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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from              to             

Commission file number 1-3671

Registrant’s telephone number, including area code:

(703) 876-3000

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

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  x    No  ¨

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.  x

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

The aggregate market value of the voting common equity held by nonaffiliates of the registrant was $17,396,485,643 as of July 4, 2004 (based on the closing price of the shares on the New York Stock Exchange).

200,129,860 shares of the registrant’s common stock were outstanding at January 30, 2005.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates information from certain portions of the registrant’s definitive proxy statement for the 2005 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that 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 that 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:

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.

2    General Dynamics 2004 Annual Report

(Dollars in millions, unless otherwise noted)

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

General Dynamics is a market leader in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. Incorporated in Delaware, the company employs approximately 70,200 people and has a presence worldwide.

Formed in 1952 through the combination of Electric Boat Company, Consolidated Vultee and other entities, General Dynamics grew internally and through acquisitions but was significantly downsized in the early 1990s when it sold all of its divisions except Electric Boat and Land Systems. The company today is the result of an acquisition strategy that began in 1995. At that time, the company began to expand its two core defense businesses by acquiring other shipyards and combat vehicle-related businesses. The company also expanded by adding information technology products and services, particularly in the command, control, communications, computing, intelligence, surveillance and reconnaissance (C4ISR) markets. In 1999, the company acquired Gulfstream Aerospace Corporation, a business-jet aircraft manufacturer and aviation support services company. In the last 10 years, General Dynamics has acquired and successfully integrated 37 businesses, including three during 2004.

General Dynamics focuses on creating shareholder value while providing the best products and services possible to its customers, both military and commercial. The company emphasizes excellence in program management and strives continuously to improve operations while ethically managing all aspects of its business. This culture is evident in how the company deals with shareholders, employees, customers, partners and communities.

General Dynamics has four primary business groups – Information Systems and Technology, Combat Systems, Marine Systems and Aerospace – and a small Resources group.

PRODUCTS AND SERVICES

INFORMATION SYSTEMS AND TECHNOLOGY

The Information Systems and Technology group provides systems integration expertise, hardware and software products, and support services in three principal defense and intelligence markets:

Acquisitions and new program wins since 1997 have combined to build capabilities in each of these markets across a wide range of platforms on land, at sea, in the air and in space. The group’s expertise in integrating command, control and communication systems is its core business. Information Systems and Technology’s relationship with the intelligence community is strong and growing. In particular, many of its systems and products in the information-assurance arena are vital to U.S. intelligence operations. The group’s position in the expanding IT services marketplace has grown from its principal offering of network infrastructure installation into a diverse suite of IT services across the U.S. Department of Defense, the intelligence community and federal civilian agencies.

For the second year in a row, Information Systems and Technology is the company’s largest segment, contributing 35 percent of total revenues in 2004. This growth reflects the increasing importance of digital, network-centric C4ISR and information-sharing technologies in the defense and intelligence communities. As the nature of conflicts evolves, information sharing and network-centric warfare will become increasingly important in the widely dispersed battlefields of the future. Overcoming the challenges the armed services and intelligence community face will require continued innovation, interoperable technologies and a greater reliance on integrated ground, sea, air and space systems.

The Information Systems and Technology group supports these requirements with quick responses to changing warfighter needs, enabled by its deep understanding of the customer’s operating environment. This intimate knowledge has developed over time as the company

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has successfully managed the deployment, training and ongoing support of a broad base of mission-critical systems and products. The group’s programs and products are targeted, for the most part, toward meeting six types of customer requirements:

These customer requirements are manifest in the group’s portfolio of more than 3,000 contracts. While no single contract has a significant impact on the group’s overall performance, a few examples of key 2004 contract awards reflect the broad scope of its products and offerings. The Warfighter Information Network – Tactical (WIN-T) is the U.S. Army’s tactical extension of its Global Information Grid that will provide a networked environment to support the warfighter’s on-the-move voice, video and data communications. The Joint Tactical Radio System “Cluster 5” (JTRS) is a contract to develop small, lightweight software-defined radios for use by all branches of the U.S. military in systems ranging from handhelds to unattended sensors and unmanned aerial vehicles. The Mobile User Objective System (MUOS), on which the company is a partner, is a contract with the U.S. Navy that enables on-the-move satellite connectivity for U.S. and allied forces. The Joint Experimentation Program and Joint Future Lab, for the Joint Forces Command, include research and development, engineering, formulation and analysis of joint operational concepts. In the IT services market, Network-Centric Solutions (NETCENTS) will provide information technology, networking, and communications products and services in support of the U.S. Air Force’s global information requirements.

To enhance the company’s strength in Information Systems and Technology’s core markets, it acquired two companies in 2004. Spectrum Astro, Inc., manufactures and integrates spacecraft subsystem hardware, software and ground-support equipment. The acquisition complements the group’s classified and restricted payload business by addressing growing customer requirements for smaller, more cost-effective satellite systems. TriPoint Global Communications Inc. provides ground-based satellite and wireless communication equipment and integration services to both civilian and military markets. Its VertexRSI^®, Prodelin^® and Gabriel^® brands provide ground station communication products, antennas and wireless products, many of which can support on-the-move command and control. These acquisitions provide products and services that enhance the group’s offerings in space vehicle integration and mobile communications.

Net sales for the Information Systems and Technology group were 35 percent of the company’s consolidated net sales in 2004, 30 percent in 2003 and 27 percent in 2002. Net sales by major products and services were as follows:

COMBAT SYSTEMS

The Combat Systems group is a leader in the development of combat systems for the future while supplying, supporting and enhancing existing products. The group is one of the preferred providers of land and expeditionary combat systems around the world, providing tracked and wheeled armored combat vehicles, armament systems and ammunition to the U.S. military and its allies. Combat Systems develops, manufactures and supports product lines worldwide that include:

        One of the group’s key armored vehicle products is the Army’s Stryker wheeled infantry combat vehicle. Stryker proved its value throughout 2004 during combat operations in Iraq, exceeding Army and soldier expectations for mobility and survivability. Planned enhancements in both weaponry and armor protection are expected to make future Strykers even more valuable to Army commanders as new variants of the Stryker family continue to move to production, including the Mobile Gun System and the Nuclear, Biological, and Chemical (NBC) Reconnaissance variant. In the tracked armor market, the company is the only producer of America’s Abrams main battle tanks. Planned technological upgrades to M1 Abrams tanks are designed to expand substantially the capabilities of this proven system.

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Another Combat Systems program is the U.S. Marine Corps’ Expeditionary Fighting Vehicle (EFV). The EFV is designed to provide the Marines with a vehicle that enables quick deployment from the sea to an inland objective with superior mobility and lethality. During development and testing in 2004, the EFV demonstrated numerous new operational capabilities that far exceed the existing system, such as 20-25 knot water speeds, accurate and lethal firepower at increased range, and land and water mobility. The program is undergoing restructuring to align development, testing and production with available resources. Low-rate initial production is expected in 2006. The company anticipates production of over 1,000 units for the Marines through 2020, as well as additional vehicles for international sales.

In October 2003, the Combat Systems group established the European Land Combat Systems (ELCS) unit following the acquisition of Steyr Daimler Puch Spezialfahrzeug Aktiengesellschaft & Company KG (Steyr) by combining it with MOWAG AG and Santa Bárbara Sistemas, which were previously acquired. ELCS provides a wide array of wheeled and tracked combat vehicles used by numerous armies around the world. In December 2004, Portugal selected the ELCS Pandur eight-wheeled armored combat vehicle to meet a wide variety of potential defense and peacekeeping missions. The program includes 260 vehicles to be delivered over four years beginning in 2006.

The Combat Systems group is a key participant in the development of manned and robotic ground vehicles for the Army’s largest program, Future Combat Systems (FCS). It also leads the development of the Future Force Warrior (FFW), an integrated suite of advanced technologies that are designed to make the individual soldier more lethal and survivable.

The group also designs, develops and produces high-performance armament systems, including precision munitions and armaments carried on most U.S. fighter aircraft. Combat Systems is the leading U.S. producer of chemical and biological detection systems for the U.S. Department of Defense. In this area the group is developing the Joint Biological Point Detection System (JBPDS), the first deployed near-real-time biological detection capability. In addition, it has provided over 15,000 Improved Chemical Agent Monitor point detection systems currently in use in Iraq.

Combat Systems is a leader in the manufacture of large- and medium-caliber ammunition, bomb bodies and propellant. It also manufactures the Hydra-70 (70mm) rocket and precision metal and composite components, and designs and produces shaped-charge warheads and control actuation systems. In November 2004, General Dynamics acquired Engineering Technology Inc., a company that designs and builds special-purpose munitions and electromechanical and electro-optic devices, to further enhance the group’s capability in these areas.

Net sales for the Combat Systems group were 23 percent of the company’s consolidated net sales in 2004, 24 percent in 2003 and 20 percent in 2002. Net sales by major products and services were as follows:

MARINE SYSTEMS

The Marine Systems group has a long history of providing the Navy with ships and submarines used to project the United States’ presence around the globe. The company’s shipyards have demonstrated decades of innovation in developing submarines, surface combatants and auxiliary ships for the Navy, and commercial cargo ships. Today the group continues to provide the Navy with the modern, sophisticated naval platforms and capabilities that will serve the United States for years to come, including:

        In the submarine market, Marine Systems leads the development of the new Virginia-class submarines, the first of which was delivered on October 12, 2004. Construction work on the Virginia-class submarines is shared equally with the company’s teaming partner. The Virginia Class provides a key platform to the Navy, with stealth, firepower, endurance, and advanced network and communication capabilities. Complementing this platform will be the Trident SSGN submarines, which the group is developing through the conversion of four Trident ballistic-missile submarines. The Trident SSGN will be a multi-mission submarine optimized for conventional tactical strike and special operations support, important capabilities for future engagements around the world.

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In December 2004, Electric Boat delivered the Jimmy Carter (SSN-23), the nation’s most advanced submarine, to the Navy. The SSN-23 provides a one-of-a-kind multi-mission platform (MMP) configuration, which includes a 100-foot, 2,500-ton hull extension. The MMP enhances payload capability, enabling the ship to accommodate advanced technology required to develop and test an entirely new generation of weapons, sensors and undersea vehicles. At the same time, the submarine retains the operational characteristics of the Seawolf Class – the fastest, quietest, most heavily armed attack submarine in the world.

In the surface-combatant market, Marine Systems is the lead designer and producer of Arleigh Burke-class guided-missile destroyers (DDG-51), one of the most advanced surface combatants in the world. Under the Navy’s plan the company will be constructing these ships through the end of the decade. It is also one of two competitors developing a detailed design and prototype ship for the Navy’s Littoral Combat Ship (LCS). The LCS platform is intended for defense against terrorist swarm boats, mines and submarine threats in coastal areas. Marine Systems is also a member of the team that is developing the Navy’s next generation destroyer, DD(X).

Marine Systems also supports the far-reaching deployments of the Navy with its auxiliary and support ships, facilitating the efficient delivery of crucial supplies to U.S. forces around the world. It is leading the innovation of at-sea replenishment through the design and construction of the Lewis and Clark-class (T-AKE) combat-logistics ships. T-AKE is the first new Navy combat-logistics ship design in almost 20 years, using integrated electric-drive propulsion to deliver high performance at lower cost. The group also provides commercial ships, including the design and manufacture of double-hull oil tankers.

In addition, the group provides ship repair and other services to the Navy and commercial customers.

Net sales for the Marine Systems group were 25 percent of the company’s consolidated net sales in 2004, 26 percent in 2003 and 27 percent in 2002. Net sales by major products and services were as follows:

AEROSPACE

The Aerospace group designs, develops, manufactures and supports a comprehensive fleet of business-jet aircraft. The group meets the transportation needs of a diverse group of corporate and private customers. The group also offers its aircraft for both executive transport and special-mission platforms to governments and government agencies.

Aerospace was created in 1999 when the company acquired Gulfstream Aerospace Corporation. In 2001, the company expanded its product offering to include mid-size aircraft with the acquisition of Galaxy Aerospace Company. In the same year, General Dynamics formed General Dynamics Aviation Services, a separate aviation services unit.

With seven aircraft models available at varying price and performance points, the group competes aggressively and effectively in market sectors from mid-size to ultra-long-range:

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In 2004, the Aerospace group achieved a number of important milestones that continued to distinguish its products and services from its competition. The company introduced the new large-cabin, mid-range Gulfstream G350 in February, and received type certifications from the U.S. Federal Aviation Administration (FAA) or the European Aviation Safety Agency for the Gulfstream G550, Gulfstream G450, Gulfstream G350 and Gulfstream G200. These certifications enable the aircraft to be registered in the United States and 25 European nations, broadening the market appeal of each.

Also, the FAA granted identical pilot-type ratings for the G550, G500, GV, G450 and G350, creating safety, cost and convenience benefits for Gulfstream fleet operators in terms of pilot training, operations, parts inventory and maintenance.

In October 2004, the group unveiled a full-scale mock-up of the new Gulfstream G150. This aircraft, with a redesigned cabin and streamlined fuselage, will provide customers with the speed and range of the Gulfstream G100 and the comfort of a wider cabin. The G150 enters production in 2005, with first customer delivery scheduled for 2006.

Along with new products, Aerospace continues to enhance aircraft models even after their initial introduction. Major achievements include the Gulfstream Enhanced Vision System (EVS), which uses a forward-looking infrared (FLIR) camera to enable flight crews to see runway markings, taxiways, adjacent roads and surrounding areas in conditions of limited visibility. EVS was initially introduced in 2001 and remains the only FAA-certified system of its type. The FAA awarded Gulfstream its 2004 Award of Excellence in Aviation Research for the system.

Gulfstream introduced its new Broad Band Multi-Link (BBML) capability in 2004. This advanced technology enables customers to access the Internet at 51,000 feet at connection speeds similar to those they experience in their offices. A future option will allow video teleconferencing. Gulfstream’s BBML is up to 10 times faster than competitive systems and has up to 75 percent lower per-minute operating costs.

These achievements frequently result in industry recognition that further enhances the group’s reputation. For example, in 2004 the National Aeronautic Association presented the Gulfstream G550 team with the Robert J. Collier Trophy. The award cited the team for “its leading-edge achievement in designing, testing and building an innovative aircraft while incorporating measurable safety enhancements and far-reaching advances in aerospace technology.”

Also in 2004, both Professional Pilot and Aviation International News judged the Aerospace group number one in product support, for the second year in a row, based on independent surveys of business-jet operations. All six service centers under the Gulfstream name have been awarded the prestigious Diamond Award of Excellence for training by the FAA, as have the five service centers that operate under the General Dynamics Aviation Services banner.

Net sales for the Aerospace group were 16 percent of the company’s consolidated net sales in 2004, 18 percent in 2003 and 24 percent in 2002. Net sales by major products and services were as follows:

RESOURCES

The Resources group includes two businesses: a coal mining operation and an aggregates operation that mines sand, stone and gravel for use in highway and building construction. Net sales for these businesses represented approximately 1 percent of the company’s consolidated net sales in 2004 and 2 percent in 2003 and 2002. Net sales were $252 in 2004, $256 in 2003 and $286 in 2002.

For additional discussion of the company’s business groups, including significant program wins in 2004, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7, of this Annual Report on Form 10-K. For information on the revenues, operating earnings and identifiable assets attributable to each of the company’s business groups, see Note R to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.

COMPETITION

The company’s ability to compete successfully depends on the technical excellence and reliability of its products and services, its reputation for integrating complex systems, the successful management of the company’s businesses and customer relationships, and the cost competitiveness of its products and services. The company relies on these factors in the two primary markets in which it competes: defense and business-jet aircraft.

DEFENSE MARKET

The defense market is served by numerous domestic and foreign companies that offer a range of products and services and that compete with the company for many of its contracts. On occasion, the company is involved in subcontracting relationships with some of these competitors. The key competitive factors in this market are technological innovation, low-cost production, performance and market knowledge.

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The Information Systems and Technology group competes with a broad range of entities, from large defense companies to smaller niche competitors with specialized technologies, and often teams with other companies. The Combat Systems group competes with both domestic and foreign entities. On occasion, the company partners with some of these entities and currently is in a teaming arrangement with another U.S. defense contractor on the manned vehicle portion of the FCS program. The Marine Systems group operates in a market with only one other primary competitor, Northrop Grumman Corporation; however, the company also teams with it on several programs, including the Virginia-class submarine construction contract. The Navy’s LCS program has expanded competition to include another large defense company seeking a role as a shipbuilding prime contractor.

BUSINESS-JET AIRCRAFT MARKET

Competition in the business-jet aircraft market generally is divided into segments based on the cabin size, range and price of the aircraft. Gulfstream offers a total of seven products described under Products and Services – Aerospace. The company has at least one competitor for each of its products. The number of competitors increases for the shorter-range aircraft. The key competitive factors in the business-jet market are the safety and performance characteristics of the aircraft, the quality and timeliness of the service provided, advances in technology, innovative marketing programs and price. The company believes that it competes favorably on these criteria.

CUSTOMERS

The company’s primary customer is the U.S. government, particularly the Department of Defense. In 2004, 67 percent of the company’s net sales were to the U.S. government; 16 percent were to U.S. commercial customers; 12 percent were directly to international defense customers; and the remaining 5 percent were to international commercial customers.

U.S. GOVERNMENT

The company’s net sales to the U.S. government were as follows:

The company’s U.S. government sales are funded by customer budgets, which operate on an October-to-September fiscal year. In February of each year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is the result of months of policy and program reviews throughout the Executive branch. From February through September of each year, the appropriations and authorization committees of Congress review the president’s budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and authorization legislation. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies.

There are two primary risks associated with this process. First, the process may be delayed or disrupted because of congressional schedules, negotiations over funding levels for programs or unforeseen world events, which could, in turn, alter the funding for a program or contract. Second, funding for multi-year contracts can be changed by future appropriations, which could affect the timing of funds, schedules and program content.

The company’s U.S. government business is performed under both cost-reimbursement and fixed-price contracts. The company’s 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. The company’s production contracts are largely fixed-price, in which the company agrees to perform a specific scope of work for a fixed amount. In 2004, cost-reimbursement and fixed-price contracts accounted for approximately 47 percent and 53 percent, respectively, of the company’s government business.

In practice, cost-reimbursement and fixed-price contracts each present advantages and disadvantages. Cost-reimbursement contracts generally involve lower risk for the company and sometimes involve fee schedules that award the company increased payments for satisfying certain performance criteria. However, not all costs are recoverable under these types of contracts, and the government has the right to object to costs, which could increase the company’s risk. Fixed-price contracts generally offer greater profit potential if the company can complete the work for less than the contract amount. However, on fixed-price contracts the company is responsible for absorbing any cost overruns that might occur.

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U.S. COMMERCIAL

The company’s commercial sales were $3,052 in 2004, $2,929 in 2003 and $3,157 in 2002. These sales represented approximately 16 percent of the company’s consolidated net sales in 2004,18 percent in 2003 and 23 percent in 2002. The majority of these sales were for Gulfstream aircraft, primarily to Fortune 500^® corporations and large, privately held companies. The aircraft are operated by customers in a wide range of industries.

INTERNATIONAL

The company’s direct (non-Foreign Military Sales) sales to defense and commercial customers outside the United States were $3,243 in 2004, $2,519 in 2003 and $1,738 in 2002. These sales represented approximately 17 percent of the company’s consolidated net sales in 2004, 15 percent in 2003 and 13 percent in 2002. International defense sales were primarily from the company’s subsidiaries located abroad; international commercial sales were primarily exports of business-jet aircraft.

The company has operations throughout the world, including Australia, Austria, Canada, Germany, Mexico, Spain, Switzerland and the United Kingdom. Sales from international operations were $2,701 in 2004, $2,175 in 2003 and $970 in 2002. The long-lived assets of operations located outside the United States were 5 percent of the company’s total long-lived assets as of December 31, 2004, 4 percent as of December 31, 2003, and 2 percent as of December 31, 2002.

For information regarding sales by geographic region, see Note R to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.

SUPPLIERS

The company, in some cases, depends on suppliers and subcontractors for raw materials and components used in the production of its products. In some instances, the company relies on only one or two sources of supply. A disruption in deliveries from suppliers, therefore, could have an adverse effect on the company’s ability to meet its commitments to customers. While high prices for some raw materials important to some of General Dynamics’ businesses, particularly steel, have caused pricing pressures, 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

As part of its normal business operations, the company conducts independent research and development (R&D) activities. The company also conducts R&D activities under U.S. government contracts to develop products for large systems-development and technology programs.

The majority of company-sponsored R&D expenditures in each of the past three years was in the company’s defense business. In accordance with government regulations, the company recovers a significant portion of these expenditures through overhead charges to U.S. government contracts. The R&D activities of the Aerospace group consist primarily of internally funded product enhancement and development programs for Gulfstream aircraft.

R&D expenditures were as follows:

BACKLOG

The company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts and includes funded and unfunded portions. For additional discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7, of this Annual Report on Form 10-K.

Summary backlog information for each business group follows:

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DEFENSE BUSINESS

For U.S. defense programs, the funded backlog represents those items that have been authorized and appropriated by the Congress and funded by the customer. The funded backlog for international defense programs represents commitments by international customers that are similarly approved and funded by their governments. The unfunded backlog represents orders for which funding has not been appropriated. While there is no guarantee that future budgets and appropriations will provide funding for a given program, management has included in unfunded backlog only those programs that it believes are likely to receive funding.

AEROSPACE

The Aerospace funded backlog represents orders for which the company has definitive purchase contracts and deposits from a customer. The unfunded Aerospace backlog consists of options to purchase new aircraft and agreements to provide future aircraft maintenance and support services.

REGULATORY MATTERS

U.S. GOVERNMENT DEFENSE CONTRACTS

Generally, U.S. government contracts are subject to procurement laws and regulations. The majority of the company’s contracts are governed by the Federal Acquisition Regulation (FAR), which lays out uniform policies and procedures for acquiring goods and services by the U.S. government, and agency-specific acquisition regulations that implement or supplement the FAR. For example, the Department of Defense implements the FAR through the Defense Federal Acquisition Regulation (DFAR). The FAR regulates all phases of the acquisition of products and services, including:

The FAR also contains guidelines and regulations for managing a contract after award, including conditions under which contracts may be terminated, in whole or in part, at the government’s convenience or for default. If a contract is terminated for the convenience of the 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. If a contract is terminated for default, the government generally pays for only the work it has accepted. These regulations also subject the company to financial audits and other reviews by the government of its costs, performance, accounting and general business practices relating to its contracts, which may result in adjustment of the company’s contract-related costs and fees. Failure to comply with procurement laws or regulations can also result in civil, criminal or administrative proceedings involving fines, penalties, suspension of payments, or suspension or disbarment from government contracting or subcontracting for a period of time.

INTERNATIONAL

The company’s international sales are subject to U.S. and foreign government regulations and procurement policies and practices, including regulations relating to import-export control, investments, exchange controls and repatriation of earnings. International sales are also subject to currency exchange, political and economic risks.

BUSINESS-JET AIRCRAFT

The Aerospace group is subject to FAA regulation in the United States and other similar aviation regulatory authorities throughout the world. For an aircraft to be manufactured and sold, the model must receive a type certificate from the appropriate aviation authority, and each individual aircraft must receive a certificate of airworthiness. Aviation authorities may require changes to aircraft if deemed necessary for safety purposes. Maintenance facilities must also be licensed by aviation authorities.

ENVIRONMENTAL

General Dynamics is subject to a variety of federal, state, local and foreign environmental laws and regulations covering the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. The company regularly assesses its compliance status and management of environmental matters and believes that its operations are in substantial compliance with 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 and often are allowable contract costs the company can recover from the U.S. government. These costs have historically not had a material impact on the company’s results of operations, financial condition or cash flows. Based on information currently available to the company and current U.S. government policies relating to allowable costs, the company does not expect the cost of continued environmental compliance to have a material impact on its results of operations, financial condition or cash flows.

A Potentially Responsible Party (PRP) has joint and several liability under existing U.S. environmental laws. Where the company has been designated a PRP by the U.S. Environmental Protection Agency or a state environmental agency, it is potentially liable to the government or third

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parties for the full cost of remediating contamination at the relevant site. The company generally seeks to mitigate these environmental liabilities by pursuing available insurance proceeds and appropriate cost-recovery actions. In the unlikely event that the company is required to fully fund the remediation of a site, the current statutory framework would allow the company to pursue rights to contribution from other PRPs. For additional information relating to the impact of environmental controls, see Note O to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.

INTELLECTUAL PROPERTY

The company is a 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 licenses certain intellectual property rights of third parties. The U.S. government has licenses to the company’s patents developed in the performance of government contracts, and it may use or authorize others to use the inventions covered by the company’s 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.

AVAILABLE INFORMATION

The company files several types of reports with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports include an annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Free copies of these reports are made available as soon as practicable on the company’s website (http://www.generaldynamics.com) and through the General Dynamics investor relations office at (703) 876-3000.

These reports can also be obtained at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. 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 (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

ITEM 2. PROPERTIES

The company believes that its main facilities are adequate for its present needs and, as supplemented by planned improvements and construction, expects them to remain adequate for the foreseeable future. A summary of floor space at the main facilities of the Information Systems and Technology, Combat Systems, Marine Systems and Aerospace business groups as of December 31, 2004, follows*:

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ITEM 3. LEGAL PROCEEDINGS

For information relating to legal proceedings, see Note O to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.

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, 2004.

PART II

ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 the Supplementary Data contained in Part II, Item 8, of this Annual Report on Form 10-K.

The number of holders of the company’s common stock as of January 30, 2005, was approximately 153,400.

The company made no repurchases of its common stock during the quarter ended December 31, 2004. For additional information relating to the company’s repurchases of its common stock during the past three years, see Financial Condition, Liquidity and Capital Resources–Financing Activities–Share Repurchases under Part II, Item 7, of this Annual Report on Form 10-K.

General Dynamics 2004 Annual Report    13

ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)

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

Note:    Prior year amounts have been reclassified for discontinued operations.

14    General Dynamics 2004 Annual Report

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(For an overview of the company’s business groups, including a discussion of products and services provided, see the Business discussion contained in Part I, Item 1, of this Annual Report on Form 10-K.)

MANAGEMENT OVERVIEW

General Dynamics designs, develops, manufactures and supports leading-edge technology products and services for mission-critical information systems and technologies; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and business aviation. 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. It operates through four primary business groups – Information Systems and Technology, Combat Systems, Marine Systems and Aerospace – and a small Resources group.

The company has two primary business markets – defense and business aviation. The majority of the company’s revenues derive from contracts with the U.S. military. Current U.S. policy is to pursue the Global War on Terrorism, encourage the spread of democratic institutions and significantly enhance homeland defense efforts. U.S. military doctrine provides that these diverse and demanding missions require U.S. armed forces that are equipped and trained to prevail quickly in small- and large-scale conflicts around the world. Current policy also dictates that success will require the transformation of U.S. forces so they are more strategically mobile, operationally lethal and tactically survivable. These endeavors have driven steady funding increases for the U.S. Department of Defense since 2001.

For fiscal year 2005, the Congress appropriated $403 billion for the Department of Defense, a 30 percent increase in funding since 2001. This amount includes $148 billion for procurement and research and development (R&D) activities, an increase of 44 percent since 2001. Procurement and R&D budgets provide the majority of the company’s revenues. Their sustained increases demonstrate solid administration and congressional support. With previously approved and recently announced supplemental funding, the Congress is being asked to provide additional funding for operations in Iraq and Afghanistan, bringing the Department of Defense’s total funding for fiscal year 2005 to over $500 billion, approximately a 60 percent increase since 2001. Over 16 percent of the supplemental 2005 spending will go toward additional procurement, as currently requested by the president. The U.S. Army will receive $9 billion of that request, and the U.S. Marine Corps will get $3 billion, assuming the Congress approves the president’s request. For fiscal year 2006, the president has requested that the Congress appropriate $420 billion for the Department of Defense, a 4 percent increase over 2005. This includes $147 billion for procurement and R&D. Overall, while Department of Defense funding levels may change over time, the company expects the levels of funding available for its programs to remain consistent for 2005 and 2006.

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The global defense market is shaped largely by the demands of the U.S. military. Many foreign governments remain committed to funding weapons and equipment modernization in the pursuit of interoperability with U.S. and allied forces and flexible capabilities for peacekeeping and regional operations. The company continues to focus on the needs of these customers and expects growing international sales.

The Aerospace group is one of the world’s leading designers and manufacturers of business-jet aircraft and is a leader in the long-range and ultra-long-range, large-cabin business-jet market, as well as in the business-jet service and product support market. The group’s market is influenced in part by the capital goods sector and the demand for business-aviation products by U.S. and foreign businesses, the U.S. and other governments, and high-net-worth individuals.

The business-aviation market improved considerably during 2004, with an increase in demand, a reduction in aircraft inventory – both new and pre-owned – and a firming in pricing. The increase in demand was across the Aerospace group’s customer base, reflecting the improved global economy and higher U.S. corporate earnings. The cost containment and efficiency initiatives that the company implemented in 2003 resulted in a marked increase in the group’s earnings and margins in 2004. The company expects that the business-aviation market will continue to improve and that the group will continue to benefit from that improvement and from its management and cost-reduction initiatives.

General Dynamics’ management is committed to creating shareholder value through ethical business practices, disciplined program management and continuous operational improvements. The company has proven itself over the past 10 years as an industry leader in generating strong cash flows, which have enabled it to enhance returns through strategic and tactical acquisitions, payment of dividends and share repurchases.

CONSOLIDATED OVERVIEW

Results of Operations

General Dynamics’ net sales increased 17 percent in 2004 over 2003 to $19.2 billion. This growth resulted from increased volume across all of the company’s primary business groups and in part from acquisitions in the Information Systems and Technology and Combat Systems groups. The Information Systems and Technology group provided the most significant contribution to the sales growth in 2004 as a result of strong demand for its communications and information technology products and services. The company’s 2004 performance followed sales growth of 20 percent in 2003. The company’s net sales increased to $16.4 billion in 2003 from $13.7 billion in 2002. This increase was driven by acquisitions in the Information Systems and Technology and Combat Systems groups and increased volume in the company’s defense businesses, reduced in part by lower sales of new aircraft in the Aerospace group.

In 2004, General Dynamics’ focus on operations and program execution resulted in substantial improvement in the company’s earnings and operating margins over 2003. Operating earnings increased 34 percent from 2003, double the rate of sales growth, to $1.9 billion in 2004. All of the company’s major business units contributed to this performance. The Aerospace group improved its earnings significantly on effectively the same volume as 2003. The Marine Systems group experienced reduced losses in its commercial shipbuilding business compared with 2003, which also contributed to higher earnings in 2004. Overall, the company’s operating margins increased to 10.1 percent in 2004 from 8.8 percent in 2003, reflecting the increased demand for the company’s products and services, the successful integration of businesses acquired in 2003 and improved processes that resulted in significant cost reductions.

Operating earnings in 2003 decreased 8 percent from 2002 to $1.4 billion. The impact of increased volume across the company and acquisitions in the Information Systems and Technology and Combat

16    General Dynamics 2004 Annual Report

Systems groups was offset by decreased earnings in the Marine Systems and Aerospace groups. Earnings were down in those groups in 2003 due to performance problems on commercial shipbuilding contracts and reduced sales of new aircraft and market pricing pressures at Gulfstream.

The company generated substantial cash flow from operating activities in 2004 and 2003, significantly exceeding net earnings in each year. In 2002, cash flow from operating activities approximated net earnings. Net cash provided by operating activities was $1.8 billion in 2004 compared with $1.7 billion in 2003 and $1.1 billion in 2002. The company used its cash to fund acquisitions and capital expenditures, repurchase its common stock, pay dividends and reduce debt.

General and administrative (G&A) expenses as a percentage of sales decreased to 6.2 percent in 2004 compared with 6.6 percent in 2003 and 6.5 percent in 2002. G&A was $1.2 billion in 2004, $1.1 billion in 2003 and $892 in 2002.

In 2004, the company had net expense from non-operating items of $8 compared with income of $3 in 2003. In 2002, income from non-operating items was $47, which included a $36 gain from the sale of certain assets of Combat Systems’ Space Propulsion operation. Net interest expense increased to $148 in 2004 from $98 in 2003 because of a higher average borrowing balance from the company’s issuance of additional debt in 2003 used to fund acquisitions. Net interest expense was $45 in 2002.

The company’s effective tax rate was 32.6 percent in 2004, 27.3 percent in 2003 and 33.7 percent in 2002. The 2003 tax rate was lower than the other years because of the settlement of the 1996 to 1998 audit cycle with the Internal Revenue Service and the resolution of some outstanding state tax disputes. These events resulted in non-cash benefits in 2003 totaling $68, favorably impacting the company’s tax rate by 5 percent.

In 2004, General Dynamics reviewed its businesses to identify operations that were not core to the company and could be divested. As a result, the company completed the sale of two businesses in 2004 and entered into definitive agreements to sell two additional businesses, both of which closed in the first quarter of 2005. The company’s reported net sales for all periods presented exclude the revenues associated with these businesses. Their earnings, however, are included as discontinued operations, net of income taxes, for all periods. For additional discussion of these divestiture activities, see Note C to the Consolidated Financial Statements.

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’ operations in 2002 are included as discontinued operations, net of income taxes. The company recognized an after-tax loss of $134, including an after-tax charge of $109 for ship lease obligations and the write-down of assets to net realizable value upon disposal of this business.

General Dynamics’ total backlog reached its highest level ever, $42.1 billion, and the funded backlog grew 14 percent over 2003 to $28.3 billion at December 31, 2004. Each of the company’s business groups experienced significant new order activity in 2004, resulting in total new orders of $19.6 billion during the year.

The total backlog for the company’s defense businesses was $35 billion at the end of 2004, up $1.1 billion over year-end 2003. The defense backlog represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog grew 14 percent in 2004 to $23.4 billion. This includes items that have been authorized and appropriated by the Congress and funded by the customer, as well as commitments by international customers that are also approved and funded by their governments. The unfunded backlog for the defense businesses represents firm orders for which funding has not been appropriated. The backlog does not include work awarded under indefinite delivery, indefinite quantity (IDIQ) contracts. The total potential value of these contracts, which may be realized over the next 10 years, was approximately $6.4 billion as of December 31, 2004.

The Aerospace group’s total backlog at December 31, 2004, was $6.8 billion, an increase of 5 percent over 2003. Perhaps more important, the Aerospace funded backlog, which is an indicator of near-term demand, increased 13 percent in 2004 to $4.6 billion. This growth reflects the increase in demand for new aircraft throughout the year that culminated in a record number of orders in the fourth quarter. The funded backlog includes orders for which the company has definitive purchase contracts and deposits from the customer. The unfunded backlog of $2.2 billion at year-end 2004 consists of options to purchase new aircraft and agreements to provide future aircraft maintenance and support services.

The Resources group’s backlog was $258 at year-end 2004, of which $200 was funded.

General Dynamics 2004 Annual Report    17

REVIEW OF OPERATING SEGMENTS

INFORMATION SYSTEMS AND TECHNOLOGY

Results of Operations and Outlook

The Information Systems and Technology group’s sales and earnings increased significantly in 2004 compared with 2003. The group enjoyed growing demand in all of its markets – tactical and strategic mission systems, intelligence mission systems, and network infrastructure and information technology (IT) services – including:

Acquisitions in 2003 and 2004 were the other major driver of the sales growth, contributing about half of the increase over 2003.

The group’s 2004 operating margins were down slightly from 2003 because of a change in the mix of program deliveries through the year and lower-margin businesses acquired in the second half of 2003. Of note, the group’s overall margins improved in 2004 over the fourth quarter of 2003 as it continued to integrate these businesses.

During 2004, the company completed two acquisitions in the group – Spectrum Astro, Inc., in July and TriPoint Global Communications Inc., in September. These acquisitions enhance the group’s offerings in space vehicle integration and mobile communications.

The company expects the Information Systems and Technology group to experience single-digit sales growth in 2005. Operating margins should remain similar to average margins in 2004, though margins may fluctuate from period to period based on contract mix and timing of deliveries. The group will continue to focus on operations and program performance and the integration of the businesses acquired in 2004.

In 2003, the group experienced significant sales and earnings growth over 2002 as a result of increased volume in several areas of the business, including:

The acquisitions of Veridian Corporation and Digital System Resources, Inc., in the third quarter of 2003 also contributed significantly to the sales and earnings growth, though the lower margins associated with these businesses reduced the group’s overall operating margins as discussed above.

The Information Systems and Technology group’s backlog grew to a record $9.4 billion in 2004, an increase of 26 percent over 2003. The group’s funded backlog, representing over 75 percent of the total backlog, increased by $1.2 billion in 2004. Unlike the company’s other defense businesses, the Information Systems and Technology group’s backlog is made up primarily of a large number of mid-size contracts and programs. However, 2004 saw an unusually high number of awards for large-scale, long-term programs in the defense market for communications and IT products and services. The group received many of these significant awards during the year, leading to the substantial increase in backlog.

The Army selected the Information Systems and Technology group as the prime contractor for its WIN-T program. WIN-T is the Army’s key initiative designed to transform its tactical communications network from the current

18    General Dynamics 2004 Annual Report

system to support the future force. The entire WIN-T program has a potential value of $7 billion through 2018, and work is expected to be shared evenly with the company’s principal subcontractor.

The group was also awarded “Cluster 5” of the Joint Tactical Radio System (JTRS), a contract worth $295 to develop small, lightweight software-defined radios for use by all branches of the U.S.military in systems ranging from handhelds to unattended sensors and unmanned aerial vehicles. The JTRS program is designed to transform joint service operations by providing communication flexibility and adaptability to fighting forces. If all options are exercised, the contract has a potential value of over $1 billion through 2011.

The group is part of a team that was selected by the U.S. Navy to build the Mobile User Objective System (MUOS), a narrowband tactical satellite communications system. The Information Systems and Technology group will lead the segments of the MUOS program that supply network management, satellite control and a secure ground network, as well as a JTRS-compliant terminal solution. The subcontract is valued at over $800.

The group is also a member of a team that was selected as Canada’s Maritime Helicopter Project (MHP) provider. The MHP program calls for the replacement of Canada’s aging fleet of marine helicopters with 28 state-of-the-art helicopters to be used for anti-submarine patrols, surveillance, search-and-rescue and disaster relief. The company has been selected to provide the integrated mission systems for the new helicopters and related support for 20 years under a subcontract arrangement with a potential value of up to $1.3 billion.

The Information Systems and Technology group was also awarded a five-year contract valued at approximately $480 to continue its support of the U.S. Joint Forces Command’s Joint Experimentation Program and Joint Futures Lab, which develops new warfighting concepts, organizational structures and emerging technologies. The company has supported this program for the past six years, providing services such as R&D, engineering, and formulation and analysis of joint operational concepts.

The Information Systems and Technology group’s backlog at the end of 2004 also includes several international programs, reflecting the demand for its products and services overseas. The group’s most significant international contract is the BOWMAN program, a secure digital voice and data communications system for the U.K. armed forces. The group’s year-end backlog includes approximately $1.9 billion for the BOWMAN program.

The group’s backlog does not include approximately $6.3 billion of potential contract value awarded under IDIQ contracts. IDIQ contracts are used when the customer has not defined the exact timing and quantity of deliveries that will be required at the time the contract is executed. These agreements set forth the majority of the contractual terms, including prices, but are funded as delivery orders are placed. A significant portion of this IDIQ value represents contracts for which the company has been designated as the sole-source supplier over several years to design, develop, produce and integrate complex products and systems for the military or other government agencies. Management believes that the customers intend to fully implement these systems. However, because the value of these arrangements is subject to the customer’s future exercise of an indeterminate quantity of delivery orders, the company recognizes these contracts in backlog only when they are funded.

The company was awarded several significant IDIQ contracts during 2004, including one of four contracts under the Air Force’s Network-Centric Solutions (NETCENTS) program. Under the NETCENTS program, the company will provide information technology, networking, and voice, video and data communications products and services to support the Air Force’s global information requirements. The multiple-award IDIQ program has a three-year base period with two one-year options and a potential value of $9 billion.

In addition, the Information Systems and Technology group was awarded one of 12 Information Technology Systems Support (ITSS) III contracts by the U.S. Department of Justice (DOJ) to provide state-of-the-art IT services and project-related hardware to DOJ organizations and other federal agencies. This multiple-award IDIQ program has a performance period of seven years and a ceiling value of approximately $1 billion.

COMBAT SYSTEMS

Results of Operations and Outlook

The Combat Systems group posted solid increases in net sales and operating earnings in 2004 compared with 2003. Strengthened by acquisitions completed in 2003, the group’s volume increased in 2004 as demand for its products grew both in the United States and abroad. In particular, the group’s sales of armored vehicles in Europe, including Leopard tanks, Ulan infantry fighting vehicles and Piranha combat vehicles, increased significantly in 2004. In addition, the group experienced increased activity on its contract to develop manned ground vehicles for the Army’s Future Combat Systems (FCS) program and in its munitions and armaments businesses. These gains were partially offset by lower volume on some combat vehicle production programs, including fewer M1 Abrams tank upgrades and reduced deliveries on the Stryker program due to the timing of customer requirements.

Operating earnings increased at almost double the rate of the group’s sales growth in 2004. A shift in contract mix and improved performance on

General Dynamics 2004 Annual Report    19

a number of the group’s programs, including FCS, Stryker and tactical air munitions contracts, contributed to the strong earnings performance.

The company expects the Combat Systems group’s sales to increase significantly in 2005 based on the group’s solid backlog and opportunities for growth in the United States and internationally. Operating margins in 2005 should approximate those achieved in 2004.

In 2003, the Combat Systems group experienced substantial growth in net sales and operating earnings due largely to several acquisitions during the year. In 2003, the company acquired General Motors Defense, Intercontinental Manufacturing Company and Steyr Daimler Puch Spezialfahrzeug Aktiengesellschaft & Company KG. In addition, increased activity on the Leopard tank production program, growing contributions to the Army’s FCS program and solid performance in the company’s munitions and armaments businesses augmented the contributions of acquired businesses. This growth was reduced in part by fewer M1 Abrams main battle tank upgrades and reduced deliveries of the Pizarro Advanced Infantry Fighting Vehicle in Spain.

The Combat Systems group’s total backlog increased in 2004 to $8.7 billion at year end. The group’s funded backlog grew by 10 percent to reach $6.4 billion at the end of 2004. The group’s backlog consists primarily of long-term production contracts with scheduled deliveries through 2012.

The group’s backlog at year end includes approximately $790 for the production of Stryker wheeled combat vehicles. In 2004, Combat Systems received orders from the Army for 328 vehicles valued at approximately $440 to complete the fourth Stryker brigade. The group also was awarded three delivery orders worth $206 for 95 additional Stryker combat vehicles, including the first production of the Mobile Gun System and Nuclear, Biological, and Chemical Reconnaissance variants. In the first quarter of 2005, the Army ordered 423 additional vehicles, valued at over $580, to equip the fifth Stryker brigade. The Stryker program, which currently calls for a total of six brigades by 2008, is a key component of the ongoing Army transformation.

The Army also awarded the Combat Systems group several contracts to extend the company’s M1 Abrams main battle tank program. The first was a delivery order valued at $121 under a contract to upgrade 65 M1A2 Abrams tanks to the M1A2 System Enhancement Program (SEP) configuration. Through this program, the company retrofits M1A2 tanks with improved electronics, command-and-control capabilities and armor enhancements that are designed to improve the tank’s effectiveness. In January 2005, the Army awarded the company a modification worth $161 to upgrade an additional 64 M1A2 Abrams tanks. During 2004, the company was also awarded a $52 delivery order for 120 M1A1 Abrams Integrated Management (AIM) material sets to be delivered by June 2006. In addition, the company was awarded a contract modification valued at $267 to provide 125 M1A1 hardware kits for the Egyptian co-production program.

Another significant award for the Combat Systems group in 2004 was a $25 delivery order initiating a contract for the production of Joint Biological Point Detection Systems (JBPDS). The JBPDS is a self-powered instrument suite that rapidly detects and identifies biological warfare agents such as airborne viruses, bacteria and toxins. This contract has a potential value of $750 for approximately 1,100 systems through 2009 if all options are exercised.

        Internationally in 2004, the Government of Portugal conducted a competition for armored vehicles and in December selected the group’s Pandur II vehicle and funded the program. A contract valued at over $475 to produce 260 armored combat vehicles was finalized and added to the backlog in the first quarter of 2005.

In addition to the 2004 contract awards discussed above, Combat Systems’ backlog at year end includes several significant ongoing programs. The group is contributing to the Army’s FCS program through the development of manned ground vehicles and the autonomous navigation system for unmanned and manned ground vehicles. The group’s backlog at the end of 2004 includes $1.8 billion for this aspect of the FCS program. The Information Systems and Technology group is also participating in this program, providing the integrated computer system, sensor data management and mission planning and preparation services.

The FCS program has been restructured to deliver newly developed technologies to existing forces as soon as they are available, rather than waiting until all planned technology innovations are complete. With this acceleration of new technologies, the Army plans to focus on networking capabilities, unattended munitions, unmanned systems and manned ground vehicles.

20    General Dynamics 2004 Annual Report

The Combat Systems group’s Leopard program is a long-term battle tank manufacturing contract for the Spanish army under license from a German company. The year-end backlog includes $1.2 billion for the production of 232 Leopard tanks, with deliveries scheduled through 2008. The group also produces Pizarro Advanced Infantry Fighting Vehicles for the Spanish army. The group’s backlog at the end of 2004 includes over $850 for the production of 212 Pizarro vehicles scheduled for delivery through 2012.

Another key program in the Combat Systems group is the Marine Corps’ Expeditionary Fighting Vehicle (EFV) contract. In 2004, the company was awarded a contract modification to continue the system development and demonstration phase of the EFV program, which deferred the beginning of low-rate initial production from 2005 to 2006. The group’s backlog at year-end 2004 includes approximately $470 for this effort. Program production, which currently calls for over 1,000 vehicles, is scheduled to begin in 2006 and continue into 2020.

The Combat Systems year-end 2004 backlog also includes over $1.2 billion in armament, munitions and composite structures programs. The ammunition programs include the production of Hydra-70 (70mm) rockets, motors and warheads. In 2004, the group received orders worth approximately $125 from the U.S.Army Aviation and Missile Command for the Hydra-70 program. These orders extended deliveries through 2006 and brought the total contract value to date to $960. Also in 2004, the U.S.Army Joint Munitions Command awarded the group $110 worth of modifications to a contract for the production of MK80 Series bomb bodies. The contract has a total potential value of $240, and deliveries are scheduled through 2005.

MARINE SYSTEMS

Results of Operations and Outlook

In 2004, the Marine Systems group’s net sales grew as a result of higher activity on engineering and repair contracts and several early-stage production and development programs, including the T-AKE combat-logistics ships, the conversion of Trident ballistic missile submarines to a conventional-strike configuration (SSGN) and the Virginia-class submarine program. The growth in sales was partially reduced by lower volume on commercial shipbuilding contracts and mature production programs, including the delivery of the final Seawolf-class submarine.

The group’s operating earnings and margins improved significantly in 2004 compared with 2003 because of improved results on the company’s commercial shipbuilding programs in 2004 relative to 2003. The company experienced losses in the first quarter of 2003 on the construction of two roll-on/roll-off cargo ships. The two ships were delivered later in the year with no additional write- offs. Later in 2003, the group recorded losses on the first of four double-hull oil tankers. The losses totaled $70 and were the result of labor hour and material cost growth. The company’s estimates to complete the tankers remained firm through the first half of 2004. However, after the first ship was delivered in the third quarter of 2004, the company identified additional performance problems related to schedule delays and subcontractor difficulties. As a result, the company recorded additional losses on the contract of $43 in the second half of 2004. The second and third double-hull tankers are scheduled for delivery in 2005, with the fourth to be delivered in 2006. Management continues to monitor the program closely in order to mitigate the risk of further cost growth.

The company expects the Marine Systems group’s sales in 2005 to approximate the group’s results in 2004 with slightly improved margins, assuming no further deterioration on the commercial tanker contract.

In 2003, the Marine Systems group’s net sales increased over 2002 from increased activity on a number of design and early-stage production contracts, including the Virginia-class, SSGN and T-AKE programs, as well as growth in engineering and repair work. This growth was offset partially by lower activity on several mature ship construction programs. Earnings and margins declined in 2003 as a result of the performance issues on the two commercial shipbuilding programs discussed above.

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The Marine Systems group’s backlog at the end of 2004 was $16.8 billion, consisting of numerous long-term submarine and ship construction programs, along with repair and engineering contracts. The group’s funded backlog grew by $1.1 billion, or 13 percent, in 2004, reaching $9.9 billion at year end. This backlog provides for shipbuilding programs through 2014. While the Navy’s future shipbuilding plan fluctuates over time, the group’s current shipbuilding and submarine programs are well-funded through the next several years.

The group’s most significant contract in backlog is the Virginia-class submarine construction program. The company has nine Virginia-class submarines under contract following the delivery of the lead ship in the class, the Virginia, in October 2004. At year-end 2004, the group’s backlog includes $9.1 billion for the construction of these submarines. The current Navy plan calls for one submarine to be delivered per year. The company is the prime contractor on this program, and construction is shared equally with its teaming partner.

The group’s backlog at the end of 2004 includes $3.4 billion for 10 Arleigh Burke-class DDG destroyers scheduled for delivery through 2010. This includes $489 in funding awarded to the company in 2004. In January 2005, the Navy awarded the company an additional $562, which funded the final destroyer under contract in the DDG program.

During 2004, the Navy exercised options worth approximately $580 for the fifth and sixth ships in the T-AKE program, a new class of combat-logistics ships. The group’s backlog includes $1.5 billion at year end for the construction of the first six ships with deliveries scheduled from 2006 through 2008. In January 2005, the Navy exercised additional options worth approximately $590 for two more ships, bringing the total contract value to $2.5 billion. The contract has options for four more ships for a total potential contract value of $3.7 billion.

The group also received approximately $390 in contract modifications from the Navy in 2004 to provide design, engineering, material and logistics support for strategic and attack submarines; R&D for submarine research vehicles; and planning, scheduling and technical support for submarine maintenance activities. These awards modify a $32 contract awarded in March 2004 that has a potential value of $1.1 billion over five years if all options are exercised.

In 2004, the group received $165 in modifications to its contract to convert four Trident ballistic-missile submarines to an SSGN configuration, a multi-mission submarine optimized for conventional tactical strike and special-operations support. These awards modify a contract that the Navy awarded to the Marine Systems group in 2002 and bring the total program value to over $1 billion. In January 2005, the Navy awarded the group an additional $150 contract modification to continue the conversion.

The Marine Systems group leads one of two teams selected for the final stage of development for the Littoral Combat Ship (LCS), the Navy’s newest class of high-speed surface combatants designed to operate in coastal areas against terrorist threats, high- speed swarm boats, mines and diesel submarines. In 2004, the Navy awarded the group an option worth $79 to continue development of its proposed design for the LCS.

AEROSPACE

Results of Operations and Outlook

The Aerospace group’s sales increased slightly in 2004 compared with 2003. New aircraft deliveries and aircraft services activity were up while pre-owned aircraft sales were lower. The group’s earnings and margins in 2004 grew considerably over 2003. This increase resulted from three factors:

        In 2003, the company initiated a series of cost-containment efforts and process improvements in response to declining market conditions and an oversupply of aircraft in the business-jet market. These steps removed significant costs from the group’s new aircraft manufacturing process. In addition, the company implemented a more disciplined approach to pre-owned aircraft activity. As a result, sales of pre-owned aircraft in 2004 resulted in earnings of $6 compared with losses of $64 in 2003. These factors, combined with the increased volume and improved mix of aircraft deliveries, resulted in the significant rise in earnings and margins for the group in 2004.

Business-jet market conditions improved significantly in 2004. Demand for new aircraft increased steadily throughout the year, and there was a marked improvement in pricing in the order activity late in the year. The group finished 2004 with a record number of orders in the fourth quarter and for the full year, excluding orders from fractional fleet customers. With the 2005 production schedule substantially sold out, the company expects moderate sales growth in the Aerospace group in 2005 with improving operating margins.

22    General Dynamics 2004 Annual Report

Net sales and operating earnings decreased in 2003 compared with 2002 because of deterioration in the business-jet market during the second half of 2002 and the first half of 2003. Lower demand for new aircraft and oversupply of new and pre-owned aircraft for sale in the market resulted in downward pricing pressures. These factors lowered the group’s sales and caused earnings and margins to decline in 2003.

Summary of Aircraft Statistical Information

Sales contracts for new aircraft usually have two major milestones: the manufacture of the “green” aircraft and the aircraft’s completion, which includes exterior painting and installation of customer-selected interiors and optional avionics. The company records revenues when green aircraft are delivered to and accepted by the customer, and when the customer accepts final delivery of the fully outfitted aircraft.

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