Business Overview

General Dynamics offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design and construction; and information systems, technologies and services. We operate through four business groups - Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology. Our primary customers are the U.S. military, other U.S. government organizations, the armed forces of other nations, and a diverse base of corporate, government and individual buyers of business aircraft. We operate in two primary markets: defense and business aviation. The majority of our revenues derive from contracts with the U.S. military. The following discussion should be read in conjunction with our 2008 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, and with the unaudited Consolidated Financial Statements included in this Form 10-Q.

Results of Operations

Consolidated Overview



                                   April 5       March 30
              Three Months Ended     2009          2008           Variance
              Revenues             $  8,264     $    7,005     $  1,259   18.0 %
              Operating earnings        905            861           44    5.1 %
              Operating margin         11.0 %         12.3 %

In the first quarter of 2009, each of our business groups contributed double-digit top-line growth, resulting in a significant increase in overall revenues over the first quarter of 2008. The Marine Systems group was our growth rate leader on the strength of increased activity at all of the group's shipyards. Revenues in the Combat Systems and Information Systems and Technology groups were up due to higher volume throughout each of the groups' businesses, particularly in military vehicles and tactical communications systems. In the Aerospace group, the acquisition of Jet Aviation resulted in increased revenues over the first quarter of 2008 despite lower aircraft deliveries in the quarter.

Our operating earnings in the first quarter of 2009 increased, although at a lower rate than our revenue growth. As a result, our operating margins decreased by 130 basis points compared to the first quarter of 2008. Operating margins in the Marine Systems group increased in the first quarter due to improved operating performance at each of our shipyards. Margins were lower, however, in the Combat Systems and Information Systems and Technology groups due to a shift in program mix compared to the first quarter of 2008. In the Aerospace group, margins were down due primarily to the addition of the lower-margin volume from the acquisition of Jet Aviation and the impact of adjustments to pre-owned aircraft inventories.

General and administrative (G&A) expenses as a percentage of sales for the first three months of 2009 were 6.2 percent compared with 6.1 percent in the same period in 2008. We expect G&A expenses as a percentage of sales for the full-year 2009 to approximate the full-year 2008 rate of 5.9 percent.

Net cash provided by operating activities from continuing operations was $154 in the first three months of 2009, compared with $431 in the same period in 2008. We used our cash to fund acquisitions and capital expenditures, repurchase our common stock, pay dividends and repay maturing debt. Our net debt - debt less cash and equivalents and marketable securities - was $2.6 billion at the end of the first quarter of 2009 compared with essentially no net debt at the end of the first quarter of 2008. Net debt increased as a result of approximately $3.3 billion spent on acquisitions, $1.1 billion of share repurchases, $552 of dividends paid and $486 of capital expenditures during the past 12 months.

Net interest expense in the first three months of 2009 increased by $20 over the first three months of 2008 to $39 due to the issuance of additional debt in 2008 and lower interest income on a reduced invested cash balance. We expect full-year net interest expense of approximately $150.

Our effective tax rate for the three-month period ended April 5, 2009, was 31.8 percent compared with 32.2 percent in the same period in 2008. We anticipate an effective tax rate of approximately 31.5 percent for the full-year 2009, compared with 31.2 percent in 2008. For additional discussion of tax matters, see Note I to the unaudited Consolidated Financial Statements.

We generated total new orders of $5.9 billion in the first quarter of 2009, with particularly strong order activity in the Information Systems and Technology group. The group had a book-to-bill ratio greater than one despite its highest quarterly revenues to date. Total company backlog at the end of the quarter was $71.1 billion compared to $74.1 billion at the end of 2008. Funded backlog was $49.2 billion as of April 5, 2009, down from $51.7 billion at the end of the year. Our total backlog does not include work awarded under unfunded indefinite delivery, indefinite quantity (IDIQ) contracts, unexercised options associated with existing firm contracts or options to purchase new aircraft, which we refer to collectively as estimated potential contract value. At the end of the first quarter of 2009, management's estimate of this potential contract value, which we expect to realize over the next 10 to 15 years, was approximately $17.9 billion, up 6.5 percent from $16.8 billion at the end of 2008.

Aerospace



                                         April 5       March 30
       Three Months Ended                  2009          2008            Variance
       Revenues                          $  1,455     $    1,279     $  176      13.8 %
       Operating earnings                     200            236        (36 )   (15.3 )%
       Operating margin                      13.7 %         18.5 %
       Aircraft deliveries (in units):
       Green                                   31             37         (6 )   (16.2 )%
       Completion                              34             36         (2 )    (5.6 )%

The deterioration in the global economic environment in late 2008 and early 2009 has significantly impacted the business-jet market. In particular, new-aircraft order activity has declined, some customers have defaulted on their aircraft contracts and pre-owned aircraft inventories have grown.

In response to these conditions, the Aerospace group reduced its 2009 aircraft production schedule to level-load its 2009 and 2010 output. This resulted in fewer aircraft deliveries in the first quarter of 2009 compared to the same quarter in 2008 and an 8 percent decrease in new-aircraft revenues. In addition, aircraft services volume was down 9 percent organically in the quarter, again the result of the economic pull-back. The group did not sell any pre-owned aircraft in the first quarter of 2009, compared with one aircraft sold for $9 in the first quarter of 2008. Overall, Gulfstream's revenues declined 8.6 percent from the first quarter of 2008. With the addition of the revenues of Jet Aviation, acquired in the fourth quarter of 2008, the Aerospace group's first-quarter revenues were up compared to the same period in 2008.

The deterioration in the business-jet market also led to a decline in the group's first-quarter operating earnings and margins compared to the prior-year period. The net reduction in earnings consisted of the following factors:

                 Aircraft manufacturing and completions   $   18
                 Pre-owned aircraft                          (22 )
                 Aircraft services                             5
                 Other                                       (37 )
                 Total decrease in operating earnings     $  (36 )

Aircraft manufacturing and completion earnings increased over the first quarter of 2008 despite the decline in aircraft deliveries due to the addition of Jet Aviation's completion business, liquidated damages received on defaulted aircraft contracts and cost reduction efforts that resulted in improved manufacturing margins at Gulfstream compared with the first quarter of 2008. The group is committed to reducing costs through a continued focus on production improvements and operational efficiencies to maintain operating margins in the aircraft manufacturing process.

The pre-owned aircraft market is suffering from a glut of supply and a significant reduction in the volume of transactions. Given the current market conditions, the group further wrote down the carrying value of its pre-owned aircraft inventory. The group had seven pre-owned aircraft available for sale at the end of the quarter, up from four aircraft at the end of the year.

Aircraft services earnings, which include Jet Aviation's maintenance and repair activities, fixed-base operations and aircraft management services, were up slightly in the quarter.

While the combined effect of these operating factors netted steady earnings compared with 2008, the group's first-quarter earnings were also impacted by higher product development costs, severance costs associated with workforce reduction activities and intangible asset amortization related to the Jet Aviation acquisition. As a result, the group's operating earnings declined from the first quarter of 2008 to 2009, and its margins were down 480 basis points.

We expect revenues in the Aerospace group for the full-year 2009 to approximate the revenues generated by the group in 2008, reflecting the impact of the reduced aircraft production schedule and a full year of Jet Aviation results. The group's quarterly revenues are likely to fluctuate during the year, including the effect of a planned workforce furlough in the third quarter. We expect the group's operating margins to be approximately 500 basis points lower than those achieved in 2008 due

to the addition of the Jet Aviation services business, the deterioration of the pre-owned market and pressures on pricing in the group's mid-cabin segment.

Combat Systems



                                    April 5       March 30
               Three Months Ended     2009          2008          Variance
               Revenues             $  2,407     $    1,997     $  410   20.5 %
               Operating earnings        279            259         20    7.7 %
               Operating margin         11.6 %         13.0 %

The Combat Systems group's revenues increased significantly in the first quarter of 2009 compared to the same quarter in 2008. Excluding acquisitions, the group grew 13.7 percent over the first quarter of 2008. Each of the group's businesses contributed to the revenue growth in the quarter:

                        U.S. military vehicles       $  257
                        Weapons systems                  89
                        Munitions                        46
                        European military vehicles       18
                        Total increase in revenues   $  410

The increase in U.S. military vehicle revenues was driven primarily by higher activity on the Stryker wheeled combat vehicle program, as well as several contracts in support of the Abrams main battle tank, including the System Enhancement Package (SEP) upgrade and the M1A1 reset programs. In the weapons systems business, revenues increased as a result of the acquisition of AxleTech International (AxleTech) in the fourth quarter of 2008. Revenues in the group's munitions business grew in the first quarter of 2009 primarily as a result of increased activity on its medium- and small-caliber munitions supply contracts for the United States. In the group's European military vehicle business, higher volume in the arms and munitions programs led the growth in revenue.

In the first quarter of 2009, we signed a renegotiated contract with the Czech Republic for the purchase of 107 Pandur II vehicles, including 17 vehicles the group had previously completed. Deliveries of the remaining vehicles are scheduled through 2013. Under the terms of the revised contract, we billed and collected the majority of the contracts-in-process balance under the original contract and added approximately $40 to the group's backlog, for a total remaining backlog value of approximately $375.

The Combat Systems group's operating earnings increased in the first quarter of 2009, though at a lower rate than the group's revenue growth. As a result, operating margins were down 140 basis points. The decline in margins was due to a shift in program mix, most notably within the mine-resistant, ambush protected (MRAP) vehicle program. Deliveries of the remaining vehicles under contract are scheduled to be complete by the end of the second quarter of 2009.

We expect Combat Systems to generate revenue growth of approximately 20 to 25 percent for the full year 2009 with margins in the mid-12 percent range.

Marine Systems



                                    April 5      March 30
               Three Months Ended     2009         2008          Variance
               Revenues             $  1,669     $   1,378     $  291   21.1 %
               Operating earnings        163           122         41   33.6 %
               Operating margin          9.8 %         8.9 %

The Marine Systems group's revenues and operating earnings increased significantly in the first quarter of 2009 over the same prior-year period. The growth in the group's revenues was shared among all of its shipyards and consisted of the following:

      Multi-year Navy ship production                                 $  238
      Other Navy ship design and production, engineering and repair       29
      Commercial ship production                                          24
      Total increase in revenues                                      $  291

The group's multi-year ship-production programs for the U.S. Navy include submarines (Virginia class), combat-logistics ships (T-AKE) and destroyers (DDG-51 and DDG-1000). The most significant growth in the quarter was on the Virginia program as construction continued on the remaining five ships under the Block II contract. The group also began initial ramp-up activities on the eight-ship Block III contract, which was awarded in the fourth quarter of 2008. The second Block II ship is scheduled for delivery in the third quarter of 2009, and Block III deliveries are scheduled through 2019. Construction is in process on the eighth through 11th ships of the group's 14-ship T-AKE program. The group delivered the seventh T-AKE in the first quarter of 2009, and deliveries are scheduled through 2012. Destroyer construction activity was up as volume increased on the group's design and production contracts for the DDG-1000 next-generation destroyer while the workload on the DDG-51 Arleigh Burke program decreased slightly. The group began construction of the first DDG-1000 and continued work on the remaining four DDG-51s under contract with deliveries scheduled through 2011. The next Arleigh Burke destroyer is scheduled to be delivered in the second quarter of 2009.

In addition to the large, multi-ship programs, volume increased in the quarter on engineering and repair programs for the Navy. The group's product carrier program generated the increase in commercial shipbuilding volume in the first quarter. The first ship under contract was delivered in January 2009, and construction is in process on the second through fourth ships. The second and third ships are scheduled to be delivered in the second half of 2009. The current construction plan includes deliveries through the fourth quarter of 2010.

The Marine Systems group continued to improve its performance in the first quarter of 2009, resulting in substantial operating earnings growth at each of our shipyards. As the group's workload

increases, we remain focused on achieving continued operational efficiencies across the shipyards. These efficiencies led to increased earnings rates on several key programs in the quarter, including the Virginia-class, DDG-51, DDG-1000 and commercial product carrier programs. As a result, the group's operating margins improved by 90 basis points over the first quarter of 2008.

We expect 2009 revenue growth in Marine Systems of approximately 5 to 6 percent. However, the group's substantial backlog offers an opportunity to outperform this expectation. We expect full-year operating margins in the group to improve slightly over the 9.4 percent margins achieved in 2008.

Information Systems and Technology



                                    April 5      March 30
               Three Months Ended     2009         2008          Variance
               Revenues             $  2,733     $   2,351     $  382   16.2 %
               Operating earnings        289           260         29   11.2 %
               Operating margin         10.6 %        11.1 %

The Information Systems and Technology group's revenues increased significantly in the first quarter of 2009 compared with the same period in 2008, as each of the group's markets produced double-digit growth. The group generated organic growth of 13.7 percent. The group's 2009 top-line increase consisted of the following:

             Tactical and strategic mission systems             $  162
             Information technology (IT) and mission services      163
             Intelligence mission systems                           57
             Total increase in revenues                         $  382

Revenues in the tactical systems business were up primarily as a result of increased volume on several key U.S. military programs, including the Warfighter Information Network - Tactical (WIN-T) program, which provides warfighters fast, secure, mobile command-and-control capabilities, and the Common Hardware/Software III (CHS-3) program, which provides commercial and ruggedized computers, network equipment and software to the U.S. armed forces and other U.S. federal agencies worldwide. In the group's United Kingdom operations, volume on the BOWMAN communications program for the U.K. armed forces remained steady as the group continued with ongoing logistics support and sustainment activity. In IT services, revenues increased due to the addition of volume from recent acquisitions and higher activity on training and IT infrastructure programs. In the group's intelligence systems business, volume increased most notably on several space systems programs, including ramp-up activity on a contract to build the spacecraft for NASA's Landsat Data Continuity Mission.

Operating earnings in the Information Systems and Technology group increased significantly in the first quarter of 2009, although at a slightly lower rate than the revenue growth. A shift in the group's contract mix resulted in a 50 basis-point decrease in operating margins in the quarter.

We expect full-year 2009 revenue growth in the Information Systems and Technology group of approximately 8 percent. Based on the scheduled program mix within the group for 2009, we expect full-year operating margins to decrease 30 to 40 basis points compared to the 10.7 percent margins achieved in 2008.

Corporate

Corporate results consist primarily of compensation expense for stock options and a portion of the results from our commercial pension plans. Corporate operating expenses totaled $26 in the first quarter of 2009 compared with $16 in the first quarter of 2008. The increase resulted primarily from higher stock option expense. We expect 2009 Corporate expense to be approximately $90 to $100.

Backlog

The following table details the backlog and the total estimated contract value
of each business group at the end of the first quarter of 2009 and fourth
quarter of 2008:



                                                                                Estimated        Total
                                                                                Potential      Estimated
                                                                    Total       Contract       Contract
April 5, 2009                              Funded     Unfunded     Backlog        Value          Value
Aerospace                                 $ 20,179    $     590    $ 20,769    $     2,071    $    22,840
Combat Systems                              11,746        2,724      14,470          2,112         16,582
Marine Systems                               9,431       16,031      25,462          1,208         26,670
Information Systems and Technology           7,795        2,629      10,424         12,556         22,980
Total                                     $ 49,151    $  21,974    $ 71,125    $    17,947    $    89,072

December 31, 2008
Aerospace                                 $ 21,861    $     618    $ 22,479    $     2,342    $    24,821
Combat Systems                              12,127        2,831      14,958          2,732         17,690
Marine Systems                              10,482       15,963      26,445          1,510         27,955
Information Systems and Technology           7,242        3,003      10,245         10,263         20,508
Total                                     $ 51,712    $  22,415    $ 74,127    $    16,847    $    90,974

Defense Businesses

The total backlog for our defense businesses represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog 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 similarly approved and funded by their governments. The unfunded backlog for the defense businesses represents firm orders that do not meet these criteria. While there is no guarantee that future budgets and appropriations will provide funding for a given program, we have included in the backlog only firm contracts we believe are likely to receive funding. Our backlog does not include work awarded under unfunded indefinite delivery, indefinite quantity (IDIQ) contract awards or unexercised options. The estimated potential contract value represents management's estimate of the potential value we will receive under these arrangements.

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, which set forth the majority of the contractual terms, including prices, are funded as delivery orders are placed. A significant portion of our IDIQ value represents contracts for which we have been designated as the sole-source supplier to design, develop, produce and integrate complex products and systems over several years for the military or other government agencies. Management believes the customers intend to fully implement these systems. The estimated potential contract value also includes our estimate of the value we will receive under multiple-award IDIQ contracts in which we are one of several companies competing for task orders under the contract. Because the value of these arrangements is subject to the customer's future exercise of an indeterminate quantity of delivery orders, we recognize these contracts in backlog only when they are funded.

Contract options in our defense businesses represent agreements to perform additional work beyond the products and services associated with firm contracts, if the customer exercises the option. These options are negotiated in conjunction with a firm contract and provide the terms under which the customer may elect to procure additional units or services at a future date. We recognize unexercised options in backlog when the customer exercises the option and establishes a firm order.

Our defense businesses received over $5 billion of new awards during the first quarter of 2009. The orders in the first quarter included several notable contract awards.

Combat Systems awards included the following:

• Approximately $220 from the U.S. Army to continue performing contractor logistics support for the Stryker program, bringing the total contract value to date to more than $1.2 billion.

• Approximately $200 for the production of Stryker Reactive Armor Tile sets and Hull Protection kits.

• Approximately $150 from the Army for the production of Hydra-70 rockets. This order brings the total contract value to date to more than $900.

• Combined orders totaling approximately $80 for RG-31 vehicle-related spares under the MRAP vehicle program.

Information Systems and Technology awards included the following:

• Approximately $250 under the Mobile User Objective System (MUOS) program for risk reduction and design development, bringing the total contract value to date to $1.2 billion. MUOS is designed to provide cell phone-like services to ground-based warfighters around the globe.

• Approximately $70 from the Army to field the enhanced Prophet tactical signals intelligence (SIGINT) system. The contract has a potential value of more than $850 if all options are exercised.

• One of 59 General Services Administration (GSA) Alliant contracts to provide federal government agencies with integrated information technology solutions. Alliant is an IDIQ program with a $50 billion potential value among all awardees over a 10-year period.

• One of 142 contracts under the second STRI Omnibus Contract (STOC II) to provide modeling, simulation and instrumentation solutions in support of Army training and testing requirements. STOC II is an IDIQ program with a potential value of $17.5 billion among all awardees over a 10-year period.

Following the end of the quarter, the Marine Systems group received an order from the Navy for the construction of its second littoral combat ship (LCS). The ship is scheduled for delivery in the second quarter of 2012. In addition, the group has reached an agreement in principle with the Navy regarding future . . .