue upon recording of the new aircraft sales transaction. These option commitments totaled $551 as of December 31, 2002, down from $567 in the third quarter. The company expects approximately half of these options to be exercised in 2003, with the remainder exercised in 2004. Beyond these commitments, additional aircraft trade-ins are likely to be accepted throughout the year in connection with future orders for new aircraft.

     The company provides product warranties to its customers associated with certain product sales, particularly business aircraft. The company also offers a five-year maintenance program that supplements the standard product warranties on G400 and G550 aircraft models. The company records estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is based on the estimated number of months of warranty coverage remaining for products delivered and the average historical monthly warranty payments and is included in other current liabilities and other liabilities on the Consolidated Balance Sheet. The changes in the carrying amount of warranty liabilities for the year ended December 31, 2002, were as follows:

	December 31		Warranty								December 31
	2001		Accruals		Payments			Adjustments			2002
Warranty liabilities	$	112	$	50	$	(18	)	$	(7	)	$	137

P. TERMINATION OF A-12 PROGRAM

In January 1991, the 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 Navy’s carrier-based Advanced Tactical Aircraft. Both the company and McDonnell Douglas, now owned by The Boeing Company, (the contractors) were parties to the contract with the Navy; each had full responsibility to the 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 Navy demanded that the contractors repay $1.4 billion 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’ challenge to the termination for default, or a negotiated settlement.

48 General Dynamics 2002 Annual Report

     The contractors filed a complaint on June 7, 1991, in the U.S. Court of Federal Claims contesting the default termination. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following further proceedings, the court issued an order converting the termination for default to a termination for convenience. On March 31, 1998, a final judgment was entered in favor of the contractors for $1.2 billion plus interest.

     On July 1, 1999, the U.S. Court of Appeals for the Federal Circuit found that the Trial Court erred in converting the termination for default to a termination for convenience without first determining whether a default existed. The Court of Appeals remanded the case for determination of whether the government’s default termination was justified. On August 31, 2001, following the trial on remand, the Trial Court issued an opinion upholding the default termination of the A-12 contract. In its opinion, the Trial Court rejected all of the government’s arguments to sustain the default termination except for one: schedule. With respect to the government’s schedule arguments, the Trial Court held that the schedule the government unilaterally imposed was reasonable and enforceable, and that the government had not waived that schedule. On the sole ground that the contractors were not going to deliver the first aircraft on the date provided in the unilateral schedule, the Trial Court upheld the default termination and entered judgment for the government.

     The contractors filed post-trial motions seeking reconsideration by the Trial Court of its opinion and judgment. On October 4, 2001, the Trial Court denied the contractors’ post-trial motions. On November 30, 2001, the company filed its notice of appeal, and during 2002, the contractors and the Navy filed their respective appellate briefs with the Court of Appeals. On January 9, 2003, the appeal was argued before a three-judge panel of the Court of Appeals.

     Following the August 31, 2001, decision of the Trial Court, the Navy and the contractors discussed the continued deferral of the payment of the $1.4 billion in unliquidated progress payments, plus interest, by an extension of the deferment agreement between the parties pursuant to which the Navy had deferred collection since 1991. No agreement was reached concerning this issue, though the contractors do not believe that the Trial Court’s decision triggers their obligation to make payment to the Navy. The Navy took no action to collect this amount from the contractors and settlement negotiations were conducted by the parties. On August 30, 2002, the Navy notified the contractors in writing that unless they paid, within 30 days, these unliquidated progress payments plus interest (approximately $2.3 billion), it would turn the matter over to the Defense Finance and Accounting Service for collection. The contractors have advised the Navy that they would resist collection as improper. In light of the Navy’s collection demand, the contractors requested the Trial Court to enter a stay of its judgment pending the outcome of the appeal. On December 13, 2002, the Trial Court agreed and entered a stay of its judgment pending appeal.

     On March 17, 2003, the Court of Appeals vacated the Trial Court’s judgment and remanded the case to the Trial Court for further proceedings. The Court of Appeals found that the Trial Court misapplied the controlling legal standard in concluding that the termination for default could be sustained solely on the basis of the contractors’ inability to complete the first flight of the first test aircraft by December 1991. Rather, the Court of Appeals held that in order to uphold a termination for default a Trial Court would have to determine that there was no reasonable likelihood that the contractors could perform the entire contract effort within the time remaining for performance. This is a determination the company does not believe is supported by the evidence.

     If, contrary to the company’s expectations, the default termination is ultimately sustained, the contractors could collectively be required to repay the government as much as $1.4 billion for progress payments received for the A-12 contract plus interest (approximately $1 billion at December 31, 2002). This would result in liability of approximately $1.2 billion pretax, $685 after-tax, to be taken as a charge against discontinued operations. The company has sufficient resources to pay such an obligation if required.

Q. EQUITY COMPENSATION PLANS

Under the 1997 Incentive Compensation Plan, awards may be granted in cash, common stock, options to purchase common stock, restricted shares of common stock, or any combination of these. Awards of stock options and restricted stock are intended to qualify as deductible, performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). Incentive Compensation Plan awards of cash and unrestricted stock are not designed to be deductible by the company under Section 162(m).

     Stock options may be granted either as incentive stock options, intended to qualify under Section 422 of the Code, or as options not qualified under the Code. All options are issued with an exercise price at or above 100 percent of the fair market value of the common stock on the date of grant. Options granted under Gulfstream’s incentive compensation plans prior to the company’s acquisition of Gulfstream were subject to different vesting periods based on the terms of the plans. At the time of the acquisition, substantially all of the outstanding Gulfstream options became fully vested.

     A grant of restricted shares pursuant to the Incentive Compensation Plan is a transfer of shares of common stock, for such consideration and subject to such restrictions, if any, on transfer or other incidents of ownership, for such periods of time as the Compensation Committee (or its subcommittee) may determine. Until the end of the applicable period of restriction, the restricted shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated. However, during the period of restriction, the recipient of restricted shares will be entitled to vote the restricted shares and to retain cash dividends paid thereon. Awards of

General Dynamics 2002 Annual Report 49

restricted shares may be granted pursuant to a performance formula whereby the number of shares initially granted increases or decreases based on the increase or decrease in the price of the common stock over a performance period.

     Under the Non-Employee Directors 1999 Stock Plan, the company may also grant awards of cash, common stock, options to purchase common stock, restricted shares of common stock, or any combination of these to any member of the company’s board of directors who is not an employee of the company.

     Information with respect to restricted stock awards is as follows:

Year Ended December 31	2002		2001		2000
Number of shares awarded		375,043		340,888		385,023
Weighted average grant price	$	88.23	$	71.39	$	44.15

There were 1,310,322 shares of restricted stock outstanding at December 31, 2002.

     Information with respect to stock options is as follows:

Year Ended December 31	2002			2001			2000
Number of shares:
Outstanding at beginning of year		7,066,113			6,573,599			7,502,881
Granted		2,254,000			2,418,080			2,961,050
Exercised		(1,505,046	)		(1,766,787	)		(3,669,070	)
Canceled		(152,542	)		(158,779	)		(221,262	)
Outstanding at end of year		7,662,525			7,066,113			6,573,599
Exercisable at end of year		4,119,791			3,237,568			3,023,399
Weighted average exercise price:
Outstanding at beginning of year	$	54.31		$	44.57		$	39.82
Granted		93.89			72.18			43.17
Exercised		43.56			42.61			33.11
Canceled		72.13			53.29			54.76
Outstanding at end of year		67.64			54.31			44.57
Exercisable at end of year		52.87			46.02			42.45

Information with respect to stock options outstanding and exercisable at December 31, 2002, is as follows:

Options Outstanding
	Number		Weighted		Weighted
Range of	Outstanding at		Average Remaining		Average
Exercise Prices	12/31/02		Contractual Life		Exercise Price
$4.10		22,375		1.47	$	4.10
22.02		10,000		0.75		22.02
41.66–63.03		3,099,575		1.74		46.50
63.41–91.18		2,352,239		3.10		71.90
93.92–104.48		2,178,336		4.17		93.98
		7,662,525

Options Exercisable
	Number		Weighted
Range of	Exercisable at		Average
Exercise Prices	12/31/02		Exercise Price
$4.10		22,375	$	4.10
22.02		10,000		22.02
41.66–63.03		2,968,075		46.61
63.41–91.18		1,119,341		70.71
93.92–104.48		–		–
		4,119,791

At December 31, 2002, in addition to the shares reserved for issuance on the exercise of options outstanding, 7,442,402 shares have been authorized for options and restricted stock that may be granted in the future.

50 General Dynamics 2002 Annual Report

     Had compensation cost for stock options been determined based on the fair value at the grant dates for awards under the company’s incentive compensation plans, the company’s net earnings and net earnings per share would have been reduced to the pro forma amounts indicated as follows:

Year Ended December 31		2002		2001		2000
Net Earnings:	As reported	$	917	$	943	$	901
	Fair value-based stock
	compensation expense		28		22		15
	Pro forma		889		921		886
Net Earnings Per Share—Basic:	As reported	$	4.55	$	4.69	$	4.51
	Pro forma		4.41		4.58		4.43
Net Earnings Per Share—Diluted:	As reported	$	4.52	$	4.65	$	4.48
	Pro forma		4.38		4.54		4.40
Weighted average fair value of options granted		$	21.31	$	17.67	$	10.20

The compensation cost calculated under the fair value approach shown above is recognized over the vesting period of the stock options. Fair value is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for all years presented: (1) expected dividend yields from 1.3 to 1.8 percent, (2) expected volatility from 26.6 to 32.9 percent, (3) risk-free interest rates from 3.0 to 6.7 percent and (4) expected lives from 27 to 54 months.

R. RETIREMENT PLANS

The company provides defined benefit pension and other postretirement benefits to certain eligible employees. The following is a reconciliation of the benefit obligations, plan/trust assets and funded status of the company’s plans:

	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
Change in Benefit Obligation
Benefit obligation at beginning of year	$	(5,162	)	$	(4,579	)	$	(984	)	$	(835	)
Service cost		(157	)		(130	)		(13	)		(11	)
Interest cost		(366	)		(338	)		(69	)		(62	)
Amendments		(25	)		(24	)		(5	)		(56	)
Actuarial loss		(177	)		(156	)		(173	)		(65	)
Acquisitions/other		(4	)		(195	)		7			(25	)
Benefits paid		292			260			74			70
Benefit obligation at end of year	$	(5,599	)	$	(5,162	)	$	(1,163	)	$	(984	)
	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
Change in Plan/Trust Assets
Fair value of assets at beginning of year	$	6,107		$	6,165		$	324		$	349
Actual return on plan/trust assets		(486	)		80			(16	)		(16	)
Acquisitions		3			134			–			10
Employer contributions		15			1			32			20
Curtailment/settlement		(18	)		(13	)		–			–
Benefits paid		(292	)		(260	)		(45	)		(39	)
Fair value of assets at end of year	$	5,329		$	6,107		$	295		$	324
	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
Funded Status Reconciliation
Funded status	$	(270	)	$	945		$	(868	)	$	(660	)
Unrecognized net actuarial loss (gain)		525			(682	)		247			37
Unrecognized prior service cost		232			242			49			47
Unrecognized transition (asset) obligation		–			(2	)		23			34
Prepaid (accrued) benefit cost	$	487		$	503		$	(549	)	$	(542	)

General Dynamics 2002 Annual Report 51

		Pension Benefits									Other Postretirement Benefits
		2002			2001			2000			2002			2001			2000
Assumptions at December 31
Discount rate			7.00	%		7.25	%		7.50	%		7.00	%		7.25	%		7.50	%
Varying rates of increase in compensation levels based on age			4.00–11.00	%		4.00–11.00	%		4.00–11.00	%
Expected weighted–average long–term rate of return on assets (a)			8.34	%		8.16	%		8.31	%		8.00	%		8.00	%		8.00	%
Assumed health care cost trend rate for next year:
	Post–65 claim groups											11.75	%		4.75	%		5.75	%
	Pre–65 claim groups											11.75	%		4.75	%		5.75	%

(a) The expected weighted-average long-term rate of return on assets represents a composite of the beginning-of-year expected rates of return for the company’s various retirement plans, which differ based on the investment strategies of the respective plan. The increase in the weighted-average rate in 2002 results from a relative shift of assets toward plans with higher assumed rates of return.

Net periodic pension and other postretirement benefits costs included the following:

	Pension Benefits									Other Postretirement Benefits
	2002			2001			2000			2002			2001			2000
Service cost	$	157		$	130		$	121		$	13		$	11		$	10
Interest cost		366			338			322			69			62			56
Expected return on plan assets		(520	)		(486	)		(445	)		(26	)		(25	)		(24	)
Recognized net actuarial gain		(25	)		(41	)		(33	)		(2	)		(3	)		(11	)
Amortization of unrecognized transition (asset) obligation		(2	)		(7	)		(7	)		11			11			12
Amortization of prior service cost		36			33			32			3			(1	)		(1	)
	$	12		$	(33	)	$	(10	)	$	68		$	55		$	42

Pension Benefits. As of December 31, 2002, the company had six noncontributory and three contributory trusteed, qualified defined benefit pension plans covering substantially all of its government business employees and two noncontributory plans covering substantially all of its commercial business employees. Under certain plans, benefits are a function primarily 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 benefits to be earned in the future.

     The company amortizes changes in prior service cost resulting from plan amendments on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.

     The company’s contractual arrangements with the U.S. government provide for the recovery of contributions to the company’s government plans. The amount contributed to certain plans, charged to contracts and included in net sales has exceeded the net periodic pension cost as determined under SFAS No. 87, “Employers’ Accounting for Pensions.” The company has deferred recognition of earnings resulting from this difference to provide a better matching of revenues and expenses. Similarly, pension

52 General Dynamics 2002 Annual Report

settlements and curtailments under the government plans have also been deferred. The aforementioned deferrals have been classified against the prepaid pension cost related to these plans.

     The company’s commercial plans’ net prepaid pension cost of $321 and $293 at December 31, 2002 and 2001, respectively, is included in other noncurrent assets on the Consolidated Balance Sheet.

     At December 31, 2002, approximately 66 percent of the plans’ assets were invested in diversified U.S. common stocks including futures contracts, 12 percent in mortgage-backed securities, 9 percent in diversified U.S. corporate debt securities and 13 percent in securities of the U.S. government or its agencies.

     In addition to the qualified defined benefit plans, the company provides eligible employees the opportunity to participate in defined contribution savings plans, which permit contributions on both a pretax and after-tax basis. Generally, salaried employees and certain hourly employees are eligible to participate upon commencement of employment with the company. Under most plans, the employee may contribute to various investment alternatives, including investment in the company’s common stock. In certain 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 to the defined contribution plans totaled $80 in 2002, $64 in 2001 and $57 in 2000. Approximately 15 million shares of the company’s common stock were held by the defined contribution plans at both December 31, 2002 and 2001.

     The company also sponsors several unfunded non-qualified supplemental executive plans, which provide participants with additional benefits, including any excess of such benefits over limits imposed on qualified plans by federal law. The recorded liability and expense related to these plans are not material to the company’s results of operations or financial condition.

     Other Postretirement Benefits. The company maintains plans providing postretirement health care coverage for many of its current and former employees and postretirement life insurance benefits for certain retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. Both health and life insurance benefits are provided only to those employees who retire directly from the service of the company and not to those who terminate service/seniority prior to eligibility for retirement.

     The company maintains several Voluntary Employee’s Beneficiary Association (VEBA) trusts for certain plans. It is the company’s policy to fund the VEBAs in accordance with existing federal income tax regulations. At December 31, 2002, the majority of the VEBA trusts’ assets were invested in diversified U.S. common stocks, U.S. fixed income securities and bank notes. For non-funded plans, claims are paid as received.

     The health care cost trend rates are assumed to decline gradually to 4.75 percent for post-65 and pre-65 claim groups in the year 2009 and thereafter over the projected payout period of the benefits. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of a one-percentage point increase or decrease in the assumed health care cost trend rate on the total service and interest cost is $5 and $(5), respectively, and the effect on the accumulated postretirement benefit obligation is $78 and $(66), respectively.

     The company’s contractual arrangements with the U.S. government provide for the recovery of contributions to a VEBA and, for non-funded plans, recovery of claims paid. The net periodic postretirement benefit cost exceeds the company’s cost currently allocable to contracts. To the extent recovery of the cost is considered probable based on the company’s backlog, the company defers the excess in contracts in process until such time that the cost is allocable to contracts.

General Dynamics 2002 Annual Report 53

S. BUSINESS GROUP INFORMATION

The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems and Aerospace. The company organizes and measures its business groups in accordance with the nature of products and services offered. These business groups derive their revenues from information technology and communications, land and amphibious combat systems, naval and commercial shipbuilding, and business aviation, respectively. The company also owns certain commercial operations which are identified for reporting purposes as Resources. The company measures each group’s profit based on operating earnings. As a result, net interest, other income and expense items and income taxes have not been allocated to the company’s business groups.

     Summary financial information for each of the company’s business groups follows:

	Net Sales						Operating Earnings						Sales to U.S. Government
	2002		2001		2000		2002		2001		2000		2002		2001		2000
Information Systems and Technology	$	3,681	$	2,691	$	2,337	$	436	$	261	$	217	$	2,801	$	1,1091	$	1,606
Combat Systems		2,923		2,210		1,273		323		238		156		2,321		1,785		1,084
Marine Systems		3,650		3,612		3,413		287		310		324		3,435		3,403		3,360
Aerospace		3,289		3,265		3,029		447		625		592		249		140		130
Resources*		286		276		253		89		52		36		—		—		—
	$	13,829	$	12,054	$	10,305	$	1,582	$	1,486	$	1,325	$	8,806	$	7,319	$	6,180

													Depreciation,
	Identifiable Assets						Capital Expenditures						Depletion and Amortization
	2002		2001		2000		2002		2001		2000		2002		2001		2000
Information Systems and Technology	$	3,613	$	3,374	$	2,261	$	81	$	54	$	71	$	51	$	87	$	83
Combat Systems		2,439		2,118		1,054		49		43		14		43		56		26
Marine Systems		1,933		1,731		1,613		81		119		132		60		55		52
Aerospace		2,505		2,360		1,710		32		28		29		36		44		39
Resources*		293		313		317		15		20		25		16		16		17
Corporate**		948		1,173		1,032		6		92		17		7		6		7
	$	11,731	$	11,069	$	7,987	$	264	$	356	$	288	$	213	$	264	$	224

* Resources includes the results of the company’s coal, aggregates and finance operations, as well as the operating results of the company’s commercial pension plans, as further described in Note R.

** Corporate identifiable assets include cash and equivalents from domestic operations, deferred taxes, real estate held for development and net prepaid pension cost related to the company’s commercial pension plans.

54 General Dynamics 2002 Annual Report

     The following table presents revenues by geographic area (based on the location of the company’s customers):

Year Ended December 31		2002		2001		2000
North America:
	United States	$	12,041	$	10,757	$	9,335
	Canada		104		115		153
	Other		84		11		38
	Total North America		12,229		10,883		9,526
Europe			1,199		555		190
Africa/Middle East			202		426		229
Asia/Pacific			144		153		275
Latin America			54		19		67
Other			1		18		18
		$	13,829	$	12,054	$	10,305

     T. QUARTERLY DATA (UNAUDITED)

			2002												2001
			4Q			3Q			2Q			1Q			4Q			3Q		2Q		1Q
Net Sales			$	3,937		$	3,284		$	3,506		$	3,102		$	3,484		$	2,988	$	2,936	$	2,646
Operating Earnings				366			424			423			369			413			372		369		332
Net Earnings from Continuing Operations				269			278			272			232			251			228		225		239
Net Earnings from Discontinued Operations				(112	)		(10	)		(9	)		(3	)		(5	)		2		2		1
Net Earnings				157			268			263			229			246			230		227		240
Earnings Per Share:
	Basic (a):
		Continuing Operations	$	1.34		$	1.38		$	1.35		$	1.15		$	1.24		$	1.13	$	1.12	$	1.19
		Discontinued Operations		(0.56	)		(0.05	)		(0.05	)		(0.01	)		(0.02	)		0.01		0.01		0.01
		Net Earnings		0.78			1.33			1.30			1.14			1.22			1.14		1.13		1.20	(b)
	Diluted (a):
		Continuing Operations	$	1.33		$	1.37		$	1.34		$	1.14		$	1.23		$	1.12	$	1.11	$	1.18
		Discontinued Operations		(0.55	)		(0.05	)		(0.05	)		(0.01	)		(0.02	)		0.01		0.01		0.01
		Net Earnings		0.78			1.32			1.29			1.13			1.21			1.13		1.12		1.19	(b)
Market Price Range:
	High		$	85.40		$	108.80		$	111.18		$	96.80		$	96.00		$	90.20	$	84.28	$	78.19
	Low			74.08			73.25			91.01			75.00			75.60			73.76		62.94		60.50
Dividends Declared			$	0.30		$	0.30		$	0.30		$	0.30		$	0.28		$	0.28	$	0.28	$	0.28
Quarterly data is based on a 13 week period

(a) The sum of the basic and diluted earnings per share for the four quarters of 2002 and 2001 differs from the annual basic and diluted earnings per share due to the required method of computing the weighted average number of shares in interim periods.

(b) Included a non-cash tax benefit of $28, or $.14 per share, as further described in Note D.

General Dynamics 2002 Annual Report 55

U. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The floating rate notes described in Note J are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain 100-percent owned subsidiaries of General Dynamics Corporation (the Guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the Guarantors on a combined basis (each Guarantor together with its majority-owned subsidiaries) and all other subsidiaries on a combined basis as of December 31, 2002 and 2001, for the balance sheet, as well as the statements of earnings and cash flows for each of the three years in the period ended December 31, 2002.

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

							Other
				Guarantors			Subsidiaries
				on a Combined			on a Combined			Consolidating			Total
Year Ended December 31, 2002	Parent			Basis			Basis			Adjustments			Consolidated
Net Sales	$	–		$	12,187		$	1,642		$	–		$	13,829
Cost of sales		(31	)		10,039			1,336			–			11,344
General and administrative expenses		–			798			105			–			903
Operating Earnings		31			1,350			201			–			1,582
Interest expense		(37	)		(5	)		(16	)		–			(58	)
Interest income		2			2			9			–			13
Other income, net		(4	)		37			14			–			47
Earnings From Continuing Operations Before Income Taxes		(8	)		1,384			208			–			1,584
Provision for income taxes		7			467			59			–			533
Discontinued operations, net of tax		–			(134	)		–			–			(134	)
Equity in net earnings of subsidiaries		932			–			–			(932	)		–
Net Earnings	$	917		$	783		$	149		$	(932	)	$	917

							Other
				Guarantors			Subsidiaries
				on a Combined			on a Combined			Consolidating			Total
Year Ended December 31, 2001	Parent			Basis			Basis			Adjustments			Consolidated
Net Sales	$	–		$	11,454		$	600		$	–		$	12,054
Cost of sales		(24	)		9,285			499			–			9,760
General and administrative expenses		–			767			41			–			808
Operating Earnings		24			1,402			60			–			1,486
Interest expense		(52	)		(4	)		(12	)		–			(68	)
Interest income		4			4			4			–			12
Other expense, net		(34	)		(32	)		61			–			(5	)
Earnings From Continuing Operations Before Income Taxes		(58	)		1,370			113			–			1,425
Provision for income taxes		(40	)		499			23			–			482
Discontinued operations, net of tax		–			–			–			–			–
Equity in net earnings of subsidiaries		961			–			–			(961	)		–
Net Earnings	$	943		$	871		$	90		$	(961	)	$	943

							Other
				Guarantors			Subsidiaries
				on a Combined			on a Combined			Consolidating			Total
Year Ended December 31, 2000	Parent			Basis			Basis			Adjustments			Consolidated
Net Sales	$	–		$	10,026		$	279		$	–		$	10,305
Cost of sales		(14	)		8,123			229			–			8,338
General and administrative expenses		–			625			17			–			642
Operating Earnings		14			1,278			33			–			1,325
Interest expense		(60	)		(1	)		(11	)		–			(72	)
Interest income		5			5			2			–			12
Other expense, net		(7	)		(29	)		29			–			(7	)
Earnings From Continuing Operations Before Income Taxes		(48	)		1,253			53			–			1,258
Provision for income taxes		(90	)		450			(1	)		–			359
Discontinued operations, net of tax		–			2			–			–			2
Equity in net earnings of subsidiaries		859			–			–			(859	)		–
Net Earnings	$	901		$	805		$	54		$	(859	)	$	901

56 General Dynamics 2002 Annual Report

CONDENSED CONSOLIDATING BALANCE SHEET

								Other
					Guarantors			Subsidiaries
					on a Combined			on a Combined			Consolidating			Total
December 31, 2002		Parent			Basis			Basis			Adjustments			Consolidated
ASSETS
Current Assets:
Cash and equivalents		$	55		$	–		$	273		$	–		$	328
Accounts receivable			–			867			207			–			1,074
Contracts in process			19			1,753			242			–			1,914
Inventories
	Work in process		–			745			5			–			750
	Raw materials		–			391			5			–			396
	Pre–owned aircraft		–			230			–			–			230
	Other		–			28			1			–			29
Assets of discontinued operations			–			69			–			–			69
Other current assets			122			139			47			–			308
Total Current Assets			196			4,122			780			–			5,098
Noncurrent Assets:
Property, plant and equipment			145			2,928			396			–			3,469
Accumulated depreciation, depletion & amortization of PP&E			(24	)		(1,432	)		(157	)		–			(1,713	)
Intangible assets and goodwill			–			3,473			1,004			–			4,477
Accumulated amortization of intangible assets			–			(377	)		(30	)		–			(407	)
Other assets			263			214			230			–			707
Investment in subsidiaries			10,020			–			–			(10,020	)		–
Total Noncurrent Assets			10,404			4,806			1,443			(10,020	)		6,633
		$	10,600		$	8,928		$	2,223		$	(10,020	)	$	11,731
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short–term debt		$	714		$	6		$	12		$	–		$	732
Liabilities of discontinued operations			–			125			–			–			125
Other current liabilities			83			2,836			806			–			3,725
Total Current Liabilities			797			2,967			818			–			4,582
Noncurrent Liabilities:
Long–term debt			500			65			153			–			718
Other liabilities			362			738			132			–			1,232
Total Noncurrent Liabilities			862			803			285			–			1,950
Shareholders’ Equity:
Common stock, including surplus			757			3,746			1,120			(4,866	)		757
Other shareholders’ equity			8,184			1,412			–			(5,154	)		4,442
Total Shareholders’ Equity			8,941			5,158			1,120			(10,020	)		5,199
		$	10,600		$	8,928		$	2,223		$	(10,020	)	$	11,731

								Other
					Guarantors			Subsidiaries
					on a Combined			on a Combined			Consolidating			Total
December 31, 2002		Parent			Basis			Basis			Adjustments			Consolidated
ASSETS
Current Assets:
Cash and equivalents		$	174		$	–		$	265		$	–		$	439
Accounts receivable			–			805			163			–			968
Contracts in process			35			1,520			177			–			1,732
Inventories
	Work in process		–			643			–			–			643
	Raw materials		–			358			3			–			361
	Pre–owned aircraft		–			254			–			–			254
	Other		–			30			1			–			31
Assets of discontinued operations			–			85			–			–			85
Other current assets			147			234			51			–			432
Total Current Assets			356			3,929			660			–			4,945
Noncurrent Assets:
Property, plant and equipment			157			2,828			493			–			3,478
Accumulated depreciation, depletion & amortization of PP&E			(19	)		(1,396	)		(345	)		–			(1,760	)
Intangible assets and goodwill			–			3,139			989			–			4,128
Accumulated amortization of intangible assets			–			(332	)		(38	)		–			(370	)
Other assets			224			208			216			–			648
Investment in subsidiaries			9,158			–			–			(9,158	)		–
Total Noncurrent Assets			9,520			4,447			1,315			(9,158	)		6,124
		$	9,876		$	8,376		$	1,975		$	(9,158	)	$	11,069
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short–term debt		$	1,165		$	20		$	26		$	–		$	1,211
Liabilities of discontinued operations			–			14			–			–			14
Other current liabilities			143			2,559			652			–			3,354
Total Current Liabilities			1,308			2,593			678			–			4,579
Noncurrent Liabilities:
Long–term debt			500			60			164			–			724
Other liabilities			356			776			106			–			1,238
Total Noncurrent Liabilities			856			836			270			–			1,962
Shareholders’ Equity:
Common stock, including surplus			694			3,737			1,117			(4,854	)		694
Other shareholders’ equity			7,018			1,210			(90	)		(4,304	)		3,834
Total Shareholders’ Equity			7,712			4,947			1,027			(9,158	)		4,528
		$	9,876		$	8,376		$	1,975		$	(9,158	)	$	11,069

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

							Other
				Guarantors			Subsidiaries
				on a Combined			on a Combined			Consolidating		Total
Year Ended December 31, 2002	Parent			Basis			Basis			Adjustments		Consolidated
Net Cash Provided by Operating Activities from Continuing Operations	$	(46	)	$	1,031		$	141		$	–	$	1,126
Net Cash Used by Discontinued Operations		–			(1	)		–			–		(1	)
Net Cash Provided by Operating Activities		(46	)		1,030			141			–		1,125
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired		(2	)		(268	)		(5	)		–		(275	)
Capital expenditures		(6	)		(205	)		(53	)		–		(264	)
Proceeds from sale of assets		15			108			10			–		133
Other, net		(5	)		11			–			–		6
Net Cash Used by Investing Activities		2			(354	)		(48	)		–		(400	)
Cash Flows from Financing Activities:
Net repayments of commercial paper		(451	)		–			–			–		(451	)
Net repayments of other debt, including financing operations		(5	)		(58	)		(35	)		–		(98	)
Dividends paid		(236	)		–			–			–		(236	)
Other, net		(90	)		–			39			–		(51	)
Net Cash Used by Financing Activities		(782	)		(58	)		4			–		(836	)
Cash sweep by parent		707			(618	)		(89	)		–		–
Net Decrease in Cash and Equivalents		(119	)		–			8			–		(111	)
Cash and Equivalents at Beginning of Year		174			–			265			–		439
Cash and Equivalents at End of Year	$	55		$	–		$	273		$	–	$	328

							Other
				Guarantors			Subsidiaries
				on a Combined			on a Combined			Consolidating		Total
Year Ended December 31, 2001	Parent			Basis			Basis			Adjustments		Consolidated
Net Cash Provided by Operating Activities from Continuing Operations	$	86		$	810		$	203		$	–	$	1,099
Net Cash Provided by Discontinued Operations		–			2			–			–		2
Net Cash Provided by Operating Activities		86			812			203			–		1,101
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired		(1,162	)		(374	)		85			–		(1,451	)
Capital expenditures		(92	)		(244	)		(20	)		–		(356	)
Other, net		(19	)		54			26			–		61
Net Cash Used by Investing Activities		(1,273	)		(564	)		91			–		(1,746	)
Cash Flows from Financing Activities:
Net proceeds from commercial paper issuances		825			–			–			–		825
Net proceeds from floating rate notes		500			–			–			–		500
Net repayments of other debt, including financing operations		(149	)		(5	)		1			–		(153	)
Dividends paid		(219	)		–			–			–		(219	)
Other, net		(72	)		14			13			–		(45	)
Net Cash Provided by Financing Activities		885			9			14			–		908
Cash sweep by parent		323			(257	)		(66	)		–		–
Net Increase in Cash and Equivalents		21			–			242			–		263
Cash and Equivalents at Beginning of Year		153			–			23			–		176
Cash and Equivalents at End of Year	$	174		$	–		$	265		$	–	$	439

								Other
					Guarantors			Subsidiaries
					on a Combined			on a Combined			Consolidating		Total
Year Ended December 31, 2000		Parent			Basis			Basis			Adjustments		Consolidated
Net Cash Provided by Operating
	Activities from Continuing Operations	$	(53	)	$	1,135		$	(13	)	$	–	$	1,069
Net Cash Provided by Discontinued Operations			–			1			–			–		1
Net Cash Provided by Operating Activities			(53	)		1,136			(13	)		–		1,070
Cash Flows from Investing Activities:
Capital expenditures			(17	)		(268	)		(3	)		–		(288	)
Other, net			(6	)		(54	)		19			–		(41	)
Net Cash Used by Investing Activities			(23	)		(322	)		16			–		(329	)
Cash Flows from Financing Activities:
Net repayments of commercial paper			(508	)		–			–			–		(508	)
Dividends paid			(202	)		–			–			–		(202	)
Purchases of common stock			(208	)		–			–			–		(208	)
Proceeds from option exercises			111			–			–			–		111
Net repayments of other debt, including finance operations			–			(5	)		(23	)		–		(28	)
Net Cash Used by Financing Activities			(807	)		(5	)		(23	)		–		(835	)
Cash sweep by parent			866			(859	)		(7	)		–		–
Net Decrease in Cash and Equivalents			(17	)		(50	)		(27	)		–		(94	)
Cash and Equivalents at Beginning of Year			170			50			50			–		270
Cash and Equivalents at End of Year		$	153		$	–		$	23		$	–	$	176

58 General Dynamics 2002 Annual Report

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 accounting principles generally accepted in the United States 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 Committee of the board of directors, which is composed of three 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 KPMG LLP, independent auditors, whose report follows.

Michael J. Mancuso	John W. Schwartz
Senior Vice President and Chief Financial Officer	Vice President and Controller

Independent Auditors’ Report

To General Dynamics Corporation:

We have audited the accompanying Consolidated Balance Sheets of General Dynamics Corporation (a Delaware corporation) and subsidiaries as of December 31, 2002 and 2001, and the related Consolidated Statements of Earnings, Shareholders’ Equity and Cash Flows for each of the years in the three year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

     Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The condensed consolidated financial statements provided in Note U are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not part of the basic financial statements. These condensed consolidating financial statements have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

     As discussed in Note H to the financial statements, General Dynamics Corporation changed its method of accounting for goodwill and other intangible assets to adopt the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

McLean, Virginia
March 17, 2003	KPMG LLP

General Dynamics 2002 Annual Report 59

Selected Financial Data (Unaudited)

The following table presents summary selected historical financial data derived from the audited Consolidated Financial Statements and other information of the company for each of the five years presented. The following information should be read in conjunction with Management’s Discussion and Analysis of the Results of Operations and Financial Condition and the audited Consolidated Financial Statements and related Notes thereto.

(Dollars and shares in millions, except per share and employee amounts)				2002			2001			2000			1999			1998
Summary of Operations
Net sales			$	13,829		$	12,054		$	10,305		$	8,948		$	7,395
Operating earnings				1,582			1,486			1,325			1,203			918
Interest expense, net				(45	)		(56	)		(60	)		(34	)		(17	)
Provision for income taxes, net				533			482			359			246			315
Earnings from continuing operations				1,051			943			899			880			589
Discontinued operations, net of tax				(134	)		–			2			–			–
Net earnings				917			943			901			880			589
Earnings per share:
	Basic:
		Continuing operations		5.22			4.69			4.50			4.40			2.95
		Discontinued operations		(0.67	)		–			0.01			–			–
		Net earnings		4.55			4.69			4.51			4.40			2.95
	Diluted:
		Continuing operations		5.18			4.65			4.47			4.36			2.91
		Discontinued operations		(0.66	)		–			0.01			–			–
		Net earnings		4.52			4.65			4.48			4.36			2.91
Cash dividends per common stock share				1.20			1.12			1.04			0.96			0.88
Sales per employee (adjusted for business acquisitions)				269,200			253,800			240,000			227,500			208,600
Financial Position
Cash and equivalents and marketable securities			$	328		$	439		$	175		$	270		$	303
Total assets				11,731			11,069			7,987			7,744			6,196
Short- and long-term debt				1,450			1,935			512			1,022			530
Shareholders’ equity				5,199			4,528			3,820			3,170			2,407
Book value per share				25.87			22.56			19.05			15.77			12.08
Other Information
Funded backlog			$	21,338		$	19,368		$	14,366		$	11,949		$	10,841
Total backlog				28,971			26,816			19,666			19,914			19,332
Shares outstanding				201.0			200.7			200.5			201.0			199.3
Weighted average shares outstanding:
	Basic			201.4			201.1			199.8			200.0			199.5
	Diluted			202.9			202.9			201.3			202.1			202.2
Active employees				53,900			51,500			43,300			43,400			38,400

60 General Dynamics 2002 Annual Report

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EX-10.7

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EX-10.17

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EX-21

Exhibit 21, Annual Report on Form 10-K
for the year ended December 31, 2002
Commission File Number 1-3671
Page 1

GENERAL DYNAMICS CORPORATION
SUBSIDIARIES
AS OF JANUARY 31, 2003

Subsidiaries of General Dynamics			Place of	Percent of
Corporation (Parent and Registrant)			Incorporation	Voting Power
American Overseas Marine Corporation			Delaware		100
	Quincy Maritime Corporation I		Delaware		100
	Quincy Maritime Corporation II		Delaware		100
	Quincy Maritime Corporation III		Delaware		100
Bath Iron Works Corporation			Maine		100
	BIW-LLTF, LLC		Maine		100
Concord I Maritime Corporation			Delaware		100
	Braintree I Maritime Corp.		Delaware		100
Concord II Maritime Corporation			Delaware		100
	Braintree II Maritime Corp.		Delaware		100
Concord III Maritime Corporation			Delaware		100
	Braintree III Maritime Corp.		Delaware		100
Concord IV Maritime Corporation			Delaware		100
	Braintree IV Maritime Corp.		Delaware		100
Concord V Maritime Corporation			Delaware		100
	Braintree V Maritime Corp.		Delaware		100
Convair Aircraft Corporation			Delaware		100
Convair Corporation			Delaware		100
Eagle Enterprise, Inc.			Delaware		100
Elco Company, The			New Jersey		100
Electric Boat Corporation			Delaware		100
	EB Groton Engineering, Inc.		Delaware		100
	Electric Boat – Australia LLC		Delaware		100
	Electro Dynamic Corporation		Delaware		100
Electrocom, Inc.			Delaware		100
GD Plus S.A.R.L			France		100
General Dynamics Armament and Technical Products, Inc.			Delaware		100
	GDATP International, Inc.		Delaware		100
	XCORE, Inc.		Delaware		100
General Dynamics Decision Systems, Inc.			Delaware		100
	General Dynamics Satellite Communication Services, Inc.		Delaware		100
General Dynamics Foreign Sales Corporation			Virgin Islands		100
General Dynamics Government Systems Corporation			Delaware		100
	General Dynamics Advanced Information Systems		Delaware		100
		General Dynamics Creative Concepts, Inc.	Delaware		100
		General Dynamics Devcor, Inc.	Delaware		100
	General Dynamics C4 Systems, Inc.		Delaware		100
		General Dynamics Interactive Corporation	Delaware		100
	General Dynamics Government Systems Overseas Corporation		Delaware		100
	General Dynamics Network Systems, Inc.		Delaware		100
		General Dynamics Federal Services	California		100
		it international Telecom USA, Inc.	Delaware		100
	General Dynamics Overseas Systems and Services Corporation		Delaware		100
		General Dynamics Telecommunications do Brasil LTDA	Brazil		100
		GTE Internet Services of Egypt	Egypt		100
General Dynamics International Corporation			Delaware		100
General Dynamics Land Systems, Inc.			Delaware		100
	AV Technology, LLC		Maryland		100

Exhibit 21, Annual Report on Form 10-K
for the year ended December 31, 2002
Commission File Number 1-3671
Page 2

GENERAL DYNAMICS CORPORATION
SUBSIDIARIES
AS OF JANUARY 31, 2003

Subsidiaries of General Dynamics					Place of	Percent of
Corporation (Parent and Registrant)					Incorporation	Voting Power
	General Dynamics Land Systems Customer Service & Support Company				Texas		100
		General Dynamics Support Services Company			Delaware		100
		Global Support Services Company			Cayman Islands		100
	General Dynamics Land Systems International, Inc.				Delaware		100
	General Dynamics Robotic Systems, Inc.				Delaware		100
	G.T. Devices, Inc.				Maryland		100
General Dynamics Manufacturing Limited					Canada		100
General Dynamics Marine Systems, Inc.					Delaware		100
General Dynamics Ordnance and Tactical Systems, Inc.					Virginia		100
	General Dynamics OTS (Aerospace), Inc.				Washington		100
		Bi-propellant Rocket Research Corporation			Delaware		100
	General Dynamics OTS (California), Inc.				California		100
		General Dynamics OTS GMBH			Switzerland		100
	General Dynamics OTS (Downey), Inc.				Delaware		100
		AMMS, Inc.			Delaware		100
	General Dynamics OTS (DRI), Inc.				Alabama		100
	General Dynamics OTS (Niceville), Inc.				Florida		100
	General Dynamics OTS (Pennsylvania), Inc.				Pennsylvania		100
	St. Marks Powder, Inc.				Delaware		100
General Dynamics Properties, Inc.					Delaware		100
General Dynamics Shared Resources, Inc.					Delaware		100
General Dynamics Worldwide Holdings, Inc.					Cayman Islands		100
General Dynamics Worldwide Holdings, Inc.					Deleware		100
	GCC Beteiligungsverwatungs GMBH				Australia		100
	GD Canada Acquisition Corporation				New Brunswick		100
	General Dynamics Canada Ltd.				Canada		100
		Computing Devices (Thailand) Limited			Thailand		100
	General Dynamics Limited				United Kingdom		100
		General Dynamics United Kingdom Limited			United Kingdom		100
		CDC Systems U.K. Limited			England and Wales		100
		Computing Devices Hastings Limited			United Kingdom		100
		Computing Devices Eastbourne Limited			United Kingdom		100
	it International Telecom Inc.				Canada		100
		it International Telecom Limited			England and Wales		100
		Page Europa SpA			Italy		100
				Pagetel Sistem Muhendisligi Sanayi ve Ticaret Limited	Turkey		100
Gulfstream Aerospace Corporation					Delaware		100
	Gulfstream Delaware Corporation				Delaware		100
		Gulfstream Aerospace Corporation			California		100
		Gulfstream Aerospace Corporation			Georgia		100
			Gulfstream Aerospace (Middle East) Ltd.		Cyprus		100
			Gulfstream International Corporation		Delaware		100
	Gulfstream Aerospace Corporation				Oklahoma		100

Exhibit 21, Annual Report on Form 10-K
for the year ended December 31, 2002
Commission File Number 1-3671
Page 3

GENERAL DYNAMICS CORPORATION
SUBSIDIARIES
AS OF JANUARY 31, 2003

Subsidiaries of General Dynamics					Place of	Percent of
Corporation (Parent and Registrant)					Incorporation	Voting Power
Gulfstream Aerospace Corporation of Texas					Texas		100
		Gulfstream Aerospace Services Corporation			Delaware		100
			Gulfstream DAL Holdings, LLC		Delaware		100
				Gulfstream DAL, LP	Texas		100
		Gulfstream Aircraft Incorporated			Georgia		100
		Gulfstream Alliance Holdings, Inc.			Delaware		100
			Gulfstream 100 Holdings, LLC		Delaware		100
			Gulfstream 200 Holdings, LLC		Delaware		100
				Gulfstream Aerospace LP	Texas		100
		General Dynamics Aviation Services Corporation (DE)			Delaware		100
			General Dynamics Aviation Services Corporation (FL)		Florida		100
			General Dynamics Aviation Services Corporation (MN)		Minnesota		100
			General Dynamics Aviation Services Corporation (NV)		Nevada		100
		Gulfstream Financial Services Corporation			Georgia		100
		Gulfstream NetJets, Inc.			Georgia		100
		Gulfstream Tennessee Corporation			Delaware		100
		Interiores Aereos S.A. de C.V.			Mexico		100
Material Service Resources Company					Delaware		100
	Capital Fuels Sales Corporation				Delaware		100
	Capital Resources Development Company				Delaware		100
	CFTX, Inc.				Delaware		100
	Material Service Corporation				Delaware		100
		Material Service Foundation			Illinois		100
		MLRB, Inc.			Illinois		100
		Mineral and Land Resources Corporation			Delaware		100
		Thornton Quarries Corporation			Illinois		100
	Century Mineral Resources, Inc.				Illinois		100
	Freeman Energy Corporation				Delaware		100
		Freeman United Coal Mining Company			Delaware		100
	Prairie Energy Sales Corporation				Delaware		100
NASSCO Holdings Incorporated					Delaware		100
	International Manufacturing Technologies, Inc.				California		100
		Technologias Internacionales de Manufactura S.A. de C.V.			Mexico		100
	National Steel and Shipbuilding Company				Nevada		100
Patriot I Shipping Corp.					Delaware		100
Patriot II Shipping Corp.					Delaware		100
Patriot IV Shipping Corp.					Delaware		100
Santa Bárbara Sistemas, S.A.					Spain		100
	Santa Bárbara Sistemas GmbH				Germany		100

EX-23 10 w84261exv23.htm CONSENT OF KMPG LLP

Exhibit 23, Annual Report on Form 10-K
for the year ended December 31,  2002
Commission File Number 1-3671

Independent Auditors’ Consent

General Dynamics Corporation:

We consent to the incorporation by reference in the registration statements (Nos. 2-23904, 2-24270, 33-23448, 33-42799, 333-26571, 333-74574, 333-77024, 333-80213-01, 333-101634 and 333-103607) on Forms S-8 and S-4 of General Dynamics Corporation of our report dated March 17, 2003, with respect to the consolidated balance sheets of General Dynamics Corporation as of December 31, 2002 and 2001, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of General Dynamics Corporation. Our report refers to a change in accounting for goodwill and other intangible assets.

/s/ KPMG LLP

McLean, Virginia
March 21, 2003

EX-24 11 w84261exv24.htm POWER OF ATTORNEY OF THE BOARD OF DIRECTORS

Exhibit 24, Annual Report on Form 10-K
for the year ended December 31, 2002
Commission File Number 1-3671
IRS No. 13-1673581

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENT, that each of the undersigned Directors of GENERAL DYNAMICS CORPORATION, a Delaware corporation, hereby constitutes and appoints each of NICHOLAS D. CHABRAJA, MICHAEL J. MANCUSO and DAVID A. SAVNER as his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the 2002 Annual Report on Form 10-K of General Dynamics Corporation, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary as fully as to all intents and purposes as he might or could do in person, and hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

     IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 5th day of March 2003.

/s/ Nicholas D. Chabraja Nicholas D. Chabraja		/s/ George A. Joulwan George A. Joulwan
/s/ James S. Crown James S. Crown		/s/ Paul G. Kaminski Paul G. Kaminski
/s/ Lester Crown Lester Crown		/s/ James R. Mellor James R. Mellor
/s/ Charles H. Goodman Charles H. Goodman		/s/ Carl E. Mundy, Jr. Carl E. Mundy, Jr.
	/s/ Carlisle A. H. Trost Carlisle A. H. Trost

EX-99.5 12 w84261exv99w5.htm CERTIFICATE FOR NICHOLAS CHABRAJA

Exhibit 99.5

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of General Dynamics Corporation (the “Company”) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nicholas D. Chabraja, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1)	the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Nicholas D. Chabraja Nicholas D. Chabraja Chairman and Chief Executive Officer
March 24, 2003

EX-99.6 13 w84261exv99w6.htm CERTIFICATE FOR MICHAEL MANCUSO

Exhibit 99.6

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of General Dynamics Corporation (the “Company”) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael J. Mancuso, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1)	the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Michael J. Mancuso Michael J. Mancuso Senior Vice President and Chief Financial Officer
March 24, 2003

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EX-23

exv23

EX-24

exv24

EX-99.5

exv99w5

EX-99.6

exv99w6