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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

---

FORM 10-Q

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(Mark One)

| | x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| | - | ---------------------------------------------------------------------------------------

| |  | FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
| |  | --------------------------------------------

OR

| | o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| | - | ----------------------------------------------------------------------------------------

COMMISSION FILE
NUMBER: 333-13105

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FIREARMS TRAINING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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| | DELAWARE(State or other jurisdiction ofincorporation or organization) |  | 57-0777018(I.R.S. Employer Identification No.) | 
| | --------------------------------------------------------------------- |  | ---------------------------------------------- | 

7340 MCGINNIS FERRY ROADSUWANEE, GEORGIA 30024(Address of
principal executive offices)

TELEPHONE NUMBER (770) 813-0180(Registrants telephone number, including area
code)

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 o

Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of August 11, 2003, there were 70,153,159 shares of the Registrants Class A Common Stock outstanding.

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FIREARMS TRAINING SYSTEMS, INC.INDEX



|           |    |                       |  |                                                                                                      | Pagenumber
|---------- | -- | --------------------- |  | ---------------------------------------------------------------------------------------------------- | ----------
|           |    |                       |  |                                                                                                      |           
|PARTI.     |    | FINANCIAL INFORMATION | 
|           |    |                       |  |                                                                                                      |           
|           |    | ITEM1.                |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                                         |           
|           |    |                       |  |                                                                                                      |           
|           |    |                       |  | Condensed Consolidated Statements of OperationsThree months ended June 30, 2003 and 2002 (unaudited) | 3         
|           |    |                       |  |                                                                                                      |           
|           |    |                       |  | Condensed Consolidated Balance SheetsJune 30, 2003 (unaudited) and March 31, 2003                    | 4         
|           |    |                       |  |                                                                                                      |           
|           |    |                       |  | Condensed Consolidated Statements of Cash FlowsThree months ended June 30, 2003 and 2002 (unaudited) | 5         
|           |    |                       |  |                                                                                                      |           
|           |    |                       |  | Notes to Condensed Consolidated Financial Statements(unaudited)                                      | 6         
|           |    |                       |  |                                                                                                      |           
|           |    | ITEM2.                |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                | 13        
|           |    |                       |  |                                                                                                      |           
|           |    | ITEM3.                |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                           | 19        
|           |    |                       |  |                                                                                                      |           
|           |    | ITEM4.                |  | CONTROLS AND PROCEDURES                                                                              | 19        
|           |    |                       |  |                                                                                                      |           
|PARTII.    |    | OTHER INFORMATION     | 
|           |    |                       |  |                                                                                                      |           
|           |    | ITEM1.                |  | LEGAL PROCEEDINGS                                                                                    | 20        
|           |    |                       |  |                                                                                                      |           
|           |    | ITEM6.                |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                     | 20        
|           |   
|SIGNATURES | 21
|           |   





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##### Table of Contents

| | PART I. | FINANCIAL INFORMATION
| | ------- | ---------------------

| | ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | ------- | -------------------------------------------

FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited
and in thousands, except per share amounts)



|                                                      |  | ThreeMonthsEndedJune30, |       
|----------------------------------------------------- |  | ----------------------- | ------
|                                                      |  |                         |       
|                                                      |  | 2003                    |       
|                                                      |  |                         |       
|Revenue                                               |  | $                       | 15,618
|Cost of revenue                                       |  |                         | 11,347
|                                                      |  |                         |       
|Gross margin                                          |  |                         | 4,271 
|                                                      |  |                         |       
|Operating expenses                                    |  |                         |       
|Selling, general and administrative                   |  |                         | 2,897 
|Research and development                              |  |                         | 523   
|Depreciation and amortization                         |  |                         | 125   
|                                                      |  |                         |       
|Total operating expenses                              |  |                         | 3,545 
|                                                      |  |                         |       
|Operating income                                      |  |                         | 726   
|                                                      |  |                         |       
|Other income (expense), net                           |  |                         |       
|Interest expense, net                                 |  |                         |       
|Debt, net                                             |  |                         | (1,070
|Dividends on mandatorily redeemable preferred stock   |  |                         | (691  
|Foreign currency exchange                             |  |                         | 48    
|Other, net                                            |  |                         | (6    
|                                                      |  |                         |       
|Total other income (expense)                          |  |                         | (1,719
|                                                      |  |                         |       
|Income (loss) before provision for income taxes       |  |                         | (993  
|Provision for income taxes                            |  |                         | (103  
|                                                      |  |                         |       
|Net income (loss) before preferred stock adjustments  |  |                         | (890  
|Preferred stock adjustments                           |  |                         |      
|                                                      |  |                         |       
|Net income (loss) attributable to common shareholders |  | $                       | (890  
|                                                      |  |                         |       
|Earnings per share                                    |  |                         |       
|Basic income (loss) per share                         |  | $                       | (0.01 
|                                                      |  |                         |       
|Diluted income (loss) per share                       |  | $                       | (0.01 
|                                                      |  |                         |       
|Weighted average common shares outstanding - basic    |  |                         | 70,153
|Weighted average common shares outstanding - diluted  |  |                         | 70,153

The accompanying notes are an integral part of these condensed consolidated
statements.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                           |  | (unaudited)June 30, |          | March 31, |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------- | -------- | --------- | -
|                                                                                                           |  | 2003                |          | 2003      |  
|                                                                                                           |  |                     |          |           |  
|                                                                                                           |  | (in thousands)      |         
|ASSETS                                                                                                     |  |                     |          |           |  
|Current assets                                                                                             |  |                     |          |           |  
|Cash and cash equivalents                                                                                  |  | $                   | 3,940    |           | $
|Restricted cash                                                                                            |  |                     | 3,046    |           |  
|Accounts receivable, net of allowance of $350 and $362 in June and March 2003, respectively                |  |                     | 11,867   |           |  
|Income taxes receivable                                                                                    |  |                     | 364      |           |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                |  |                     | 6,114    |           |  
|Unbilled receivables                                                                                       |  |                     | 58       |           |  
|Inventories, net                                                                                           |  |                     | 9,923    |           |  
|Prepaid expenses and other current assets                                                                  |  |                     | 1,430    |           |  
|                                                                                                           |  |                     |          |           |  
|Total current assets                                                                                       |  |                     | 36,742   |           |  
|Property and equipment, net                                                                                |  |                     | 2,101    |           |  
|Other noncurrent assets                                                                                    |  |                     | 448      |           |  
|                                                                                                           |  |                     |          |           |  
|Total assets                                                                                               |  | $                   | 39,291   |           | $
|                                                                                                           |  |                     |          |           |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                      |  |                     |          |           |  
|Current liabilities                                                                                        |  |                     |          |           |  
|Long - term debt due within one year                                                                       |  | $                   | 1,550    |           | $
|Accounts payable                                                                                           |  |                     | 3,115    |           |  
|Accrued liabilities                                                                                        |  |                     | 4,645    |           |  
|Accrued interest                                                                                           |  |                     | 883      |           |  
|Income taxes payable                                                                                       |  |                     | 19       |           |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                                |  |                     | 1,334    |           |  
|Deferred revenue                                                                                           |  |                     | 849      |           |  
|Warranty and contract cost provision reserve - current                                                     |  |                     | 1,805    |           |  
|                                                                                                           |  |                     |          |           |  
|Total current liabilities                                                                                  |  |                     | 14,200   |           |  
|Long-term debt                                                                                             |  |                     | 38,854   |           |  
|Warranty and contract cost provision reserve - noncurrent                                                  |  |                     | 537      |           |  
|Other noncurrent liabilities                                                                               |  |                     | 523      |           |  
|Manditorily redeemable preferred stock                                                                     |  |                     | 28,308   |           |  
|                                                                                                           |  |                     |          |           |  
|Total liabilities                                                                                          |  |                     | 82,422   |           |  
|                                                                                                           |  |                     |          |           |  
|Commitments and contingencies                                                                              |  |                     |          |           |  
|Stockholders deficit                                                                                      |  |                     |          |           |  
|Class A common stock, $0.000006 par value; 100,000 shares authorized, 70,153 shares issued and outstanding |  |                     |         |           |  
|Additional paid-in capital                                                                                 |  |                     | 123,215  |           |  
|Stock warrants                                                                                             |  |                     | 613      |           |  
|Accumulated deficit                                                                                        |  |                     | (167,109 | )         |  
|Accumulated other comprehensive income (loss)                                                              |  |                     | 150      |           |  
|                                                                                                           |  |                     |          |           |  
|Total stockholders deficit                                                                                |  |                     | (43,131  | )         |  
|                                                                                                           |  |                     |          |           |  
|Total liabilities and stockholders deficit                                                                |  | $                   | 39,291   |           | $
|                                                                                                           |  |                     |          |           |  

The accompanying notes are an integral part of these condensed consolidated
statements.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited
and in thousands)



|                                                                            |  | ThreeMonthsEndedJune30, |       
|--------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                            |  |                         |       
|                                                                            |  | 2003                    |       
|                                                                            |  |                         |       
|Cash flows from operating activities                                        |  |                         |       
|Net income (loss) attributable to common shareholders                       |  | $                       | (890  
|Adjustments for non-cash items                                              |  |                         |       
|Preferred stock adjustments to net income                                   |  |                         |      
|Amortization of debt discount                                               |  |                         |      
|Non-cash interest and financing costs                                       |  |                         | 799   
|Depreciation and amortization                                               |  |                         | 269   
|Change in inventory reserve                                                 |  |                         | 96    
|Change in warranty and contract cost provision reserve                      |  |                         | (288  
|Gain on sale of assets                                                      |  |                         | (5    
|Deferred income taxes                                                       |  |                         |      
|Changes in assets and liabilities                                           |  |                         |       
|Accounts receivable, net                                                    |  |                         | 6,602 
|Income taxes receivable                                                     |  |                         | 459   
|Costs and estimated earnings in excess of billings on uncompleted contracts |  |                         | (1,417
|Unbilled receivables                                                        |  |                         | 45    
|Inventories                                                                 |  |                         | 40    
|Prepaid expenses and other current assets                                   |  |                         | 213   
|Accounts payable                                                            |  |                         | (2,133
|Accrued liabilities                                                         |  |                         | (159  
|Income taxes payable                                                        |  |                         | (157  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |                         | 57    
|Deferred revenue                                                            |  |                         | (1,005
|Noncurrent liabilities                                                      |  |                         | 27    
|                                                                            |  |                         |       
|Total adjustments                                                           |  |                         | 3,443 
|                                                                            |  |                         |       
|Net cash provided by operating activities                                   |  |                         | 2,553 
|                                                                            |  |                         |       
|Cash flows from investing activities                                        |  |                         |       
|Change in restricted cash                                                   |  |                         | (1,607
|Purchase of property and equipment                                          |  |                         | (293  
|Proceeds from disposal of property and equipment                            |  |                         | 5     
|                                                                            |  |                         |       
|Net cash provided (used) by investing activities                            |  |                         | (1,895
|                                                                            |  |                         |       
|Cash flows from financing activities                                        |  |                         |       
|Payments on long-term debt                                                  |  |                         | (19   
|Payment of deferred financing costs                                         |  |                         | (409  
|                                                                            |  |                         |       
|Net cash used by financing activities                                       |  |                         | (428  
|                                                                            |  |                         |       
|Effect of exchange rate changes on cash                                     |  |                         | 253   
|                                                                            |  |                         |       
|Net increase in cash and cash equivalents                                   |  |                         | 483   
|Cash and cash equivalents, beginning of period                              |  |                         | 3,457 
|                                                                            |  |                         |       
|Cash and cash equivalents, end of period                                    |  | $                       | 3,940 
|                                                                            |  |                         |       
|Supplemental cash flow disclosures                                          |  |                         |       
|Cash paid (received) for                                                    |  |                         |       
|Interest                                                                    |  | $                       | 836   
|Income taxes                                                                |  | $                       | (358  

The accompanying notes are an integral part of these condensed consolidated
statements.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)

1.Basis of presentation

The unaudited condensed consolidated financial statements of Firearms Training Systems, Inc. and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of
America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the full year ending March 31, 2004. We suggest that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto for the year ended March 31, 2003, included in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).

2.Revenue recognition

A significant amount of the Companys revenue is derived from the sale of small and supporting arms training simulators and accessories. Revenue from sales to commercial customers and small governmental agencies is
primarily recognized upon shipment when title passes; as all material commitments have been fulfilled, the sales price is fixed and determinable and collectibility is reasonably assured.

A large portion of the Companys small and supporting arms training simulator revenue is derived from contracts with various large governmental agencies. Governmental contracts that involve high volume purchases of
the Companys standard systems and related accessories are accounted for as multiple-element arrangements. These contracts require little or no modifications to the existing proprietary platform; specify pricing terms by product and billings
generally correspond to the underlying shipment schedule. Revenue under these contracts is recognized upon delivery. Advanced billings related to these contracts are recorded as deferred revenue and are recognized ratably as units are
delivered.

Other governmental contracts require significant customization of the Companys existing proprietary platform or require the development of new
systems to meet required customer specifications. These contracts are accounted for under the percentage of completion method, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Contract costs include
all direct material, direct labor and other costs directly related to the contract. Selling, general, and administrative costs are charged to expense as incurred. Changes in job performance, job conditions, and estimated profitability, including
those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined

Provisions for estimated losses on uncompleted contracts accounted for under both methods described above are made in the period in which such losses are determined.

Revenue from extended warranty sales and customer logistics support sales are recorded as deferred revenue and are recognized ratably as income over the lives of the related service
agreements, which generally range from one to three years. Costs associated with these sales are recorded in the period incurred.

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3.Stock-based compensation

On May 1, 2003, the Company issued Series I, J and K Stock Options for a total of 5,800,000 shares of Common Stock under the Option Plan with an exercise price equal to the
$0.40 per share market value of the stock on that date. The options were granted under the following terms and conditions:

Series I
OptionsOptions to purchase 300,000 shares of stock were granted to each of the three non-employee directors of the Company. One-third of the options are exercisable per year on a cumulative basis beginning on the first
anniversary of the grant date, and the options expire on the seventh anniversary of the grant date.

Series J OptionsOptions to purchase 2,100,000 and 1,400,000 shares of stock were granted to the Chief Executive Officer and Chief Operating Officer of the Company, respectively. One-fifth of the options become exercisable per year on a cumulative basis
over a five-year period beginning January 1, 2004, and the options expire on the seventh anniversary of the grant date.

Series K
OptionsOptions to purchase 1,400,000 shares of stock were granted to certain employees of the Company. One-third of the options are exercisable per year on a cumulative basis beginning on the first anniversary of the
grant date, and the options expire on the seventh anniversary of the grant date.

Changes in outstanding options during the three months ended June 30, 2003 are as
follows



|                                   |  | Options   |   | Exercise Price |      | WeightedAverageExercise Price |  
|---------------------------------- |  | --------- | - | -------------- | ---- | ----------------------------- | -
|                                   |  |           |   |                |      |                               |  
|Outstanding, March 31, 2003        |  | 1,690,143 |   | $              | 0.01 |                               | 
|Granted                            |  | 5,820,000 |   |                | 0.40 |                               | 
|Cancelled                          |  | (376,405  | ) |                | 0.01 |                               | 
|                                   |  |           |   |                |      |                               |  
|Outstanding, June 30, 2003         |  | 7,133,738 |   | $              | 0.01 |                               | 
|                                   |  |           |   |                |      |                               |  
|Shares available for future grants |  | 363,583   |   |                |      |                               | 
|                                   |  |           |   |                |      |                               |  

The Company has elected to account for its stock-based compensation plans under APB
No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:



|                          |  | Three Months EndedJune 30, |  
|------------------------- |  | -------------------------- | -
|                          |  |                            |  
|                          |  | 2003                       |  
|                          |  |                            |  
|Risk-free interest rate   |  | 2.28                       | %
|Expected dividend yield   |  | 0                          |  
|Expected lives (in years) |  | 3.5                        |  
|Expected volatility       |  | 221.58                     | %

No options were granted during the period ended June 30, 2002, and accordingly,
the assumptions are not applicable for that period.

The total value of options granted during the three months ended June 30, 2003 was computed as approximately
$2,2 million or $0.385 per share. That value and the value computed for unvested options granted in prior years is being amortized on a pro forma basis over the vesting period of the options. Pro forma information (in thousands, except per share
amounts) regarding net earnings (loss) and earnings (loss) per share as if the Company had accounted for options using the fair value method is as follows:

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|                                                              |  | Three Months Ended June 30,              |      
|------------------------------------------------------------- |  | ---------------------------------------- | -----
|                                                              |  |                                          |      
|                                                              |  | 2003                                     |      
|                                                              |  |                                          |      
|                                                              |  | (in thousands, except per share amounts) |      
|Net income (loss) attributable to common shareholders         |  |                                          |      
|As reported                                                   |  | $                                        | (890 
|Fair value based compensation cost, net of taxes              |  |                                          | (43  
|                                                              |  |                                          |      
|Pro forma net income (loss) applicable to common shareholders |  | $                                        | (933 
|                                                              |  |                                          |      
|Basic income (loss) per share                                 |  |                                          |      
|As reported                                                   |  | $                                        | (0.01
|Pro forma                                                     |  | $                                        | (0.01
|Diluted income (loss) per share                               |  |                                          |      
|As reported                                                   |  | $                                        | (0.01
|Pro forma                                                     |  | $                                        | (0.01

4.Inventory

Inventories consist primarily of simulators, computer hardware,
projectors, and component parts. Inventories are valued at the lower of cost on a moving weighted average or market basis. Cost includes materials, labor, and factory overhead. Market is defined as net realizable value.

Inventories consist of the following (in thousands)



|                                          |  | June 30,2003 |        | March 31,2003 |  
|----------------------------------------- |  | ------------ | ------ | ------------- | -
|                                          |  |              |        |               |  
|Raw materials                             |  | $            | 6,593  |               | $
|Work in process                           |  |              | 2,513  |               |  
|Finished goods                            |  |              | 2,122  |               |  
|                                          |  |              |        |               |  
|Inventories, gross                        |  |              | 11,228 |               |  
|Reserve for excess and obsolete inventory |  |              | (1,305 | )             |  
|                                          |  |              |        |               |  
|Inventories, net                          |  | $            | 9,923  |               | $
|                                          |  |              |        |               |  

5.Long-term contracts

Costs and estimated earnings on
uncompleted contracts and related amounts billed as of June 30, and March 31, 2003, respectively, are as follows (in thousands):



|                                                                            |  | June 30,2003 |         | March 31,2003 |  
|--------------------------------------------------------------------------- |  | ------------ | ------- | ------------- | -
|                                                                            |  |              |         |               |  
|Cost incurred on uncompleted contracts                                      |  | $            | 30,059  |               | $
|Estimated earnings                                                          |  |              | 12,770  |               |  
|                                                                            |  |              |         |               |  
|                                                                            |  |              | 42,829  |               |  
|Less: billings to date                                                      |  |              | (38,049 | )             |  
|                                                                            |  |              |         |               |  
|                                                                            |  | $            | 4,780   |               | $
|                                                                            |  |              |         |               |  
|Such amounts are included in the following accounts (in thousands)          |  |              |         |               |  
|Cost and estimated earnings in excess of billing on uncompleted contracts   |  | $            | 6,114   |               | $
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |              | (1,334  | )             |  
|                                                                            |  |              |         |               |  
|                                                                            |  | $            | 4,780   |               | $
|                                                                            |  |              |         |               |  

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6.Other noncurrent assets

Other noncurrent assets consist of the following intangible assets (in thousands):



|                             |  | June30,2003 |      | March31,2003 |  
|---------------------------- |  | ----------- | ---- | ------------ | -
|                             |  |             |      |              |  
|Non-compete agreement        |  | $           | 33   |              | $
|Deferred financing costs     |  |             | 659  |              |  
|                             |  |             |      |              |  
|                             |  |             | 692  |              |  
|Accumulated amortization     |  |             | (244 | )            |  
|                             |  |             |      |              |  
|Other noncurrent assets, net |  | $           | 448  |              | $
|                             |  |             |      |              |  

Deferred financing costs as of June 30, 2003, includes approximately $409,000
relating to a June 26, 2003 amendment to the Companys credit agreement which extended the maturity date from September 30, 2003 to October 15, 2004.

Amortization expense for the period ended June 30, 2003 was $59,000. Estimated amortization expense for the year ending March 31, 2004 will be approximately $320,000.

7.Long-term debt

Long-term debt consists of
the following (in thousands):



|                             |  | June30,2003 |        | March31,2003 |  
|---------------------------- |  | ----------- | ------ | ------------ | -
|                             |  |             |        |              |  
|Working capital - borrowings |  | $           | 130    |              | $
|Long-term debt - Senior      |  |             | 12,000 |              |  
|Long-term debt - Junior      |  |             | 28,118 |              |  
|Capital lease obligations    |  |             | 156    |              |  
|                             |  |             |        |              |  
|                             |  |             | 40,404 |              |  
|Due within one year          |  |             | (1,550 | )            |  
|                             |  |             |        |              |  
|Long-term debt               |  | $           | 38,854 |              | $
|                             |  |             |        |              |  

Prior to March 31, 2003, interest expense on the Companys credit agreement was
substantially offset by amortization of debt discount that was established in a previous debt restructuring. As of March 31, 2003, the debt discount was fully amortized, and interest expense is currently being reported without the offsetting
amortization.

On June 26, 2003, the Company and its lenders agreed to amend the Companys credit agreement extending the maturity date of the Senior and
Junior Secured Loans and the Revolving Loans and Letters of Credit from September 30, 2003 to October 15, 2004, and eliminating further extension options.

Under
the terms of the amendment, the Company paid an amendment fee of approximately $409,000 in July 2003 and will reduce the outstanding balance of the Senior Secured Loans by approximately $400,000 on December 31, 2003, and by an additional amount of
approximately $1,100,000 on June 30, 2004. The interest rate on the Senior Secured Loans will increase from prime plus 1% to prime plus 2.5% for the period from June 2, 2003 through December 31, 2003 and then to prime plus 3.5% for the period
from January 1, 2004 until the maturity date. The interest rate on the Junior Secured Loans will increase from 10% to 15% for the period from June 2, 2003 through the maturity date, with 10% payable in cash and 5% payable in additional notes with
the same terms. All other terms and conditions of the New Credit Agreement remain unchanged.

9



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8.Mandatorily redeemable preferred
stock

In August 2000 the Company issued 21,361.113 shares of Series B preferred stock with a liquidation value of $1,000 per share (approximately $21.4
million) in conjunction with a debt restructuring. Holders of the Series B preferred stock are entitled to receive cumulative dividends equal to 10% of the liquidation preference payable quarterly in additional shares of Series B preferred stock.
The preferred stock is subject to mandatory redemption on the latest maturity date (October 15, 2004, as of June 30, 2003) of the Senior Secured Loans (Note 7) at the liquidation value thereof. Accrual of dividends prior to March 31, 2003 was
substantially offset by amortization of a restructuring liability allocated to the preferred stock, which was fully amortized on March 31,2003.

During the three
months ended June 30, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments with Characteristics of bothLiabilitiesand Equities.Accordingly, the mandatorily redeemable preferred stock has been classified as a liability in the balance sheet as of June 30, 2003, and has been reclassified in the
March 31, 2003 balance sheet for comparative purposes. The $691,000 dividends on the preferred stock have been included in operations as additional interest expense for the three months ended June 30, 2003. Dividends on preferred stock are reported
as an adjustment to net income to arrive at net income attributable to common shareholders in periods prior to April 1, 2003.

9.Related party transactions

A group of entities affiliated with
Centre Partners Management LLC (the Centre Entities) are among the Companys largest shareholders. The Centre Entities hold a seat on the Companys Board of Directors. In addition, the Centre Entities, and other institutional lenders who
are also major shareholders as a result of a previously reported restructuring transaction, were party to the amendment to the credit agreement discussed in Note 7. These entities continue to be the Companys primary lenders. As a result of the
share ownership of the Centre Entities and their representation on the Board of Directors, the Centre Entities have the ability to influence the operations of the Company.

The Company entered into a consulting agreement, dated October 4, 2000, with Sugarman & Company, LLP, a company in which Randy Sugarman is the managing partner and has an 80% ownership interest. Under the agreement
and in accordance with the terms of the Companys restructuring in fiscal year 2001, Mr. Sugarman was engaged by the Company to evaluate its financial position and operations and make recommendations to senior management regarding changes
that need to be made to improve profitability and liquidity. Mr. Sugarmans services were performed on an hourly basis, plus out-of-pocket expenses, and the Company was billed accordingly. From May 16, 2001 until August 9, 2002,
Mr. Sugarman served as Interim Chief Executive Officer and President of the Company. Mr. Sugarman ceased to be an officer of the Company on August 9, 2002, in connection with the conclusion of the Companys engagement of Sugarman
& Company LLP. The Company incurred fees of $134,000, plus expenses of $30,000 for consulting services under the agreement during the three months ended June 30, 2002.

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10.Net income per common share

Net income (loss) per share was calculated as follows for the three months ended June 30, 2003 and 2002(in thousands except per share amounts):



|                                                                                               |  | ThreeMonthsEndedJune30, |       
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                               |  |                         |       
|                                                                                               |  | 2003                    |       
|                                                                                               |  |                         |       
|Basic:                                                                                         |  |                         |       
|Net income (loss) attributable to common shareholders                                          |  | $                       | (890  
|                                                                                               |  |                         |       
|Weighted average common shares outstanding                                                     |  |                         | 70,153
|Per share amount                                                                               |  | $                       | (0.01 
|                                                                                               |  |                         |       
|Diluted                                                                                        |  |                         |       
|Net income (loss) attributable to common shareholders                                          |  | $                       | (890  
|                                                                                               |  |                         |       
|Weighted average common shares outstanding - basic                                             |  |                         | 70,153
|Shares assumed issued upon exercise of dilutive stock options using the treasury stock method  |  |                         |      
|Shares assumed issued upon exercise of dilutive stock warrants using the treasury stock method |  |                         |      
|                                                                                               |  |                         |       
|Weighted average common shares outstanding - diluted                                           |  |                         | 70,153
|                                                                                               |  |                         |       
|Per share amount                                                                               |  | $                       | (0.01 
|                                                                                               |  |                         |       

The number of stock options assumed to have been bought back by the Company for
computational purposes has been calculated by dividing gross proceeds from all weighted average stock options outstanding during the period, as if exercised, by the average common share market price during the period. The average common share market
price used in the above calculation was $0.73, for the periods ended June 30, 2002.

Options to purchase 943,477 shares of common stock and warrants to purchase
3,246,164 shares of common stock were outstanding as of June 30, 2002 but were not included in the computation of the 2002 diluted EPS because the exercise price of the options and warrants was greater than the average market value of the common
shares.

Options to purchase 7,133,738 shares of common stock and warrants to purchase 5,246,164 shares of common stock were outstanding as of June 30, 2003 but
were not included in the computation of the 2003 diluted EPS because their effect would have been anti-dilutive, thereby decreasing net loss per share.

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11.Contingencies and commitments

Product Warranty Reserve

The Companys product warranty accrual reflects
managements best estimate of probable liability under its product warranties. Management determines the warranty based on known product failures (if any), historical experience, and other currently available evidence.

Changes in the product warranty accrual for the three months ended June 30, 2003 and 2002 were as follows (in thousands):



|                                                            |  | ThreeMonthsEndedJune30, |    
|----------------------------------------------------------- |  | ----------------------- | ---
|                                                            |  |                         |    
|                                                            |  | 2003                    |    
|                                                            |  |                         |    
|Balance - beginning of year                                 |  | $                       | 704
|Change in liability for warranties issued during the period |  |                         | 38 
|Change in liabilities for preexisting warranties            |  |                         | (70
|                                                            |  |                         |    
|Balance - end of period                                     |  | $                       | 672
|                                                            |  |                         |    

12.Comprehensive income (loss)

The components of comprehensive income (loss) consists of the following (in thousands):



|                                         |  | ThreeMonthsEndedJune30, |     
|---------------------------------------- |  | ----------------------- | ----
|                                         |  |                         |     
|                                         |  | 2003                    |     
|                                         |  |                         |     
|Net income(loss)                         |  | $                       | (890
|Foreign currrency translation adjustment |  |                         | 253 
|                                         |  |                         |     
|Comprehensive income(loss)               |  | $                       | (637
|                                         |  |                         |     

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| | ITEM 2. | M
ANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | ------- | --------------------------------------------------------------------------------------

This Managements
Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys most recently
filed Form 10-K for the fiscal year ended March 31, 2003.

In this Quarterly Report, we state our expectations as to future events and our future financial
performance. In some cases, you can identify those so-called forward-looking statements by words such as may, will, should, expects, plans, anticipates,
believes, estimates, predicts, potential, or continue or the negative of those words and other comparable words. You should be aware that those statements are only our predictions, which
are being made as of the date hereof. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that may cause our actual results to differ materially from any of our forward-looking statements presented in this Quarterly Report include, but are not limited to:

| |  | changes in laws and regulations, both domestically and in the international markets in which we compete;
| | - | --------------------------------------------------------------------------------------------------------

| |  | changes in the competitive environment, including the introduction of competitors attracted by the prospect of increased government spending on security;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes in technology;
| | - | ----------------------

| |  | disruptions in scheduled development of new products, such as our FATS V platform;
| | - | ----------------------------------------------------------------------------------

| |  | lack of market acceptance of existing products;
| | - | -----------------------------------------------

| |  | currency fluctuations;
| | - | ----------------------

| |  | the ability to realize cost reductions and operating efficiencies in a manner that does not unduly disrupt business operations;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | industry consolidation and mergers;
| | - | -----------------------------------

| |  | market conditions that may adversely affect the availability of debt and equity financing for working capital, capital expenditures or other purposes; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | general economic conditions.
| | - | ----------------------------

Critical Accounting Policies and Estimates

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial statements requires us to make judgments regarding estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures. We base our judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We
believe our judgments and related estimates regarding the following accounting policies are critical in the preparation of our consolidated financial statements.

Revenue Recognition

Customer contracts that require significant customization of the Companys existing proprietary platform or require the
development of new systems to meet required customer specifications are accounted for under the percentage of completion method, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Accounting for such
contracts is essentially a process of measuring the results of relatively long-term events and allocating those results to relatively short-term accounting periods. This involves considerable use of estimates in determining costs and profits and
thereby estimating the timing of revenue recognition and in assigning the amounts to accounting periods. The process is complicated by the need to evaluate continually the uncertainties inherent in the performance of contracts and by the need to
rely on estimates of revenues, costs, and the extent of

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progress toward completion. The Company continually monitors each of these estimates based on the most current information available from the project
managers and project engineers assigned to the programs. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are determined. These revisions could materially increase or decrease profit margins on particular contracts in future periods.

Inventory Reserve

Inventories are valued at the lower of cost on a moving weighted average or
market, cost being determined on the first-in, first-out basis and market is defined as net realizable value. Management periodically reviews Company inventory for items that may be deemed obsolete, damaged or for amounts on hand in excess of
anticipated future demand. The underlying assumptions utilized in assessing the Companys inventory change from time-to-time due to change in the underlying sales mix, the release of new versions of the Companys proprietary system and
overall changes in technology and the marketplace. As the Company develops new product lines future charges against income may be necessary to reduce inventory to its net realizable value.

Contract Cost Provision Reserve

Management routinely assesses the Companys performance and estimated cost to
complete ongoing sales contracts. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income. In the
event management anticipates incurring costs in excess of contract revenues, the Company records a contract cost provision reserve in an amount equal to the estimated costs in excess of contracted revenues in the period in which such information
becomes apparent.

Warranty Cost Provision Reserve

Management periodically estimates expected warranty costs under the Companys standard product warranty. In determining the estimate, management analyzes the relationship of historical standard warranty costs incurred on historical sales
and the underlying product mix comprising the historical sales. Management, in turn, utilizes this historical information to estimate expected warranty costs on recent sales within the standard warranty time frame. Due to the inherent limitations in
the estimation process, the potential for product defects and other unforeseen circumstances by the Company, the possibility exists that the recorded warranty provision reserve will be inadequate to offset actual warranty costs incurred resulting in
additional charges against income. Also, actual warranty costs may be significantly lower than expected resulting in the reduction of the Companys warranty provision reserve generating an addition to income in future periods.

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RESULTS OF OPERATIONS

The following table sets forth the
operations of the Company as a percentage of gross revenues for the periods indicated:

FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME



|                                                      |  | ThreeMonthsEndedJune30, |   
|----------------------------------------------------- |  | ----------------------- | --
|                                                      |  |                         |   
|                                                      |  | 2003                    |   
|                                                      |  |                         |   
|Revenue                                               |  | 100.00                  | % 
|Cost of revenue                                       |  | 72.65                   |   
|                                                      |  |                         |   
|Gross margin                                          |  | 27.35                   |   
|                                                      |  |                         |   
|Operating expenses                                    |  |                         |   
|Selling, general and administrative                   |  | 18.55                   |   
|Research and development                              |  | 3.35                    |   
|Depreciation and amortization                         |  | 0.80                    |   
|                                                      |  |                         |   
|Total operating expenses                              |  | 22.70                   |   
|                                                      |  |                         |   
|Operating income                                      |  | 4.65                    |   
|                                                      |  |                         |   
|Other income (expense), net                           |  |                         |   
|Interest expense, net                                 |  | (11.28                  | ) 
|Foreign currency exchange                             |  | 0.31                    |   
|Other, net                                            |  | (0.04                   | ) 
|                                                      |  |                         |   
|Total other income (expense)                          |  | (11.01                  | ) 
|                                                      |  |                         |   
|Income (loss) before provision for income taxes       |  | (6.36                   | ) 
|Provision for income taxes                            |  | (0.66                   | ) 
|                                                      |  |                         |   
|Net income (loss) before preferred stock adjustments  |  | (5.70                   | ) 
|Accretion of preferred stock                          |  |                        |   
|                                                      |  |                         |   
|Net income (loss) attributable to common shareholders |  | (5.70                   | )%
|                                                      |  |                         |   

Three Months Ended June 30, 2003 and 2002:

Net Revenues: Revenues increased $2.4 million, or 18.4%, to $15.6 million for the three months ended June 30, 2003 as compared to $13.2 million for the three months ended June 30, 2002. Sales to
international customers for the three months ended June 30, 2003 increased $3.2 million, or 70.9%, to $7.7 million largely due to increased sales in Europe and the Middle East. Sales to U.S. military customers for the three months ended June 30,
2003 decreased by $0.9 million, or (11.9)%, to $6.6 million. The decrease in U.S. military sales is due primarily to the completion during the three months ended June 30, 2003, with minimal impact on sales for that period, of a major Foreign
Military Sales contract for delivery of product to Russia under a U.S. contract that significantly increased sales for the three months ended June 30, 2002. Sales to U.S. law enforcement customers for the three months ended June 30, 2003 increased
$0.2 million, or 18.6%, to $1.4 million reflecting a renewed concentration of effort in this business segment.

Cost of Revenues: Cost of revenues increased $2.0
million, or 21.3%, to $11.3 million for the three months ended June 30, 2003 as compared to $9.3 million for the three months ended June 30, 2002. As a percentage of

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revenues, cost of revenues for the three months ended June 30, 2003 increased to 72.6% as compared to 70.9% for the three months ended June 30, 2002. The
increase in cost of revenues as a percentage of revenues is attributable primarily to the completion of certain international contracts during the quarter with lower profit margins plus recognizing a reserve for potential contract liquidated damages
on late deliveries.

Gross Profit: As a result of the foregoing, gross profit increased $0.4 million, or 11.4%, to $4.3 million, or 27.4% of revenues, for the
three months ended June 30, 2003 as compared to $3.8 million, or 29.1% of revenues, for the three months ended June 30, 2002.

Total Operating Expenses: Total
operating expenses remained constant at $3.5 million for the three months ended June 30, 2003 and 2002. As a percentage of revenues, total operating expenses decreased to 22.7% for the three months ended June 30, 2003 as compared to 26.8% for the
three months ended June 30, 2002. Selling, general and administrative (SG&A) expenses, which include bid & proposal activities, increased from $2.4 million to $2.9 million. This increase in SG&A is due primarily to costs
associated with the capture of new business. Total research and development (R&D) costs remained constant, however, the Company funded portion of R&D expense decreased $0.3 million, or (37.4%), reflecting a shift in the Companys focus
to customer paid R&D programs. Depreciation and amortization expense decreased $0.1 million, or (52.8%), reflecting reduced spending on capital assets.

Operating Income: As a result of the foregoing, operating income increased $433,000 or 147.8% to $726,000 for the three months ended June 30, 2003 as compared to $293,000 for the three months ended June 30, 2002. As a percentage of revenues,
operating income was 4.6% of revenues, for the three months ended June 30, 2003 as compared to 2.2% of revenues for the three months ended June 30, 2002.

Other
Income (Expense), net: Net interest expense totaled $1.8 million, or (11.3%) of revenues for the three months ended June 30, 2002 as compared to $16,000, or (0.1%) of revenues for the three months ended June 30, 2002. The increase in interest
expense is attributable to the following factors:

| | 1. | Interest expense for the three months ended June 30, 2002 was reduced by $878,000 in amortization of debt discount related to a prior debt restructuring that became fully amortized as of March 31,
2003.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Interest expense for the three months ended June 30, 2003 includes amortization of $409,000 in additional fees related to the Fifth Amendment to the Companys credit agreement, which extended the maturity date of
the credit agreement from September 30, 2003 to October 15, 2004.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Under the Fifth Amendment to the Companys credit agreement, the interest rate on the Companys Senior Secured Loans increased from prime plus 1% to prime plus 2.5% for the period from June 2, 2003, and
the interest rate on the Companys Junior Secured Loans increased from 10% to 15% for the period from June 2, 2003.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Interest expense for the three months ended June 30, 2003 includes $691,000 in accrual of mandatorily redeemable preferred stock dividends due to the Companys adoption of the provisions of Statement of Financial
Accounting Standards No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities(FAS 150) during the period. The accrual of preferred stock dividends was
previously reported as an adjustment to Net Income to arrive at Net Income Attributable to Common Shareholders and the provisions of FAS 150 preclude the restatement of prior year financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Accrual of mandatorily redeemable preferred stock dividends, which was previously reported as an adjustment to Net Income to arrive at Net Income Attributable to Common Shareholders, for the three months ended June 30,
2002 was reduced by approximately $500,000 amortization of a debt restructuring liability that became fully amortized as of March 31, 2003.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income
(Loss) Before Provision for Income Taxes: As a result of the foregoing, income (loss) before provision for income taxes decreased by $1.3 million from income of $350,000 to a loss of ($1.0) million

Provision for Income Taxes: The effective tax rate declined from approximately 34.0% of income before taxes for the three months ended June 30, 2002 to approximately 10.4% of loss before taxes for the
three months ended June 30, 2003 due to including nondeductible dividends on preferred stock in interest expense for the 2003 period. The Company has not recorded a tax benefit for the majority of its deferred tax assets due to uncertainty of future
realization through taxable income.

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Net Income (Loss) Before Preferred Stock Adjustments: As a result of the foregoing, net income (loss) declined from net income of $231,000,
or 1.8% of revenue for the three months ended June 30, 2002 to a net loss of ($890,000) or (5.7%) of revenue for the three months ended June 30, 2003.

Preferred
Stock Adjustments: Accretion of mandatorily redeemable preferred stock dividends was $72,000 for the three months ended June 30, 2002, which was reduced by approximately $500,000 of debt restructuring liability amortization. As noted above, the
total accrual of mandatorily redeemable preferred stock dividends is included in interest expense for the three months ended June 30, 2003, since the debt restructuring liability was fully amortized as of March 31, 2003.

Net Income (Loss) Attributable to Common Shareholders: As a result of the foregoing, net income (loss) attributable to common shareholders decreased by $1.0 million from income of
$159,000 or $0.00 per share for the three months ended June 30, 2002 to a loss of ($890,000) or ($0.01) per share for the three months ended June 30, 2003.

ANALYSIS OF
BACKLOG

Backlog represents customer orders that have been contracted for future delivery. Accordingly, these orders have not yet been recognized as revenue,
but represent potential revenue. As of June 30, 2003 and 2002, the Company had a backlog of approximately $60.4 and $67.0 million, respectively. As of June 30, 2003 the backlog is comprised of $44.5 million from international customers and $15.9
million from FATS U.S. military and law enforcement customers. Approximately $35.3 million of the contracted orders are scheduled for delivery during fiscal year 2004.

LIQUIDITY AND CAPITAL RESOURCES

In August 2000, the Company entered into a Second Amended and Restated Credit Agreement (the New Credit Agreement) and
Partial Exchange Agreement with its lenders. In accordance with the New Credit Agreement, the unpaid principal and accrued interest under the old facility was converted into shares of Common Stock, shares of Series B mandatory redeemable preferred
stock, Senior Secured Loans, and Junior Secured Loans. The New Credit Agreement also provides for a New Revolving Credit Commitment comprised of available Revolving Loans and Letters of Credit. Aggregate borrowings under the New Revolving Credit
Commitment are limited to $882,000, with borrowings under the Letters of Credit subject to a sub limit of $828,000. During March, 2002, the Company and its lenders further amended the New Credit Agreement to, among other amendments, provide a
$2,200,000 Support Letter of Credit Facility and extend the maturity date of the Senior Secured Loans, Junior Secured Loans and New Revolving Loans from March 31, 2003 to September 30, 2003.

On June 26, 2003, the Company and its lenders amended the New Credit Agreement extending the maturity date of the Senior and Junior Secured Loans and the Revolving Loans and Letters of Credit from September 30, 2003 to
October 15, 2004, and eliminating further extension options. The extension also extends to October 15, 2004, the date on which the Companys mandatorily redeemable preferred stock becomes redeemable by the holders.

Under the terms of the amendment, the Company paid an amendment fee of approximately $409,000 and will reduce the outstanding balance of the Senior Secured Loans by approximately
$400,000 on December 31, 2003, and by an additional amount of approximately $1,100,000 on June 30, 2004. The interest rate on the Senior Secured Loans increased from prime plus 1% to prime plus 2.5% for the period from June 2, 2003 through
December 31, 2003 and will increase to prime plus 3.5% for the period from January 1, 2004 until the maturity date. The interest rate on the Junior Secured Loans increased from 10% to 15% for the period from June 2, 2003 through the maturity date,
with 10% payable in cash and 5% payable in additional notes with the same terms. All other terms and conditions of the New Credit Agreement remain unchanged.

The
Company is currently in discussions with several parties to negotiate an ultimate refinancing of its Credit Agreement or a transaction that would allow repayment of the debt. However, there can be no assurance that such a refinancing or transaction
may be completed on terms that would be favorable to the Company, if at all. The

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inability of the Company to satisfactorily address the concerns related to its capital structure prior to October 15, 2004 could have a severe adverse
effect on the Companys financial condition and future operations.

As of June 30, 2003, the Company had working capital of $22.5 million compared to $21.3
million as of June 30, 2002. The net $1.2 million increase in working capital is primarily the result of significantly improved results of operations for fiscal year 2003, offset by a $1.5 million increase in long-term debt due within one year. The
Companys capital expenditures for the three months ended June 30, 2003 were $0.3 million. Such expenditures include leasehold improvements, computer equipment and software, marketing product demonstration equipment, and manufacturing
machinery. As of June 30, 2003, the Company was in compliance with all covenants within its debt agreements.

The Company had a net increase in cash and cash
equivalents of $0.5 million for the three months ended June 30, 2003 compared to a net increase of $5.6 million for the three months ended June 30, 2002. For the period ended June 30, 2003, the Companys operating activities generated cash of
approximately $2.6 million compared to $4.9 million for the three months ended June 30, 2002. Cash flow from operations decreased primarily due to the net loss for the period that was offset by collection of accounts receivable and further reduced
by reductions of accounts payable and deferred revenue and an increase in costs and estimated earnings in excess of billings on uncompleted contracts. The receipt of a $4.9 million tax refund significantly increased cash flow from operations for the
three months ended June 30, 2002.

The Companys principal liquidity and capital needs are to fund working capital, provide debt service, and make capital
expenditures necessary to support and grow its business. Since August of 2000, the Company has financed its operations and growth primarily through internally generated funds and income tax refunds. With the extension of the Companys Senior
and Junior Secured Loans and Revolving Loans and Letters of Credit through October 15, 2004, as discussed above, management believes that funds provided by operations and possible equipment instalment financing will be sufficient to fund its cash
needs and anticipated capital expenditures through at least the next twelve months.

The Company is subject to several business and market risks. The Company must
continue to achieve its revenue targets and cost reduction objectives in the current fiscal year in order to generate adequate cash flow to fund working capital needs and to service debt requirements; the Company must receive new contracts for
production to be delivered in the current fiscal year to meet its revenue targets and to replenish existing backlog to sustain the revenue targets in future periods; the Company must negotiate favorable repayment terms under the Credit Agreement
which is currently scheduled to mature in October 2004.

CONCENTRATION OF CREDIT RISK

As of June 30, 2003, approximately $8.7 million in accounts receivable or 73.5% of total accounts receivable, net was due from the Companys top ten customers, $0.5 million of which was secured by performance letters of credit for
foreign receivables. The remaining $8.2 million is due from U.S., U.K. and Australian government contracts and subcontracts.

COMMITMENTS AND OTHER CONTRACTURAL
OBLIGATIONS

Disclosure of Commitments and Other Contractual ObligationsJune 30, 2003(amounts in thousands)



|                                       |  | Total |        | Lessthan1year |   | Within1-3years |  | Within4-5years |        | After5years |  
|-------------------------------------- |  | ----- | ------ | ------------- | - | -------------- |  | -------------- | ------ | ----------- | -
|                                       |  |       |        |               |   |                |  |                |        |             |  
|Long-term debt                         |  |       |        |               |   |                |  |                |        |             |  
|Working capital - borrowings           |  | $     | 130    |               | $ |               |  | $              | 130    |             | $
|Long-term debt - Senior                |  |       | 12,000 |               |   | 1,500          |  |                | 10,500 |             |  
|Long-term debt - Junior                |  |       | 28,118 |               |   |               |  |                | 28,118 |             |  
|Capital lease obligations              |  |       | 156    |               |   | 50             |  |                | 106    |             |  
|Mandatorily Redeemable Preferred Stock |  |       | 28,308 |               |   |               |  |                | 28,308 |             |  
|Other                                  |  |       |        |               |   |                |  |                |        |             |  
|Operating lease obligations            |  |       | 3,793  |               |   | 948            |  |                | 1,614  |             |  
|                                       |  |       |        |               |   |                |  |                |        |             |  
|Total                                  |  | $     | 72,505 |               | $ | 2,498          |  | $              | 68,776 |             | $
|                                       |  |       |        |               |   |                |  |                |        |             |  

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RELATED PARTIES AND TRANSACTIONS

A group of entities
affiliated with Centre Partners Management LLC (the Centre Entities) are among the Companys largest shareholders. The Centre Entities hold a seat on the Companys Board of Directors. In addition, the Centre Entities, and other
institutional lenders who are also major shareholders as a result of a previously reported restructuring transaction, were party to the amendment to the credit agreement discussed in Note 7 to the financial statements. These entities continue to be
the Companys primary lenders. As a result of the share ownership of the Centre Entities and their representation on the Board of Directors, the Centre Entities have the ability to influence the operations of the Company.

The Company entered into a consulting agreement, dated October 4, 2000, with Sugarman & Company, LLP, a company in which Randy Sugarman is the managing partner and has an 80%
ownership interest. Under the agreement and in accordance with the terms of the Companys restructuring in fiscal year 2001, Mr. Sugarman was engaged by the Company to evaluate its financial position and operations and make recommendations
to senior management regarding changes that need to be made to improve profitability and liquidity. Mr. Sugarmans services were performed on an hourly basis, plus out-of-pocket expenses, and the Company was billed accordingly. From May
16, 2001 until August 9, 2002, Mr. Sugarman served as Interim Chief Executive Officer and President of the Company. Mr. Sugarman ceased to be an officer of the Company on August 9, 2002, in connection with the conclusion of the
Companys engagement of Sugarman & Company LLP. The Company incurred fees of $134,000, plus expenses of $30,000 for consulting services under the agreement during the three months ended June 30, 2002.

| | ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| | ------- | ----------------------------------------------------------

The Companys major market risk exposure arises from
changes in interest rates and its impact on variable rate debt instruments. In addition, the Company has interest rate risk associated with fixed rate debt at maturity. The Companys objectives in interest rate risk management are to limit the
impact of interest rate changes on earnings and cash flows, and to lower overall borrowing costs. To achieve its objectives, the Company borrows at fixed rates when it believes it is in its best interests to do so, and may enter into derivative
financial instruments, such as interest rate swaps and caps, in order to limit its exposure to interest rate fluctuations. The Company does not enter into derivative or interest rate transactions for speculative purposes. There were no derivative
contracts in effect at June 30, 2003.

As of June 30, 2003, the Company had a total of approximately $28.1 million in fixed rate debt at an interest rate of 15%,
which will mature on October 15, 2004. The company also has a total of approximately $12.1 million in variable rate debt at an interest rate of prime plus primarily 2.5%, (6.5% as of June 30, 2003) through December 31, 2003, and then increasing to
prime plus 3.5% for the period from January 1, 2004 through the maturity date. If interest rates on the Companys existing variable rate debt were to increase by 10% over the next twelve months, management believes there would be no material
adverse impact on the Companys results of operations.

| | ITEM 4. | CONTROLS AND PROCEDURES
| | ------- | -----------------------

As of the end of the period covered by this report, the Companys management, including its
Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Companys SEC filings. There
has been no change in the Companys internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.

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PART II  OTHER INFORMATION

| | ITEM 1. | LEGAL PROCEEDINGS
| | ------- | -----------------

The Company is involved in legal proceedings in the ordinary course of its business, which in the
opinion of management will not have a materially adverse effect on the Companys financial position, liquidity, or results of operation.

| | ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
| | ------- | --------------------------------

(a)Exhibits:



|Exhibit 10.1 -  | Fifth Amendment to the Second Amended and Restated Credit Agreement and Partial Exchange Agreement                                             
|--------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|                |                                                                                                                                                
|Exhibit 10.2* - | Form of Series I stock option agreement dated as of May 1, 2003 between the Company and its outside directors                                  
|                |                                                                                                                                                
|Exhibit 10.3* - | Form of Series J stock option agreement dated as of May 1, 2003 between the Company and its Chief Executive Officer and Chief Operating Officer
|                |                                                                                                                                                
|Exhibit 10.4*-  | Form of Series K stock option agreement dated as of May 1, 2003 between the Company and certain of its employees                               
|                |                                                                                                                                                
|Exhibit 31.1 -  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             
|                |                                                                                                                                                
|Exhibit 31.2 -  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             
|                |                                                                                                                                                
|Exhibit 32.1 -  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                             
|                |                                                                                                                                                
|Exhibit 32.2 -  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                             

______________

| | * | Indicates management contract or compensatory plan arrangement
| | - | --------------------------------------------------------------

| | (b) | The following report on Form 8-K was filed during the quarter ended June 30, 2003:
| | --- | ----------------------------------------------------------------------------------

June 27, 2003  Press release
announcing financial results for the quarter and year ended March 31, 2003

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

DATED: August 11, 2003



| |  |  | FIREARMSTRAININGSYSTEMS,INC.                                                                     
| |  |  | -------------------------------------------------------------------------------------------------
| |  |  | /S/ JOHNA.MORELLI                                                                                
| |  |  |                                                                                                  
| |  |  | JohnA.MorelliChiefFinancialOfficerandTreasurer(PrincipalFinancialOfficerandDulyAuthorizedOfficer)

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