Pentagon audits revealed McDonnell Douglas Corp. and General Dynamics Corp. have a "possible chance of bankruptcy," a newspaper reported Tuesday.

The financial health of the nation's two largest defense contractors has been debated privately all year, but the September audits by the Defense Contract Audit Agency are the first official word on the subject, according to the Los Angeles Times.The Pentagon's accountants found that the financial condition of the two firms had deteriorated this year, but their ability to complete projects under contract was not impaired.

A General Dynamics spokesman told the Times he had not seen the audit, but said, "It is unfortunate that matters related to that were leaked at this particular time."

McDonnell Douglas' chief financial officer, Herbert Lanese, said any prediction of bankruptcy was "ludicrous." The company also discredited the criteria on which the Pentagon made its conclusions.

The formula in question is the "z-score," a weighted average of ratios that considers sales, operating profits, retained earnings and working capital as a percentage of total assets, and market value of stock as a percentage of total debt.

Auditors gave McDonnell Douglas a z-score of 2.27, or a "possible chance of bankruptcy." A score of 1.8 or lower means a "probable chance of bankruptcy."

General Dynamics got a score of 2.42, also indicating a "possible chance of bankruptcy," according to the audit.

"If I had to rely on the government for my financial analysis, I would be in a lot of trouble," said aerospace analyst Howard Rubel of C.J. Lawrence, Morgan Grenfell.