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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-Q



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2003



OR



| ̈ | 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)



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



7340 MCGINNIS FERRY
ROAD

SUWANEE, GEORGIA 30024

(Address of principal executive offices)



TELEPHONE NUMBER (770) 813-0180

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



As of October 31, 2003, there were 70,153,159 shares of the Registrants
Class A Common Stock outstanding.



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##### Table of Contents

FIREARMS TRAINING SYSTEMS, INC.



INDEX



|         |  |                                                                                                                   |  | Page number
|-------- |  | ----------------------------------------------------------------------------------------------------------------- |  | -----------
|PART I.  |  | FINANCIAL INFORMATION                                                                                             |  |            
|         |  |                                                                                                                  
|ITEM 1.  |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                                                      |  |            
|         |  |                                                                                                                  
|         |  | Condensed Consolidated Statements of OperationsThree and Six months ended September 30, 2003 and 2002 (unaudited) |  | 3          
|         |  |                                                                                                                  
|         |  | Condensed Consolidated Balance SheetsSeptember 30, 2003 (unaudited) and March 31, 2003                            |  | 4          
|         |  |                                                                                                                  
|         |  | Condensed Consolidated Statements of Cash FlowsSix months ended September 30, 2003 and 2002 (unaudited)           |  | 5          
|         |  |                                                                                                                  
|         |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                  |  | 6          
|         |  |                                                                                                                  
|ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                             |  | 12         
|         |  |                                                                                                                  
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        |  | 20         
|         |  |                                                                                                                  
|ITEM 4.  |  | CONTROLS AND PROCEDURES                                                                                           |  | 20         
|         |  |                                                                                                                  
|PART II. |  | OTHER INFORMATION                                                                                                 |  |            
|         |  |                                                                                                                  
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                                                 |  | 21         
|         |  |                                                                                                                  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               |  | 21         
|         |  |                                                                                                                  
|ITEM 6.  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                  |  | 21         
|         |  |                                                                                                                  
|         |  | SIGNATURES                                                                                                        |  | 22         



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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)



|                                                      |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|----------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | -
|                                                      |  | 2003                            |        |   | 2002                          |  
|Revenue                                               |  | $                               | 12,931 |   |                               | $
|                                                      |  |                                 |        |  
|Cost of revenue                                       |  |                                 | 9,028  |   |                               |  
|                                                      |  |                                 |        |   |                               |  
|Gross margin                                          |  |                                 | 3,903  |   |                               |  
|                                                      |  |                                 |        |   |                               |  
|Operating expenses                                    |  |                                 |        |   |                               |  
|                                                      |  |                                 |        |  
|Selling, general and administrative                   |  |                                 | 3,011  |   |                               |  
|Research and development                              |  |                                 | 723    |   |                               |  
|Depreciation and amortization                         |  |                                 | 108    |   |                               |  
|                                                      |  |                                 |        |   |                               |  
|Total operating expenses                              |  |                                 | 3,842  |   |                               |  
|                                                      |  |                                 |        |   |                               |  
|Operating income                                      |  |                                 | 61     |   |                               |  
|                                                      |  |                                 |        |   |                               |  
|Other income (expense), net                           |  |                                 |        |   |                               |  
|Interest expense, net                                 |  |                                 |        |   |                               |  
|Debt, net                                             |  |                                 | (1,351 | ) |                               |  
|Dividends on mandatorily redeemable preferred stock   |  |                                 | (707   | ) |                               |  
|Other, net                                            |  |                                 | (58    | ) |                               |  
|                                                      |  |                                 |        |   |                               |  
|Total other income (expense)                          |  |                                 | (2,116 | ) |                               |  
|                                                      |  |                                 |        |   |                               |  
|Income (loss) before provision for income taxes       |  |                                 | (2,055 | ) |                               |  
|                                                      |  |                                 |        |  
|Provision for income taxes                            |  |                                 | (458   | ) |                               |  
|                                                      |  |                                 |        |   |                               |  
|Net income (loss) before preferred stock adjustments  |  |                                 | (1,597 | ) |                               |  
|                                                      |  |                                 |        |  
|Accretion of preferred stock                          |  |                                 |       |   |                               |  
|                                                      |  |                                 |        |   |                               |  
|Net income (loss) attributable to common stockholders |  | $                               | (1,597 | ) |                               | $
|                                                      |  |                                 |        |   |                               |  
|Earnings per share                                    |  |                                 |        |   |                               |  
|                                                      |  |                                 |        |  
|Basic income (loss) per share                         |  | $                               | (0.02  | ) |                               | $
|                                                      |  |                                 |        |   |                               |  
|Diluted income (loss) per share                       |  | $                               | (0.02  | ) |                               | $
|                                                      |  |                                 |        |   |                               |  
|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



|                                                                                                           |  | September 30,  |          |   | March 31, |  
|---------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | --------- | -
|                                                                                                           |  | 2003           |          |   | 2003      |  
|                                                                                                           |  | (in thousands) |         
|                                                                                                           |  | (unaudited)    |          |   |           |  
|ASSETS                                                                                                     |  |                |          |   |           |  
|                                                                                                           |  |               
|Current assets                                                                                             |  |                |          |   |           |  
|                                                                                                           |  |               
|Cash and cash equivalents                                                                                  |  | $              | 3,287    |   |           | $
|Restricted cash                                                                                            |  |                | 1,999    |   |           |  
|Accounts receivable, net of allowance of $350 and $362 in September and March 2003, respectively           |  |                | 8,125    |   |           |  
|Income taxes receivable                                                                                    |  |                | 871      |   |           |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                |  |                | 7,778    |   |           |  
|Unbilled receivables                                                                                       |  |                | 25       |   |           |  
|Inventories, net                                                                                           |  |                | 11,429   |   |           |  
|Prepaid expenses and other current assets                                                                  |  |                | 1,339    |   |           |  
|                                                                                                           |  |                |          |   |           |  
|Total current assets                                                                                       |  |                | 34,853   |   |           |  
|                                                                                                           |  |               
|Property and equipment, net                                                                                |  |                | 2,128    |   |           |  
|                                                                                                           |  |               
|Other noncurrent assets                                                                                    |  |                | 360      |   |           |  
|                                                                                                           |  |                |          |   |           |  
|Total assets                                                                                               |  | $              | 37,341   |   |           | $
|                                                                                                           |  |                |          |   |           |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                      |  |                |          |   |           |  
|                                                                                                           |  |               
|Current liabilities                                                                                        |  |                |          |   |           |  
|                                                                                                           |  |               
|Long-term debt due within one year                                                                         |  | $              | 1,551    |   |           | $
|Accounts payable                                                                                           |  |                | 2,419    |   |           |  
|Accrued liabilities                                                                                        |  |                | 3,865    |   |           |  
|Accrued interest                                                                                           |  |                | 920      |   |           |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                                |  |                | 1,218    |   |           |  
|Deferred revenue                                                                                           |  |                | 817      |   |           |  
|Warranty and contract cost provision reserve - current                                                     |  |                | 1,932    |   |           |  
|                                                                                                           |  |                |          |   |           |  
|Total current liabilities                                                                                  |  |                | 12,722   |   |           |  
|                                                                                                           |  |               
|Long-term debt                                                                                             |  |                | 39,195   |   |           |  
|                                                                                                           |  |               
|Warranty and contract cost provision reserve - noncurrent                                                  |  |                | 492      |   |           |  
|                                                                                                           |  |               
|Other noncurrent liabilities                                                                               |  |                | 653      |   |           |  
|                                                                                                           |  |               
|Manditorily redeemable preferred stock                                                                     |  |                | 29,016   |   |           |  
|                                                                                                           |  |                |          |   |           |  
|Total liabilities                                                                                          |  |                | 82,078   |   |           |  
|                                                                                                           |  |                |          |   |           |  
|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                                                                                        |  |                | (168,706 | ) |           |  
|Accumulated other comprehensive income (loss)                                                              |  |                | 141      |   |           |  
|                                                                                                           |  |                |          |   |           |  
|Total stockholders deficit                                                                                |  |                | (44,737  | ) |           |  
|                                                                                                           |  |                |          |   |           |  
|Total liabilities and stockholders deficit                                                                |  | $              | 37,341   |   |           | $
|                                                                                                           |  |                |          |   |           |  



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)



|                                                                            |  | Six Months EndedSeptember 30, |       
|--------------------------------------------------------------------------- |  | ----------------------------- | ------
|                                                                            |  | 2003                          |       
|Cash flows from operating activities                                        |  |                               |       
|                                                                            |  |                              
|Net income (loss) attributable to common stockholders                       |  | $                             | (2,487
|Adjustments for non-cash items                                              |  |                               |       
|Preferred stock adjustments to net income                                   |  |                               | 1,398 
|Amortization of debt discount                                               |  |                               |      
|Non-cash interest and financing costs                                       |  |                               | 462   
|Depreciation and amortization                                               |  |                               | 553   
|Change in inventory reserve                                                 |  |                               | (451  
|Change in warranty and contract cost provision reserve                      |  |                               | (206  
|Loss on sale of assets                                                      |  |                               |      
|Deferred income taxes                                                       |  |                               |      
|Changes in assets and liabilities                                           |  |                               |       
|Accounts receivable, net                                                    |  |                               | 10,344
|Income taxes receivable                                                     |  |                               | (223  
|Costs and estimated earnings in excess of billings on uncompleted contracts |  |                               | (3,081
|Unbilled receivables                                                        |  |                               | 78    
|Inventories                                                                 |  |                               | (919  
|Prepaid expenses and other current assets                                   |  |                               | 304   
|Accounts payable                                                            |  |                               | (2,829
|Accrued liabilities                                                         |  |                               | (902  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |                               | (59   
|Deferred revenue                                                            |  |                               | (1,037
|Noncurrent liabilities                                                      |  |                               | 157   
|                                                                            |  |                               |       
|Total adjustments                                                           |  |                               | 3,589 
|                                                                            |  |                               |       
|Net cash provided by operating activities                                   |  |                               | 1,102 
|                                                                            |  |                               |       
|Cash flows from investing activities                                        |  |                               |       
|                                                                            |  |                              
|Change in restricted cash                                                   |  |                               | (560  
|Purchase of property and equipment                                          |  |                               | (516  
|                                                                            |  |                               |       
|Net cash used by investing activities                                       |  |                               | (1,076
|                                                                            |  |                               |       
|Cash flows from financing activities                                        |  |                               |       
|                                                                            |  |                              
|Payments on long-term debt                                                  |  |                               | (31   
|Payment of deferred financing costs                                         |  |                               | (409  
|                                                                            |  |                               |       
|Net cash used by financing activities                                       |  |                               | (440  
|                                                                            |  |                               |       
|Effect of exchange rate changes on cash                                     |  |                               | 244   
|                                                                            |  |                               |       
|Net increase (decrease) in cash and cash equivalents                        |  |                               | (170  
|                                                                            |  |                              
|Cash and cash equivalents, beginning of year                                |  |                               | 3,457 
|                                                                            |  |                               |       
|Cash and cash equivalents, end of year                                      |  | $                             | 3,287 
|                                                                            |  |                               |       
|Supplemental cash flow disclosures                                          |  |                               |       
|                                                                            |  |                              
|Cash paid (received) for                                                    |  |                               |       
|Interest                                                                    |  | $                             | 1,726 
|Income taxes                                                                |  | $                             | (248  
|                                                                            |  |                              
|Non-cash investing and financing activities                                 |  |                               |       
|Vehicles acquired through capital leases                                    |  | $                             |      



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



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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES 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 and six-month periods ended September 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



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:



|                          |  | Six Months EndedSeptember 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 six-month period ended September 30, 2002, and accordingly, the assumptions are not applicable for that period.



The total value of options granted during the six months ended September 30, 2003 was computed as approximately $2.2 million or $0.385 per share under
option. 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:



|                                                              |  | Three Months EndedSeptember 30,          |        |   | Six Months EndedSeptember 30, |  
|------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ----------------------------- | -
|                                                              |  | 2003                                     |        |   | 2002                          |  
|                                                              |  | (in thousands, except per share amounts) |       
|Net income (loss) applicable to common stockholders           |  |                                          |        |   |                               |  
|As reported                                                   |  | $                                        | (1,597 | ) |                               | $
|Fair value based compensation cost, net of taxes              |  |                                          | (47    | ) |                               |  
|                                                              |  |                                          |        |   |                               |  
|Pro forma net income (loss) applicable to common stockholders |  | $                                        | (1,644 | ) |                               | $
|                                                              |  |                                          |        |   |                               |  
|Basic income (loss) per share                                 |  |                                          |        |   |                               |  
|As reported                                                   |  | $                                        | (0.02  | ) |                               | $
|Pro forma                                                     |  | $                                        | (0.02  | ) |                               | $
|                                                              |  |                                          |        |  
|Diluted income (loss) per share                               |  |                                          |        |   |                               |  
|As reported                                                   |  | $                                        | (0.02  | ) |                               | $
|Pro forma                                                     |  | $                                        | (0.02  | ) |                               | $



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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):



|                                          |  | September 30, |        |   | March 31, |  
|----------------------------------------- |  | ------------- | ------ | - | --------- | -
|                                          |  | 2003          |        |   | 2003      |  
|Raw materials                             |  | $             | 7,376  |   |           | $
|Work in process                           |  |               | 3,165  |   |           |  
|Finished goods                            |  |               | 1,646  |   |           |  
|                                          |  |               |        |   |           |  
|Inventories, gross                        |  |               | 12,187 |   |           |  
|Reserve for excess and obsolete inventory |  |               | (758   | ) |           |  
|                                          |  |               |        |   |           |  
|Inventories, net                          |  | $             | 11,429 |   |           | $
|                                          |  |               |        |   |           |  



5. Long-term contracts



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



|                                                                            |  | September 30, |         |   | March 31, |  
|--------------------------------------------------------------------------- |  | ------------- | ------- | - | --------- | -
|                                                                            |  | 2003          |         |   | 2003      |  
|Costs incurred on uncompleted contracts                                     |  | $             | 32,377  |   |           | $
|Estimated earnings                                                          |  |               | 13,683  |   |           |  
|                                                                            |  |               |         |   |           |  
|                                                                            |  |               | 46,060  |   |           |  
|Less: billings to date                                                      |  |               | (39,500 | ) |           |  
|                                                                            |  |               |         |   |           |  
|                                                                            |  | $             | 6,560   |   |           | $
|                                                                            |  |               |         |   |           |  
|Such amounts are included in the following accounts (in thousands)          |  |               |         |   |           |  
|                                                                            |  |              
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $             | 7,778   |   |           | $
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |               | (1,218  | ) |           |  
|                                                                            |  |               |         |   |           |  
|                                                                            |  | $             | 6,560   |   |           | $
|                                                                            |  |               |         |   |           |  



6. Other noncurrent assets



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



|                             |  | September 30, |      |   | March 31, |  
|---------------------------- |  | ------------- | ---- | - | --------- | -
|                             |  | 2003          |      |   | 2003      |  
|Non-compete agreement        |  | $             | 33   |   |           | $
|Deferred financing costs     |  |               | 659  |   |           |  
|                             |  |               |      |   |           |  
|                             |  |               | 692  |   |           |  
|Accumulated amortization     |  |               | (332 | ) |           |  
|                             |  |               |      |   |           |  
|Other noncurrent assets, net |  | $             | 360  |   |           | $
|                             |  |               |      |   |           |  



Deferred financing
costs as of September 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 three and six-month periods ended September 30,
2003 was $88,000 and $147,000, respectively. Estimated amortization expense for the year ending March 31, 2004 will be approximately $390,000.



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7. Long-term debt



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



|                             |  | September 30, |        |   | March 31, |  
|---------------------------- |  | ------------- | ------ | - | --------- | -
|                             |  | 2003          |        |   | 2003      |  
|Working capital - borrowings |  | $             | 130    |   |           | $
|Long-term debt - Senior      |  |               | 12,000 |   |           |  
|Long-term debt - Junior      |  |               | 28,472 |   |           |  
|Capital lease obligations    |  |               | 144    |   |           |  
|                             |  |               |        |   |           |  
|                             |  |               | 40,746 |   |           |  
|Due within one year          |  |               | (1,551 | ) |           |  
|                             |  |               |        |   |           |  
|Long-term debt               |  | $             | 39,195 |   |           | $
|                             |  |               |        |   |           |  



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 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 Companys credit agreement remain unchanged.



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 September 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 both Liabilities and Equities. Accordingly, the mandatorily redeemable preferred stock has been classified as a liability in the balance sheet as of September 30, 2003, and has been
reclassified in the March 31, 2003 balance sheet for comparative purposes. The $707,000 and $1,398,000 dividends on the preferred stock have been included in operations as additional interest expense for the three and six-month periods ended
September 30, 2003, respectively. In periods prior to April 1, 2003, dividends on preferred stock were reported as an adjustment to net income to arrive at net income attributable to common stockholders.



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##### Table of Contents

9. Related party transactions



A group of entities affiliated with Centre Partners Management LLC (the Centre Entities) are among the Companys
largest stockholders, owning collectively approximately 48.2% of our common stock. 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
stockholders 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 $77,000 and $211,000, plus expenses of $17,000 and $47,000 respectively, for consulting services under the agreement during the three and
six-month periods ended September 30, 2002.



10. Net income per common share



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



|                                                                                               |  | Three Months EndedSeptember 30, |        | Six Months EndedSeptember 30,
|---------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | -----------------------------
|                                                                                               |  | 2003                            |        |                              
|Basic:                                                                                         |  |                                 |        |                              
|Net income (loss) attributable to common stockholders                                          |  | $                               | (1,597 | )                            
|                                                                                               |  |                                 |        |                              
|Weighted average common shares outstanding                                                     |  |                                 | 70,153 |                              
|                                                                                               |  |                                 |        |                              
|Per share amount                                                                               |  | $                               | (0.02  | )                            
|                                                                                               |  |                                 |        |                              
|Diluted                                                                                        |  |                                 |        |                              
|Net income (loss) attributable to common stockholders                                          |  | $                               | (1,597 | )                            
|                                                                                               |  |                                 |        |                              
|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                                                                               |  | $                               | (0.02  | )                            
|                                                                                               |  |                                 |        |                              



The number of stock
options assumed to be bought back by the Company for computation of diluted earnings per share 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 $0.56 and $0.65 respectively, for the three and six-month periods ended September 30, 2002.



Options to purchase 1,552,077 and 1,551,877 shares of common stock
respectively, as well as warrants to purchase 3,246,164 shares of common stock were not included in the computation of diluted earnings per share for the three and six-month periods ended September 30, 2002 because the exercise price of the options
and warrants was greater than the average market value of the common shares and their effect would have been anti-dilutive.



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 September 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 reserve based on known product failures (if any), historical experience, and other currently available evidence.



Changes in the product warranty reserve for the three and six-month periods ended September 30, 2003 and 2002 were as follows (in thousands):



|                                                            |  | Three Months EndedSeptember 30, |     | Six Months EndedSeptember 30,
|----------------------------------------------------------- |  | ------------------------------- | --- | -----------------------------
|                                                            |  | 2003                            |     |                              
|Balance - beginning of year                                 |  | $                               | 672 |                              
|                                                            |  |                                 |     |                              
|Change in liability for warranties issued during the period |  |                                 | 72  |                              
|Change in liabilities for preexisting warranties            |  |                                 | (42 | )                            
|                                                            |  |                                 |     |                              
|Balance - end of period                                     |  | $                               | 702 |                              
|                                                            |  |                                 |     |                              



12. Comprehensive income (loss)



The components of comprehensive income for the three and
six-month periods ended September 30, 2003 and 2002 consists of the following (in thousands):



|                                         |  | Three Months EndedSeptember 30, |        | Six Months EndedSeptember 30,
|---------------------------------------- |  | ------------------------------- | ------ | -----------------------------
|                                         |  | 2003                            |        |                              
|Net income (loss)                        |  | $                               | (1,597 | )                            
|                                         |  |                                 |        |                              
|Foreign currrency translation adjustment |  |                                 | (9     | )                            
|                                         |  |                                 |        |                              
|Comprehensive income                     |  | $                               | (1,606 | )                            
|                                         |  |                                 |        |                              



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##### Table of Contents

ITEM 2. MANAGEMENT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,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The ability to restructure our debt and equity facilities on terms that will be satisfactory to the Company, 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



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##### Table of Contents

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 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 changes 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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##### Table of Contents

RESULTS OF OPERATIONS



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



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                      |  | Three Months EndedSeptember 30, |    |  | Six Months EndedSeptember 30, |  
|----------------------------------------------------- |  | ------------------------------- | -- |  | ----------------------------- | -
|                                                      |  | 2003                            |    |  | 2002                          |  
|Revenue                                               |  | 100.00                          | %  |  | 100.00                        | %
|                                                      |  |                                 |    | 
|Cost of revenue                                       |  | 69.82                           |    |  | 65.88                         |  
|                                                      |  |                                 |    |  |                               |  
|Gross Margin                                          |  | 30.18                           |    |  | 34.12                         |  
|                                                      |  |                                 |    |  |                               |  
|Operating expenses                                    |  |                                 |    |  |                               |  
|                                                      |  |                                 |    | 
|Selling, general and administrative                   |  | 23.29                           |    |  | 17.70                         |  
|Research and development                              |  | 5.59                            |    |  | 4.20                          |  
|Depreciation and amortization                         |  | 0.84                            |    |  | 1.43                          |  
|                                                      |  |                                 |    |  |                               |  
|Total operating expenses                              |  | 29.72                           |    |  | 23.33                         |  
|                                                      |  |                                 |    |  |                               |  
|Operating income                                      |  | 0.46                            |    |  | 10.79                         |  
|                                                      |  |                                 |    |  |                               |  
|Other income (expense), net                           |  |                                 |    |  |                               |  
|                                                      |  |                                 |    | 
|Interest expense                                      |  |                                 |    |  |                               |  
|Debt, net                                             |  | (10.45                          | )  |  | (0.26                         | )
|Dividends on mandatorily redeemable preferred stock   |  | (5.47                           | )  |  |                              |  
|Other, net                                            |  | (0.45                           | )  |  | (0.11                         | )
|                                                      |  |                                 |    |  |                               |  
|Total other income (expense)                          |  | (16.37                          | )  |  | (0.37                         | )
|                                                      |  |                                 |    |  |                               |  
|Income (loss) before provision for income taxes       |  | (15.91                          | )  |  | 10.42                         |  
|                                                      |  |                                 |    | 
|Provision for income taxes                            |  | (3.54                           | )  |  | 3.54                          |  
|                                                      |  |                                 |    |  |                               |  
|Net income (loss) before preferred stock adjustments  |  | (12.37                          | )  |  | 6.88                          |  
|                                                      |  |                                 |    | 
|Accretion of preferred stock                          |  |                                |    |  | (0.44                         | )
|                                                      |  |                                 |    |  |                               |  
|Net income (loss) attributable to common shareholders |  | (12.37                          | )% |  | 6.44                          | %
|                                                      |  |                                 |    |  |                               |  



Three Months Ended September 30,
2003 and 2002:



Net Revenues: Revenues decreased $4.1
million, or 24.0%, to $12.9 million for the three months ended September 30, 2003 as compared to $17.0 million for the three months ended September 30, 2002. Sales to U.S. military customers for the three months ended September 30, 2003 decreased by
$4.0 million, or 45.6%, to $4.8 million. The decrease in U.S. military sales is due to the completion during the 2002 period of a substantial military contract along with significant differences in the timing of deliveries between the first and
second quarters of 2003 and 2002. Sales to U.S. law enforcement customers for the three months ended September 30, 2003 increased $0.8 million, or 46.7%, to $2.7 million reflecting an increased emphasis on law enforcement sales by the Company. Sales
to international customers for the three months ended September 30, 2003 decreased $0.8 million, or 13.2%, to $5.5 million reflecting reduced customer contract delivery and installation schedules for the current three-month period.



Cost of Revenues: Cost of revenues decreased $2.2 million, or 19.4%, to $9.0
million for the three months ended September 30, 2003 as compared to $11.2 million for the three months ended September 30, 2002. As a percentage of revenues, cost of revenues for the three months ended September 30, 2003 increased to 69.8% as
compared to 65.9% for the three months ended September 30, 2002. The increase in cost of revenues as a percentage of revenues is attributable primarily to a higher portion of lower margin revenues during the 2003 period.



Gross Margin: As a result of the foregoing, gross margin decreased $1.9
million, or 32.7%, to $3.9 million, or 30.2% of revenues, for the three months ended September 30, 2003 as compared to $5.8 million, or 34.1% of revenues, for the three months ended September 30, 2002.



Total Operating Expenses: Total operating expenses decreased $0.1 million, or
3.1%, for the three months ended September 30, 2003. Because of the reduced revenue base, as a percentage of revenues, total operating expenses increased to 29.7% for the three months ended September 30, 2003 as compared to 23.3% for the three
months ended September 30, 2002. The decrease in the amount of operating expenses is primarily due to a reduction in depreciation and amortization costs partially offset by an increase in research and development plus bid and proposal activities.



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##### Table of Contents

Operating Income: As a result of the foregoing, operating income decreased $1.7 million to $0.1 million,
or 0.5% of revenues, for the three months ended September 30, 2003 as compared to $1.8 million, or 10.8% of revenues, for the three months ended September 30, 2002.



Other Income (Expense), net: Net interest expense totaled ($2.1 million), or (16.0%) of revenues, for the three months ended
September 30, 2003 as compared to ($44,000), or (0.3%) of revenues, for the three months ended September 30, 2002. The increase in interest expense is attributable to the following factors:



| | 1. | Interest expense for the three months ended September 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 September 30, 2003 includes amortization of the additional $409,000 in 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 September 30, 2003 includes $708,000 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 previous three-month period. The accrual of
preferred stock dividends was previously reported as an adjustment to Net Income to arrive at Net Income Attributable to Common Stockholders and the provisions of FAS 150 preclude the restatement of prior year financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Accrued mandatorily redeemable preferred stock dividends, which were previously reported as an adjustment to Net Income to arrive at Net Income Attributable to Common Stockholders,
for the three months ended September 30, 2002 was reduced by approximately $567,000 amortization of a debt restructuring liability that became fully amortized as of March 31, 2003.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Provision for Income Taxes: The effective tax rate decreased to 22.3% of loss
before taxes for the three months ended September 30, 2003 as compared to 34.0% for the three months ended September 30, 2002. The reduction in the effective tax rate is primarily due to the non-deductibility of dividends on preferred stock that are
now included in the loss before tax provision. The Company has not recorded a tax benefit for the majority of its deferred tax assets due to uncertainty of future realization.



Net Income (Loss) Before Preferred Stock Adjustments: As a result of the foregoing, net income (loss) declined from net
income of $1.1 million, or 6.9% of revenue, for the three months ended September 30, 2002 to a net loss of ($1.6 million), or (12.3%) of revenue, for the three months ended September 30, 2003.



Preferred Stock Adjustments: Accretion of mandatorily redeemable preferred
stock dividends was $74,000 for the three months ended September 30, 2002, which was reduced by approximately $567,000 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 September 30, 2003, since the debt restructuring liability was fully amortized as of March 31, 2003.



Net Income (Loss) Attributable to Common Stockholders: As a result of the foregoing, net income (loss) attributable to
common stockholders decreased by $2.7 million from income of $1.1 million, or $0.02 per share, for the three months ended September 30, 2002 to a loss of ($1.6 million), or ($0.02) per share, for the three months ended September 30, 2003.



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##### Table of Contents

Six Months Ended September 30, 2003 and 2002:



Net Revenues: Revenues decreased $1.6 million, or 5.5%, to $28.6 million for the six months ended September 30, 2003 as
compared to $30.2 million for the six months ended September 30, 2002. Sales to U.S. military customers for the six months ended September 30, 2003, decreased by $4.9 million, or 30.1%, to $11.4 million. The decrease in U.S. military sales is due to
the completion during the 2002 period of a substantial military contract. Sales to U.S. law enforcement customers for the six months ended September 30, 2003 increased $1.1 million, or 35.9%, to $4.1 million reflecting an increased emphasis on law
enforcement sales by the Company. Sales to international customers for the six months ended September 30, 2003 increased $2.3 million, or 21.8%, to $13.1 million reflecting increased profits on certain percentage of completion contracts and customer
contract delivery and installation schedules during the first quarter of the period offset somewhat by the completion of a substantial contract during the 2002 period.



Cost of Revenues: Cost of revenues decreased $0.2 million, or 0.9%, to $20.4 million for the six months ended September 30,
2003 as compared to $20.6 million for the six months ended September 30, 2002. As a percentage of revenues, cost of revenues for the six months ended September 30, 2003 increased to 71.4% as compared to 68.1% for the six months ended September 30,
2002. The increase in cost of revenues as a percentage of revenues is attributable primarily to a higher portion of lower margin revenues during the 2003 period.



Gross Margin: As a result of the foregoing, gross margin decreased $1.4 million, or 15.2%, to $8.2 million, or 28.6% of
revenues, for the six months ended September 30, 2003 as compared to $9.6 million, or 31.2% of revenues, for the six months ended September 30, 2002.



Total Operating Expenses: Total operating expenses decreased $0.1 million, or 1.6%, for the six months ended September 30, 2003. Because of the reduced
revenue base, as a percentage of revenues, total operating expenses increased to 25.9% for the six months ended September 30, 2003 as compared to 24.9% for the six months ended September 30, 2002. The decrease in the amount of operating expenses is
primarily due to a reduction in depreciation and amortization costs and in net research and development costs.



Operating Income: As a result of the foregoing, operating income decreased $1.3 million to $0.8 million, or 2.8% of revenues, for the six months ended
September 30, 2003 as compared to $2.1 million, or 7.0% of revenues, for the six months ended September 30, 2002.



Other Income (Expense), net: Net interest expense totaled ($3.8 million), or (13.4%) of revenues, for the six months ended September 30, 2003 as compared
to ($60,000), or (0.2%) of revenues, for the six months ended September 30, 2002. The increase in interest expense is attributable to the following factors:



| | 1. | Interest expense for the six months ended September 30, 2002 was reduced by $1.8 million 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 six months ended September 30, 2003 includes amortization of the additional $409,000 in 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 six months ended September 30, 2003 includes $1.4 million 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
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | 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 Stockholders and the provisions of FAS 150 preclude the restatement of prior year financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Accrued mandatorily redeemable preferred stock dividends, which were previously reported as an adjustment to Net Income to arrive at Net Income Attributable to Common Stockholders,
for the six months ended September 30, 2002 was reduced by approximately $1.1 million amortization of a debt restructuring liability that became fully amortized as of March 31, 2003.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Provision for Income Taxes: The effective tax rate decreased to 18.4% of loss
before taxes for the six months ended September 30, 2003 as compared to 34.0% for the six months ended September 30, 2002. The reduction in the effective tax rate is primarily due to the non-deductibility of dividends on preferred stock that are now
included in the loss before the tax provision. The Company has not recorded a tax benefit for the majority of its deferred tax assets due to uncertainty of future realization.



Net Income (Loss) Before Preferred Stock Adjustments: As a result of the foregoing, net income (loss) declined from net
income of $1.4 million, or 4.6% of revenue, for the six months ended September 30, 2002 to a net loss of ($2.5 million), or (8.7%) of revenue, for the six months ended September 30, 2003.



Preferred Stock Adjustments: Accretion of mandatorily redeemable preferred stock dividends was $146,000 for the six months
ended September 30, 2002, which was reduced by approximately $1.1 million of debt restructuring liability amortization. As noted above, the total accrual of mandatorily redeemable preferred stock dividends is included in interest expense for the six
months ended September 30, 2003, since the debt restructuring liability was fully amortized as of March 31, 2003.



Net Income (Loss) Attributable to Common Stockholders: As a result of the foregoing, net income (loss) attributable to common stockholders decreased by
$3.7 million from income of $1.2 million, or $0.02 per share, for the six months ended September 30, 2002 to a loss of ($2.5 million), or ($0.04) per share, for the six months ended September 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 September 30, 2003 and 2002, the Company had a backlog of approximately $65.1 and $67.4 million, respectively. As of September 30, 2003 the backlog is comprised of $46.2 million from
international customers and $18.9 million from U.S. military and law enforcement customers. Approximately $38.4 million of the contracted orders are scheduled for delivery during fiscal year 2004.



A summary of changes in the Companys backlog for the three and
six-month periods ended September 30, 2003 and 2002, is as follows (in thousands):



|                              |  | Three Months EndedSeptember 30, |         |   | Six Months EndedSeptember 30, |  
|----------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | -
|                              |  | 2003                            |         |   | 2002                          |  
|Backlog - beginning of period |  | $                               | 60,368  |   |                               | $
|New bookings                  |  |                                 | 17,680  |   |                               |  
|Revenue                       |  |                                 | (12,931 | ) |                               |  
|                              |  |                                 |         |   |                               |  
|Backlog - end of period       |  | $                               | 65,117  |   |                               | $
|                              |  |                                 |         |   |                               |  



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



As of September 30, 2003, the Company had working capital of $22.1 million
compared to a deficit of ($21.3 million) as of September 30, 2002. The net $43.4 million increase in working capital is primarily due to the extension of the maturity date of the Companys credit agreements from September 30, 2003 to October
15, 2004 and the result of significantly improved results of operations during the second half of 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 six months
ended September 30, 2003 were $0.5 million. Such expenditures include leasehold improvements, computer equipment and software, marketing product demonstration equipment, and manufacturing machinery. As of September 30, 2003, the Company was in
compliance with all covenants within its debt agreements.



The
Company had a net decrease in cash and cash equivalents of ($0.2 million) for the six months ended September 30, 2003 compared to a net increase of $0.2 million for the six months ended September 30, 2002. For the period ended September 30, 2003,
the Companys operating activities generated cash of approximately $1.1 million compared to $0.4 million for the six months ended September 30, 2002. Cash flow from operations increased primarily due to the collection of accounts receivable
offset by the net loss for the period 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 six months ended September 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 installment financing will be sufficient to fund its cash needs and anticipated capital expenditures through at least the next twelve months.



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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 also negotiate favorable repayment terms under the Credit Agreement which is currently scheduled
to mature in October 2004.



CONCENTRATION OF CREDIT RISK



As of September 30, 2003, approximately $5.7 million in accounts receivable,
or 70.6% of total accounts receivable, net, was due from the Companys top ten customers, $0.3 million of which was secured by performance letters of credit for foreign receivables. The remaining $5.4 million is due from U.S., U.K., Australian,
Canadian, Dutch and Chinese government contracts and subcontracts.



COMMITMENTS AND OTHER CONTRACTURAL OBLIGATIONS



Disclosure of Commitments and Other Contractual Obligations

September 30, 2003

(amounts in thousands)



|                                       |  | Total |        | Less than1 year |   | Within 1 - 3 years |  | Within4 - 5 years |        | After 5 years
|-------------------------------------- |  | ----- | ------ | --------------- | - | ------------------ |  | ----------------- | ------ | -------------
|Long-term debt                         |  |       |        |                 |   |                    |  |                   |        |              
|Working capital - borrowings           |  | $     | 130    |                 | $ |                   |  | $                 | 130    |              
|Long-term debt - Senior                |  |       | 12,000 |                 |   | 1,500              |  |                   | 10,500 |              
|Long-term debt - Junior                |  |       | 28,472 |                 |   |                   |  |                   | 28,472 |              
|Capital lease obligations              |  |       | 144    |                 |   | 51                 |  |                   | 93     |              
|Mandatorily Redeemable Preferred Stock |  |       | 29,016 |                 |   |                   |  |                   | 29,016 |              
|Other                                  |  |       |        |                 |   |                    |  |                   |        |              
|Operating lease obligations            |  |       | 3,633  |                 |   | 960                |  |                   | 1,632  |              
|                                       |  |       |        |                 |   |                    |  |                   |        |              
|Total                                  |  | $     | 73,395 |                 | $ | 2,511              |  | $                 | 69,843 |              
|                                       |  |       |        |                 |   |                    |  |                   |        |              



RELATED PARTIES AND TRANSACTIONS



A group of entities affiliated with Centre Partners
Management LLC (the Centre Entities) are among the Companys largest stockholders. 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
stockholders 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 $77,000 and $211,000, plus expenses of $17,000 and $47,000 respectively, for consulting services under the agreement during the three and
six-month periods ended September 30, 2002.



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##### Table of Contents

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 September 30, 2003.



As of September 30, 2003, the Company had a total of approximately $28.5
million in fixed rate debt at an interest rate of 15% and a total of approximately $29.0 in mandatorily redeemable preferred stock bearing dividends at 10%, both of which will mature on October 15, 2004. The company also has a total of approximately
$12.0 million in variable rate debt at an interest rate of prime plus 2.5%, (6.5% as of September 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 of October
15, 2004. 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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##### Table of Contents

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



On August 29, 2003, the Company held its Annual Meeting of Stockholders at its headquarters in Suwanee, GA. At this meeting 69,321,176 votes were cast representing 98.8% of all eligible votes.



The following proposal was submitted to the security holders for vote:



Election of two directors. Messrs. Scott Perekslis and Ronald
Whitaker were nominated for re-election to the board of directors. This proposal received 99.9% of the eligible votes cast to affirm their re-election to the board. Mr. Perekslis received 69,251,906 votes for re-election with 69,270 votes withheld
and Mr. Whitaker received 69,264,306 votes for re-election with 56,870 votes withheld. There were no abstentions or broker non-votes applicable to this proposal. In addition, the term of office as a director of each of Ronavan Mohling and Mary Ann
Gilleece continued after the meeting.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) | Exhibits
|--- | --------



|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

---

|* | Pursuant to Commission Release No. 33-8238, this certification will be treated as accompanying this Quarterly Report on Form 10-Q and not filed as part of
such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



August 12, 2003  Press release announcing financial results for the first quarter of the year ending March 31, 2004.



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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: October 31, 2003



FIREARMS TRAINING SYSTEMS, INC./S/ John A. MorelliJohn A. MorelliChief Financial Officer and Treasurer(Principal Financial Officer and Duly Authorized Officer)