(FORTUNE Magazine) – As disarmament spread and the Berlin Wall fell, General Dynamics never got woozy from the ether of peace. ''We decided to stick to what we know and do best,'' then-CEO Stanley C. Pace told shareholders last winter. Almost 90% of the company's $10 billion in annual sales comes from weapons such as the F-16 and F-111 combat jets, M-1 tank, Phalanx antimissile system, Trident and SSN 688 submarines, and a quiver of missiles such as the Sparrow, Stinger, Standard, and Tomahawk. Yet the success of some of these arms in the Persian Gulf probably won't mean a windfall for General Dynamics. The Navy may order a few more cruise missiles than it has contracted for. But the current version of the M-1 Abrams tank, the M1A1, is being phased out this year. Even worse for the company, Defense Secretary Richard Cheney just shot down the A-12, an attack jet it was developing with McDonnell Douglas. Cheney's decision came amid charges of cost overruns and doubts about the plane's performance -- the same kinds of criticism that nearly killed the Tomahawk and the M-1. Says William A. Anders, a lively, down-to-earth former astronaut who this year succeeded Pace: ''We're the same outfit that is currently being batted around by the leadership on what klutzes we appear to be on the A-12. Yet we're the heroes who make F-16s and Tomahawk cruise missiles. It seems a little strange.'' Sticking with defense hasn't been especially profitable for General Dynamics. In the first three quarters of 1990 it lost $48 million on sales of $7.6 billion. Even in good years its pretax profit margin is only about 6%. There is better money to be made in the manufacture of cream cheese. But for the near term, General Dynamics has plenty of work: Its backlog of orders already funded by Congress totals $17 billion. Both the M-1 and Tomahawk have a place in the tortured history of defense procurement. Each faced extinction as critics complained about its cost and questioned its reliability while Presidents, Cabinet officers, and government agencies argued over strategic needs and spending priorities. Now the weapons face their first combat test. If the detractors are right, when the Abrams tank rushes into battle at 30 mph, its 1,500-horsepower turbine engine will run out of gas or choke on desert dust and fail before its thermal-sighted, laser-guided, independently stabilized 120-mm cannon gets angry. General Dynamics insists that's hot air. At Land Systems Division headquarters in suburban Detroit, there is an unmistakable ''just you wait'' attitude. Dust caused difficulties with some early prototypes whose air filters weren't properly fitted, the company admits, but current production models have been test-run 200,000 miles in the desert without major problems. The Egyptians, no strangers to sand, are buying 555 M1A1s. Says retired Brigadier General Philip L. Bolte, a former project manager for the M-1 as well as the Bradley Fighting Vehicle: ''There's no doubt in my mind they are working very well. The M-1 is clearly superior to the best tanks the Iraqis have.'' The Abrams is the creation of Philip W. Lett, who began designing tanks for Chrysler in 1950. The automaker won the contract in 1976, having outdueled General Motors for the right to make the tanks at a cost of no more than $508,000 apiece in 1972 dollars. (An M1A1 now costs $2.5 million, the equivalent of $885,000 in 1972 dollars.) General Dynamics bought the tank business for $336 million in 1982. Lett's choice of the turbine was controversial because every previous tank had a diesel engine. He picked the turbine because it had 30% fewer parts than a diesel and weighed a ton less, poundage that was added back in armor. The turbine enables an M-1 to accelerate from a standing start to 20 mph in a Porsche-like (for a tank) seven seconds. The engine sacrifices fuel efficiency, gulping 1.7 gallons per mile on level surfaces and even more when it travels over rugged terrain. But Lett notes that at its most efficient speed of 29 mph -- war speed -- the M-1 can go 289 miles, well beyond a day's fighting range. The Abrams also guzzles fuel when it idles -- rarely a matter of concern during battle, according to Lett. Says he: ''If you want to buy a tank to idle, buy a diesel.'' If the M-1 performs as advertised, crews should survive hits from any tank the Iraqis own. A two-foot-thick piece of armor invented by the British and modified by the Americans absorbs the energy of antitank shells designed to pierce armor with molten metal. To stop kinetic-energy ammunition, metal bolts that hit at many times the speed of sound, the tank is sheathed with a greenish alloy of depleted uranium. A nonradioactive byproduct of nuclear fuel making, the stuff is twice as dense as steel. Even if the tank is penetrated, special blow-off panels in the ammunition and fuel storage areas vent explosions away from the crew. M-1s incorporate automatic fire extinguishers, and some have an NBC system -- nuclear, biological, and chemical. It works by raising the cabin air pressure so poisons can't seep in. Air for the crew passes through the turbine, which burns up toxic agents, and is then filtered and cooled. On the General Dynamics assembly line at the Army's Detroit Arsenal in Warren, Michigan, anxiety is running high. Fear that the tanks might fail? Hardly. ''Best tank in the world,'' says Richard M. Lofton, vice president of Local 1200 of the United Auto Workers. But funding for the Abrams will run out in 1993. As the Army starts winding down production in June, more than 300 assemblers will lose jobs. According to Lofton, tank assemblers average 18 years' seniority and are among the most skilled factory hands in the country, fully versed in statistical process control and zero-defect production. Says recording secretary Maurice Turner: ''The stress is tremendous. You can see it in the membership's eyes.'' General Dynamics, the union, and local politicians are trying to convince the government that closing down the U.S. tank industry is bad military and industrial policy. In the meantime, the company is hawking M-1s on the international market. It has also teamed up with Caterpillar, FMC, and others to bid on contracts for a new generation of armored vehicles. The future of the Tomahawk is not in doubt, but that hasn't always been the case. The cruise missile became a political and military football until President Jimmy Carter decided in 1976 to include it in the arsenal. At its simplest, a cruise is a motorized bomb that flies like a plane, a distant descendant of the buzz bombs that terrorized Britain in World War II. The Tomahawk carries either a nuclear or a high-explosive warhead and can be launched from submarines and ships. It navigates by radar, comparing the terrain below with a detailed map of its route programmed into its electronic brain. It can deliver a 1,000-pound warhead to a target the size of a mailbox with almost as much accuracy as the postal service (Tomahawks are hitting more than 90% of the time, says a Navy official). General Dynamics was the missile's primary designer, but in 1984 Uncle Sam required the company to swap technology with McDonnell Douglas, producer of the navigation system. Now both have Tomahawk plants and bid against each other for the bulk of every year's order.

Despite the success of his weapons in the Mideast, CEO Anders isn't getting his hopes up: ''I don't think the Iraqi situation will have a major positive effect on our business, because the things we build take a long time to make.'' He frets that the war's cost could sap development budgets for the next generation of weapons. Says he: ''Our stuff is working in Saddam's backyard, but maybe to the detriment of our shares.''