##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



---



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, 2004



OR



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



COMMISSION FILE NUMBER: 333-13105



---



FIREARMS TRAINING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



---



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



7340 MCGINNIS FERRY
ROAD

SUWANEE, GEORGIA 30024

(Address of principal executive offices)



TELEPHONE NUMBER (770) 813-0180

(Registrants telephone number, including area code)



---



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



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 November 8, 2004, there were 70,516,401 shares of the Registrants
Class A Common Stock outstanding.



---



---

##### Table of Contents

FIREARMS TRAINING SYSTEMS, INC.

INDEX



|        |  |                                                                                                                    |  |     
|------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                                                    |  | PAGE
|PART I. |  | FINANCIAL INFORMATION                                                                                              |  |     
|        |  |                                                                                                                   
|ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                                                       |  |     
|        |  |                                                                                                                   
|        |  | Condensed Consolidated Statements of Operations Three and Six months ended September 30, 2004 and 2003 (unaudited) |  | 3   
|        |  |                                                                                                                   
|        |  | Condensed Consolidated Balance Sheets September 30, 2004 (unaudited) and March 31, 2004                            |  | 4   
|        |  |                                                                                                                   
|        |  | Condensed Consolidated Statements of Cash Flows Six months ended September 30, 2004 and 2003 (unaudited)           |  | 5   
|        |  |                                                                                                                   
|        |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                   |  | 6   
|        |  |                                                                                                                   
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                              |  | 13  
|        |  |                                                                                                                   
|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         |  | 19  
|        |  |                                                                                                                   
|ITEM 4. |  | CONTROLS AND PROCEDURES                                                                                            |  | 20  
|        |  |                                                                                                                   
|PART II |  | OTHER INFORMATION                                                                                                  |  |     
|        |  |                                                                                                                   
|ITEM 1. |  | LEGAL PROCEEDINGS                                                                                                  |  | 20  
|        |  |                                                                                                                   
|ITEM 2. |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                        |  | 20  
|        |  |                                                                                                                   
|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                |  | 20  
|        |  |                                                                                                                   
|ITEM 6. |  | EXHIBITS AND REPORT ON FORM 8-K                                                                                    |  | 20  
|        |  |                                                                                                                   
|        |  | SIGNATURES                                                                                                         |  | 22  



2



---

##### 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 for per share
amounts)



|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                                                    |  | 2004                            |        |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Revenue                                             |  | $                               | 20,130 |   |                               | $ | 12,931 |      |  | $ | 38,142 |   |  | $ | 28,549 |  
|Cost of revenue                                     |  |                                 | 13,764 |   |                               |   | 9,028  |      |  |   | 25,630 |   |  |   | 20,375 |  
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Gross margin                                        |  |                                 | 6,366  |   |                               |   | 3,903  |      |  |   | 12,512 |   |  |   | 8,174  |  
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                 |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Selling, general and administrative                 |  |                                 | 3,686  |   |                               |   | 3,011  |      |  |   | 7,024  |   |  |   | 5,908  |  
|Research and development                            |  |                                 | 724    |   |                               |   | 723    |      |  |   | 1,742  |   |  |   | 1,246  |  
|Depreciation and amortization                       |  |                                 | 119    |   |                               |   | 108    |      |  |   | 231    |   |  |   | 233    |  
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                            |  |                                 | 4,529  |   |                               |   | 3,842  |      |  |   | 8,997  |   |  |   | 7,387  |  
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Operating income                                    |  |                                 | 1,837  |   |                               |   | 61     |      |  |   | 3,515  |   |  |   | 787    |  
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Other income (expense), net                         |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Interest expense, net                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Debt, net                                           |  |                                 | (1,611 | ) |                               |   | (1,351 | )    |  |   | (3,010 | ) |  |   | (2,421 | )
|Dividends on mandatorily redeemable preferred stock |  |                                 | (781   | ) |                               |   | (707   | )    |  |   | (1,543 | ) |  |   | (1,398 | )
|Other, net                                          |  |                                 | (312   | ) |                               |   | (58    | )    |  |   | (403   | ) |  |   | (16    | )
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total other expense                                 |  |                                 | (2,704 | ) |                               |   | (2,116 | )    |  |   | (4,956 | ) |  |   | (3,835 | )
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Loss before benefit for income taxes                |  |                                 | (867   | ) |                               |   | (2,055 | )    |  |   | (1,441 | ) |  |   | (3,048 | )
|Benefit for income taxes                            |  |                                 | (53    | ) |                               |   | (458   | )    |  |   | (13    | ) |  |   | (561   | )
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                            |  | $                               | (814   | ) |                               | $ | (1,597 | )    |  | $ | (1,428 | ) |  | $ | (2,487 | )
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Loss per share Basic and diluted loss per share     |  | $                               | (.01   | ) |                               | $ | (.02   | )    |  | $ | (0.02  | ) |  | $ | (0.04  | )
|                                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding  basic  |  |                                 | 70,265 |   |                               |   | 70,153 |      |  |   | 70,265 |   |  |   | 70,153 |  



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



3



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for shares authorized, issued and
outstanding)



|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                         |  | September 30,2004 |          |   | March 312004 |  
|                                                                                                                                                         |  | (unaudited)       |          |   |              |  
|ASSETS                                                                                                                                                   |  |                   |          |   |              |   |          |  
|Current assets:                                                                                                                                          |  |                   |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                                |  | $                 | 3,405    |   |              | $ | 2,367    |  
|Restricted cash                                                                                                                                          |  |                   | 2,582    |   |              |   | 2,502    |  
|Accounts receivable, net of allowance of $350                                                                                                            |  |                   | 14,697   |   |              |   | 23,317   |  
|Income taxes receivable                                                                                                                                  |  |                   | 207      |   |              |   | 104      |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                                                              |  |                   | 3,969    |   |              |   | 4,268    |  
|Unbilled receivables                                                                                                                                     |  |                   | 1,248    |   |              |   | 62       |  
|Inventories, net                                                                                                                                         |  |                   | 11,805   |   |              |   | 12,221   |  
|Deferred income taxes                                                                                                                                    |  |                   | 770      |   |              |   | 770      |  
|Prepaid expenses and other current assets                                                                                                                |  |                   | 1,635    |   |              |   | 1,020    |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Total current assets                                                                                                                                     |  |                   | 40,318   |   |              |   | 46,631   |  
|                                                                                                                                                         |  |                  
|Property and equipment, net                                                                                                                              |  |                   | 2,187    |   |              |   | 2,398    |  
|                                                                                                                                                         |  |                  
|Other noncurrent assets:                                                                                                                                 |  |                   |          |   |              |   |          |  
|Deferred income taxes                                                                                                                                    |  |                   | 1,999    |   |              |   | 2,004    |  
|Deferred financing costs, net                                                                                                                            |  |                   | 1,484    |   |              |   | 187      |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Total assets                                                                                                                                             |  | $                 | 45,988   |   |              | $ | 51,220   |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                    |  |                   |          |   |              |   |          |  
|Current Liabilities                                                                                                                                      |  |                   |          |   |              |   |          |  
|Long-term debt due within one year                                                                                                                       |  | $                 | 2,181    |   |              | $ | 2,953    |  
|Accounts payable                                                                                                                                         |  |                   | 3,789    |   |              |   | 3,679    |  
|Accrued liabilities                                                                                                                                      |  |                   | 4,571    |   |              |   | 7,002    |  
|Accrued interest                                                                                                                                         |  |                   |         |   |              |   | 949      |  
|Income taxes payable                                                                                                                                     |  |                   | 223      |   |              |   | 214      |  
|Billings in excess of cost and estimated earnings on uncompleted contracts                                                                               |  |                   | 1,390    |   |              |   | 1,428    |  
|Deferred revenue                                                                                                                                         |  |                   | 3,431    |   |              |   | 1,239    |  
|Warranty and contract cost provision reserve  current                                                                                                   |  |                   | 617      |   |              |   | 1,074    |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Total current liabilities                                                                                                                                |  |                   | 16,202   |   |              |   | 18,538   |  
|                                                                                                                                                         |  |                  
|Long-term debt                                                                                                                                           |  |                   | 35,062   |   |              |   | 38,168   |  
|                                                                                                                                                         |  |                  
|Warranty and contract cost provision reserve  noncurrent                                                                                                |  |                   | 215      |   |              |   | 356      |  
|                                                                                                                                                         |  |                  
|Other noncurrent liabilities                                                                                                                             |  |                   | 633      |   |              |   | 587      |  
|                                                                                                                                                         |  |                  
|Manditorily redeemable preferred stock                                                                                                                   |  |                   |         |   |              |   | 30,485   |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Total liabilities                                                                                                                                        |  |                   | 52,112   |   |              |   | 88,134   |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Commitments and contingencies                                                                                                                            |  |                   |          |   |              |   |          |  
|                                                                                                                                                         |  |                  
|Preferred stock, 3,500 shares authorized; 3,203 shares issued and outstanding; liquidation value of $10,000 per share                                    |  |                   | 32,028   |   |              |   |         |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Stockholders deficit Class A common stock, $0.0000006 par value; 100 million shares authorized, 70,508,801 and 70,153,139 shares issued
and outstanding |  |                   |         |   |              |   |         |  
|Additional paid-in capital                                                                                                                               |  |                   | 123,407  |   |              |   | 123,215  |  
|Stock warrants                                                                                                                                           |  |                   | 613      |   |              |   | 613      |  
|Accumulated deficit                                                                                                                                      |  |                   | (162,609 | ) |              |   | (161,181 | )
|Accumulated other comprehensive income                                                                                                                   |  |                   | 437      |   |              |   | 439      |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Total stockholders deficit                                                                                                                              |  |                   | (38,152  | ) |              |   | (36,914  | )
|                                                                                                                                                         |  |                   |          |   |              |   |          |  
|Total liabilities and stockholders deficit                                                                                                              |  | $                 | 45,988   |   |              | $ | 51,220   |  
|                                                                                                                                                         |  |                   |          |   |              |   |          |  



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



4



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)



|                                                                            |  |                                |         |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                                                            |  | Six Months Ended September 30, |        
|                                                                            |  | 2004                           |         |   | 2003 |  
|Cash flows from operating activities:                                       |  |                                |         |   |      |   |        |  
|Net loss                                                                    |  | $                              | (1,428  | ) |      | $ | (2,487 | )
|                                                                            |  |                                |         |   |      |   |        |  
|Adjustments for non-cash items                                              |  |                                |         |   |      |   |        |  
|Non-cash interest and financing costs                                       |  |                                | 2,463   |   |      |   | 1,860  |  
|Depreciation and amortization                                               |  |                                | 485     |   |      |   | 553    |  
|Change in inventory reserve                                                 |  |                                | 28      |   |      |   | (451   | )
|Change in warranty and contract cost provision reserve                      |  |                                | (598    | ) |      |   | (206   | )
|Loss on sale of assets                                                      |  |                                | 8       |   |      |   |       |  
|Deferred income taxes                                                       |  |                                | 38      |   |      |   |       |  
|Changes in assets and liabilities                                           |  |                                |         |   |      |   |        |  
|Accounts receivable, net                                                    |  |                                | 8,620   |   |      |   | 10,344 |  
|Income taxes receivable                                                     |  |                                | (103    | ) |      |   | (223   | )
|Costs and estimated earnings in excess of billings on uncompleted contracts |  |                                | 299     |   |      |   | (3,081 | )
|Unbilled receivables                                                        |  |                                | (1,186  | ) |      |   | 78     |  
|Inventories                                                                 |  |                                | 388     |   |      |   | (919   | )
|Prepaid expenses and other current assets                                   |  |                                | (615    | ) |      |   | 304    |  
|Accounts payable                                                            |  |                                | 110     |   |      |   | (2,829 | )
|Accrued liabilities                                                         |  |                                | (3,380  | ) |      |   | (902   | )
|Income taxes payable                                                        |  |                                | 9       |   |      |   |       |  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |                                | (38     | ) |      |   | (59    | )
|Deferred revenue                                                            |  |                                | 2,192   |   |      |   | (1,037 | )
|Noncurrent liabilities                                                      |  |                                | 47      |   |      |   | 157    |  
|                                                                            |  |                                |         |   |      |   |        |  
|Total adjustments                                                           |  |                                | 8,767   |   |      |   | 3,589  |  
|                                                                            |  |                                |         |   |      |   |        |  
|Net cash provided by operating activity                                     |  |                                | 7,339   |   |      |   | 1,102  |  
|                                                                            |  |                                |         |   |      |   |        |  
|Cash flows from investing activities                                        |  |                                |         |   |      |   |        |  
|Change in restricted cash                                                   |  |                                | (80     | ) |      |   | (560   | )
|Purchase of property and equipment                                          |  |                                | (307    | ) |      |   | (516   | )
|Proceeds from disposal of property and equipment                            |  |                                | 5       |   |      |   |       |  
|                                                                            |  |                                |         |   |      |   |        |  
|Net cash used by investing activities                                       |  |                                | (382    | ) |      |   | (1,076 | )
|                                                                            |  |                                |         |   |      |   |        |  
|Cash flows from financing activities                                        |  |                                |         |   |      |   |        |  
|Proceeds from long-term debt                                                |  |                                | 37,450  |   |      |   |       |  
|Payments on long-term debt                                                  |  |                                | (42,062 | ) |      |   | (31    | )
|Payment of deferred financing costs                                         |  |                                | (1,484  | ) |      |   | (409   | )
|Exercise of stock options                                                   |  |                                | 192     |   |      |   |       |  
|                                                                            |  |                                |         |   |      |   |        |  
|Net cash used by financing activities                                       |  |                                | (5,904  | ) |      |   | (440   | )
|                                                                            |  |                                |         |   |      |   |        |  
|Effect of exchange rate changes on cash                                     |  |                                | (15     | ) |      |   | 244    |  
|                                                                            |  |                                |         |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                | 1,038   |   |      |   | (170   | )
|Cash and cash equivalents, beginning of period                              |  |                                | 2,367   |   |      |   | 3,457  |  
|                                                                            |  |                                |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                              | 3,405   |   |      | $ | 3,287  |  
|                                                                            |  |                                |         |   |      |   |        |  



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



5



---

##### Table of Contents

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 period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year
ending March 31, 2005. 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, 2004, included in our 2004 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.



6



---

##### Table of Contents

3. Stock-based compensation



The Company accounts for stock incentives available to employees and non-employee directors under its stock-based
compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees as allowed under FAS No. 123, Accounting for Stock-Based Compensation. The Company
has adopted the provisions of FAS No. 123 and FAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which require disclosure of the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted.



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, |  
|                          |  | 2004                          |   |  | 2003   |  
|Risk-free interest rate   |  | 3.27                          | % |  | 2.28   | %
|Expected dividend yields  |  | 0                             |   |  | 0      |  
|Expected lives (in years) |  | 3.5                           |   |  | 3.5    |  
|Expected volatility       |  | 196.47                        | % |  | 221.58 | %



The Company issued
options to purchase a total of 5.8 million shares of its common stock under its option plan on May 1, 2003, with an exercise price equal to the $.40 per share market value of the stock on that date.



The weighted average grant-date fair value of options granted during the
six-month period ended September 30, 2004 was computed as approximately $450,000 or $.60 per share under option.



The weighted average grant-date fair value of options granted during the six-month period ended September 30, 2003 was computed as approximately $2.2
million or $.385 per share under option.



The values above 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 loss and 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, |  
|                                                 |  | (in thousands, except per share amounts) |     
|                                                 |  | 2004                                     |      |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Net loss                                         |  |                                          |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|As reported                                      |  | $                                        | (814 | ) |                               | $ | (1,597 | )    |  | $ | (1,428 | ) |  | $ | (2,487 | )
|Fair value based compensation cost, net of taxes |  |                                          | (87  | ) |                               |   | (47    | )    |  |   | (175   | ) |  |   | (90    | )
|                                                 |  |                                          |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net loss                               |  | $                                        | (901 | ) |                               | $ | (1,644 | )    |  | $ | (1,603 | ) |  | $ | (2,577 | )
|                                                 |  |                                          |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share                 |  |                                          |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|As reported                                      |  | $                                        | (.01 | ) |                               | $ | (.02   | )    |  | $ | (0.02  | ) |  | $ | (0.04  | )
|Pro forma                                        |  | $                                        | (.01 | ) |                               | $ | (.02   | )    |  | $ | (0.02  | ) |  | $ | (0.04  | )



7



---

##### Table of Contents

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 30,2004 |        |   | March 31,2004 |  
|Raw materials                             |  | $                 | 7,747  |   |               | $ | 6,293  |  
|Work in process                           |  |                   | 3,157  |   |               |   | 3,918  |  
|Finished goods                            |  |                   | 1,622  |   |               |   | 2,703  |  
|                                          |  |                   |        |   |               |   |        |  
|Inventories, gross                        |  |                   | 12,526 |   |               |   | 12,914 |  
|Reserve for excess and obsolete inventory |  |                   | (721   | ) |               |   | (693   | )
|                                          |  |                   |        |   |               |   |        |  
|Inventories, net                          |  | $                 | 11,805 |   |               | $ | 12,221 |  
|                                          |  |                   |        |   |               |   |        |  



5. Long-term contracts



Costs and estimated earnings on uncompleted contracts and
related amounts billed as of September 30 and March 31, 2004, respectively, are as follows (in thousands):



|                                                                            |  |                   |         |   |               |   |         |  
|--------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                            |  | September 30,2004 |         |   | March 31,2004 |  
|Costs incurred on uncompleted contracts                                     |  | $                 | 38,546  |   |               | $ | 34,322  |  
|Estimated earnings                                                          |  |                   | 15,346  |   |               |   | 13,007  |  
|                                                                            |  |                   |         |   |               |   |         |  
|                                                                            |  |                   | 53,892  |   |               |   | 47,329  |  
|Less: billings to date                                                      |  |                   | (51,313 | ) |               |   | (44,489 | )
|                                                                            |  |                   |         |   |               |   |         |  
|                                                                            |  | $                 | 2,579   |   |               | $ | 2,840   |  
|                                                                            |  |                   |         |   |               |   |         |  
|Such Amounts are included in the following accounts (in thousands):         |  |                   |         |   |               |   |         |  
|                                                                            |  |                  
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $                 | 3,969   |   |               | $ | 4,268   |  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |                   | (1,390  | ) |               |   | (1,428  | )
|                                                                            |  |                   |         |   |               |   |         |  
|                                                                            |  | $                 | 2,579   |   |               | $ | 2,840   |  
|                                                                            |  |                   |         |   |               |   |         |  



8



---

##### Table of Contents

6. Other noncurrent assets



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



|                             |  |                   |       |               |   |      |  
|---------------------------- |  | ----------------- | ----- | ------------- | - | ---- | -
|                             |  | September 30,2004 |       | March 31,2004 |  
|Non-compete agreement        |  | $                 |      |               | $ | 33   |  
|Debt issuance costs          |  |                   | 1,484 |               |   | 659  |  
|                             |  |                   |       |               |   |      |  
|                             |  |                   | 1,484 |               |   | 692  |  
|Accumulated amortization     |  |                   |      |               |   | (505 | )
|                             |  |                   |       |               |   |      |  
|Other noncurrent assets, net |  | $                 | 1,484 |               | $ | 187  |  
|                             |  |                   |       |               |   |      |  



At September 30, 2004,
the Company had debt issuance costs of $1.5 million related to the New Credit Agreement discussed in Note 7. For the three and six-month periods ended September 30, 2004, amortization expense, related to the previous credit facility, was $322,000
and $419,000, respectively. For the year ending March 31, 2005, amortization expense is expected to be approximately $570,000.



7. Long-term debt



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



|                             |  |                   |        |   |               |   |        |  
|---------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                             |  | September 30,2004 |        |   | March 31,2004 |  
|Working capital - borrowings |  | $                 | 7,150  |   |               | $ | 230    |  
|Long-term debt  Loan A      |  |                   | 15,000 |   |               |   | 11,582 |  
|Long-term debt  Loan B      |  |                   | 15,000 |   |               |   | 29,190 |  
|Capital lease obligations    |  |                   | 93     |   |               |   | 119    |  
|                             |  |                   |        |   |               |   |        |  
|                             |  |                   | 37,243 |   |               |   | 41,121 |  
|                             |  |                  
|Due within one year          |  |                   | (2,181 | ) |               |   | (2,953 | )
|                             |  |                   |        |   |               |   |        |  
|Long-term debt               |  | $                 | 35,062 |   |               | $ | 38,168 |  
|                             |  |                   |        |   |               |   |        |  



On September 30, 2004,
the Company entered into a Revolving Credit, Term Loan and Security Agreement (the New Credit Agreement) with CapitalSource Finance LLC (CapitalSource), as administrative, payment and collateral agent for the lenders named
therein. The New Credit Agreement permits a maximum borrowing capacity of $42 million and matures on September 30, 2009.



The New Credit Agreement provides for a revolving credit facility on which up to $12,000,000 may be drawn (subject to adjustment based on letter of credit
usage and compliance with identified leverage ratios), a $15,000,000 Term A loan and a $15,000,000 Term B loan. The revolving credit facility requires the Company to pay interest on a monthly basis in cash at an annual rate
equal to the prime rate plus .5% subject to a floor of 4.75% (5.25% at September 30, 2004). At September 30, 2004, the amount available on the revolving credit facility was $4,850,000. All amounts outstanding under the revolving credit
facility are due in full on September 30, 2009.



The Term A
loan requires the Company to pay interest on a monthly basis in cash at an annual rate equal to the prime rate plus 3% subject to a floor of 7.25% (7.75% at September 30, 2004). The Company must also make scheduled quarterly payments of
principal under the Term A loan. The quarterly principal payments required are in the amount of $531,250 for the first year of the term, $750,000 for the second through fourth years of the term, and $968,750 in the fifth year of the term.



9



---

##### Table of Contents

The Term B loan requires the Company to pay interest on a monthly basis in cash at an annual rate equal
to the prime rate plus 6% subject to a floor of 10.25% (10.75% at September 30, 2004). The Company is also required to pay interest payable-in-kind (PIK interest), which accrues monthly at an annual rate of 1.5%. The PIK
interest is due and payable on the earlier to occur of (i) the Companys early redemption or termination of the Term B loan, (ii) the lenders demand as a result of a default or (iii) September 30, 2009. The Company has the option at any
time to pay the PIK interest in cash. Outstanding principal under the Term B loan is due in full at the maturity date.



Borrowings under the New Credit Agreement are collateralized by substantially all of the Companys assets. The Company has also pledged all of the
stock of its operating subsidiary, FATS, Inc., and 65% of the stock of its foreign subsidiaries. The Company generally will be required to apply all proceeds it receives from transactions in which it sells any material assets, sells equity
securities or incurs indebtedness for borrowed money as a mandatory prepayment on the outstanding obligations under the New Credit Agreement. In addition, subject to certain availability exceptions, the Company will be required to apply 50% of its
excess cash flow each year as a mandatory prepayment. Among other restrictions, the New Credit Agreement includes certain restrictive covenants, including covenants related to indebtedness, asset acquisitions and dispositions, investments and
maintenance of required leverage ratios, minimum EBITDA and fixed charge coverage ratios.



In addition, the New Credit Agreement requires the Company to pay a number of lender fees including: (i) an unused credit line fee equal to 0.0417% per month of the difference between average outstanding revolving
loans and the revolving loan cap; (ii) a monthly collateral management fee equal to 0.0417% per month of the average outstanding revolving loans; (iii) a monthly float day fee calculated in accordance with a specified formula; (iv) a letter of
credit fee equal to 3% of the undrawn face amount of outstanding letters of credit; and (v) a termination fee (ranging from 1% to 2% of the amount prepaid as to the Term A loan, and either a yield maintenance fee calculated in accordance with a
specified formula or up to 2% of the amount prepaid depending on the timing of the prepayment as to the Term B loan) in the event the term loans are prepaid prior to the second anniversary of the closing.



As of September 30, 2004, $37,150,000 was outstanding under the New Credit
Agreement.



8. Mandatorily redeemable preferred stock (Series B)



In August 2000, the board of directors approved an
amendment to the Companys certificate of incorporation to change the number of authorized shares of preferred stock to 100,000. The board of directors then created a new class of Series B preferred stock with 50,000 authorized shares. Holders
of the Series B preferred stock were entitled to receive cumulative dividends equal to 10% of the liquidation preference payable quarterly in additional shares of Series B preferred stock.



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 August 2000 in conjunction with its debt restructuring (see Note 3 to the financial statements contained in the Companys most recently filed Form 10-K for the year ended
March 31, 2004). Accretion related to dividends earned on the Series B during the years ended March 31, 2002, 2003 and 2004 of approximately $2,353,000, $2,597,000 and $2,867,000, respectively. These amounts were previously offset by the reduction
of approximately $2,083,000 and $2,299,000 in the debt restructuring liability allocated to the preferred stock, resulting in net accretion of approximately $270,000 and $298,000 for the years ended March 31, 2002 and 2003, respectively. As of March
31, 2003, the debt restructuring liability related to the preferred stock was fully amortized and, therefore, for the year ended March 31, 2004, the total $2,867,000 of preferred stock dividends was reported without the related offsetting
amortization.



The Company adopted the classification
provisions of SFAS No. 150, Accounting for Certain Liabilities with Characteristics of both Liabilities and Equityas of the beginning of the year ended March 31, 2004. Those provisions require the Company to include the mandatorily
redeemable preferred stock as a liability in its balance sheet and to include the dividends on the preferred stock as a component of interest expense in its income statement, and prohibit reclassification of prior year amounts. Accordingly, the net
accretion of preferred stock dividends was reported as an adjustment to net income to arrive at net income attributable to common stockholders for the years ended March 31, 2002 and 2003, and the total preferred stock dividends was reported as
interest expense in the income statement for the year ended March 31, 2004.



The Series B preferred stock was subject to mandatory redemption on October 15, 2005 at its liquidation value. Accordingly, the mandatorily redeemable preferred stock was not classified as a current liability as of
March 31, 2004. All of the shares of Series B preferred stock were exchanged for shares of Series C preferred stock in connection with the debt restructuring described in Note 7.



10



---

##### Table of Contents

9. Preferred stock (Series C)



In September 2004, the board of directors created a new class of Series C preferred stock with 3,500 authorized shares.
Holders of the Series C preferred stock are entitled to receive, if declared by the board, cumulative dividends equal to (i) 10% of the liquidation preference per year through March 31, 2006; (ii) 12% of the liquidation preference per year through
September 30, 2006 and (iii) 14% of the liquidation preference per year thereafter, payable in cash. Dividends are cumulative and compound quarterly whether or not there are funds available for the payment of dividends.



The Company issued 3,202.78 shares of Series C preferred stock with a
liquidation value of $10,000 (subject to adjustment to reflect any stock split, combination, reclassification or similar event involving the Series C Preferred) per share (approximately $32.03 million) in September 2004 in exchange for the then
outstanding 32,027.80 shares of the Series B preferred stock.



The Company may redeem the shares of Series C Preferred at any time and from time to time at a redemption price equal to the liquidation preference plus the amount of all accrued and unpaid dividends, whether or not earned or declared. The
shares of Series C Preferred are required to be redeemed upon the occurrence of a change of control (which includes the sale of all or substantially all of the Companys assets, merger, consolidation or similar event in which more
than 50% of the voting stock of the Company is transferred). In the event the Company is legally prohibited from redeeming the shares when required (or the Company materially breaches any of its other obligations under the Series C Designations),
the applicable dividend rate payable on the Series C Preferred will be increased by 2% per annum.



The Series C Preferred ranks prior to all other classes of preferred and common stock as to payment of dividends and the distribution of amounts upon
liquidation, dissolution or winding up. Holders of shares of the Series C Preferred generally do not have any voting rights other than those provided by law. The Company must obtain the consent from holders of at least a majority of the outstanding
shares of Series C Preferred in order to: (i) enter into any plan of liquidation or dissolution (unless prior written notice of any such plan is given to the Series C Preferred holders and, as a result of such liquidation or dissolution, the Company
is able to satisfy in full the liquidation preferences together with all accrued and unpaid dividends on the shares); (ii) enter into any agreement which by its terms would violate or conflict with the rights of the Series C Preferred holders; (iii)
subject to certain exceptions, amend or waive any provision of the Series C Designations or the Companys certificate of incorporation. Any amendment that would decrease the dividend rate payable on the Series C Preferred requires the consent
of all holders of Series C Preferred. Any amendment that would increase the authorized number of Series C Preferred shares or that would result in the issuance of capital stock ranking senior to or on parity with the Series C Preferred as to
dividends or rights upon liquidation requires the consent of at least two holders who are not affiliates of each other and who hold, in the aggregate, at least a majority of the Series C Preferred shares.



10. Related party transactions



Special Situations Opportunity Fund I, LLC, one of the Term A lenders under
the New Credit Agreement described in Note 7, is an affiliate of First Source Financial, Inc. First Source is a preferred stockholder of FATS and an affiliate of First Source owns approximately 13.5% of the outstanding common stock of FATS. In
addition, the primary lenders under the credit facility that was paid in full in connection with the New Credit Agreement included Centre Capital Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
L.P., Centre Partners Coinvestment, L.P. (collectively, the Centre Entities). The Centre Entities are among the Companys largest stockholders and have a representative on the Companys Board of Directors.



On September 30, 2004, the Company entered into an Exchange Agreement with
the Centre Entities, U.S. Bank National Association and First Source Financial LLP. As reflected in Note 8, in accordance with the Exchange Agreement the Company issued 3,202.78 shares of its Series C preferred stock to these entities exchange for
32,027.80 shares of its Series B preferred stock previously held by them. As a result of the exchange, all of the previously issued shares of Series B Preferred were cancelled.



11



---

##### Table of Contents

11. Net loss per common share



Basic and diluted net loss per share was calculated by dividing net loss by the weighted average common shares
outstanding for the three and six-month periods ended September 30, 2004 and 2003.



Options to purchase 7,022,046 shares of common stock at September 30, 2004 and 7,133,738 shares of common stock at September 30, 2003 and warrants to purchase 5,246,164 shares of common stock at September 30, 2004 and
2003 were outstanding, but were not included in the computation of the diluted EPS because their effect would have been anti-dilutive, thereby increasing net loss per share.



12. Contingencies and commitments



Product Warranty Reserve



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



Changes in the product warranty accrual for the three and six-month periods ended September 30, 2004 and 2003 were as follows (in thousands):



|                                 |  |                                 |      |   |                               |   |     |      |  |   |      |   |  |   |     |  
|-------------------------------- |  | ------------------------------- | ---- | - | ----------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                 |  | Three Months EndedSeptember 30, |      |   | Six Months EndedSeptember 30, |  
|                                 |  | 2004                            |      |   | 2003                          |   |     | 2004 |  |   | 2003 |  
|Balance  beginning              |  | $                               | 166  |   |                               | $ | 672 |      |  | $ | 214  |   |  | $ | 704 |  
|Claims paid                      |  |                                 | (118 | ) |                               |   | (55 | )    |  |   | (131 | ) |  |   | (97 | )
|Warranties issued/(expired), net |  |                                 | 175  |   |                               |   | 85  |      |  |   | 140  |   |  |   | 95  |  
|                                 |  |                                 |      |   |                               |   |     |      |  |   |      |   |  |   |     |  
|Balance - ending                 |  | $                               | 223  |   |                               | $ | 702 |      |  | $ | 223  |   |  | $ | 702 |  
|                                 |  |                                 |      |   |                               |   |     |      |  |   |      |   |  |   |     |  



13. Supplemental cash flow
disclosures



|                                                    |  |                                |       |      |   |       |  
|--------------------------------------------------- |  | ------------------------------ | ----- | ---- | - | ----- | -
|                                                    |  | Six Months Ended September 30, |      
|                                                    |  | 2004                           |       | 2003 |  
|Cash paid (received) for (in thousands):            |  |                                |       |      |   |       |  
|                                                    |  |                               
|Interest (includes PIK interest of $6,293 for 2004) |  | $                              | 9,767 |      | $ | 1,726 |  
|Income taxes                                        |  |                                | 96    |      |   | (248  | )



14. Comprehensive loss



|                                        |  |                                 |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------------------------- | ---- | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | Three Months EndedSeptember 30, |      |   | Six Months EndedSeptember 30, |  
|                                        |  | 2004                            |      |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Net loss                                |  | $                               | (814 | ) |                               | $ | (1,597 | )    |  | $ | (1,428 | ) |  | $ | (2,487 | )
|Foreign currency translation adjustment |  |                                 | 134  |   |                               |   | (9     | )    |  |   | (2     | ) |  |   | 244    |  
|                                        |  |                                 |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Comprehensive loss                      |  | $                               | (680 | ) |                               | $ | (1,606 | )    |  | $ | (1,430 | ) |  | $ | (2,243 | )
|                                        |  |                                 |      |   |                               |   |        |      |  |   |        |   |  |   |        |  



12



---

##### 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, 2004.



You should carefully review the information contained in this Report, and should particularly consider any risks and other
factors that we set forth in the most recently filed Form 10-K for the fiscal year ended March 31, 2004, and in other reports or documents that we file from time to time with the SEC. In this 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 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, especially with respect to
large defense contractors,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in technology which may affect our existing and future product offerings,
| | - | ---------------------------------------------------------------------------------



| |  | disruptions in scheduled development of new products,
| | - | -----------------------------------------------------



| |  | decline in 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 that involve our competitors, especially with respect to large defense contractors,
| | - | ----------------------------------------------------------------------------------------------------------------------



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



| |  | general economic conditions including changes in customer budgets and spending profiles, and
| | - | --------------------------------------------------------------------------------------------



| |  | the other risks identified in Management Discussion and Analysis of Financial Condition and Results of Operations  Risk Factorscontained in the Companys
most recently filed Form 10-K for the fiscal year ended March 31, 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

Critical Accounting Policies and Estimates



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



Revenue Recognition



Customer contracts that require significant customization of the
Companys existing proprietary platform or require the development of new systems to meet required customer specifications are accounted for under the percentage of completion method, measured by the percentage of cost incurred to date to the
estimated total cost for each contract. Accounting for such contracts is essentially a process of measuring the results of relatively long-term events and allocating those results to relatively short-term accounting periods. This involves
considerable use of estimates in determining costs and profits and thereby estimating the timing of revenue recognition and in assigning the amounts to accounting periods. The process is complicated by the need to evaluate continually the
uncertainties inherent in the performance of contracts and by the need to rely on estimates of revenues, costs, and the extent of 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 being defined as net realizable value. Management periodically reviews Company inventory for items that may be deemed obsolete, damaged or for amounts on hand in excess of
anticipated future demand. The underlying assumptions utilized in assessing the Companys inventory change from time-to-time due to change in the underlying sales mix, the release of new versions of the Companys proprietary system and
overall changes in technology and the marketplace. As the Company develops new product lines, future charges against income may be necessary to reduce inventory to its net realizable value.



Contract Cost Provision Reserve



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



Warranty Cost
Provision Reserve



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



14



---

##### Table of Contents

RESULTS OF OPERATIONS



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



|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|---------------------------------------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | - |  | ------ | - |  | ------ | -
|                                                                       |  | Three Months EndedSeptember 30, |   |  | Six Months EndedSeptember 30, |  
|                                                                       |  | 2004                            |   |  | 2003                          |   |  | 2004   |   |  | 2003   |  
|Revenue                                                                |  | 100.00                          | % |  | 100.00                        | % |  | 100.00 | % |  | 100.00 | %
|Cost of revenue                                                        |  | 68.37                           |   |  | 69.82                         |   |  | 67.20  |   |  | 71.37  |  
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Gross Margin                                                           |  | 31.63                           |   |  | 30.18                         |   |  | 32.80  |   |  | 28.63  |  
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Operating expenses                                                     |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Selling, general and administrative                                    |  | 18.28                           |   |  | 23.29                         |   |  | 18.42  |   |  | 20.69  |  
|Research and development                                               |  | 3.60                            |   |  | 5.59                          |   |  | 4.57   |   |  | 4.36   |  
|Depreciation and amortization                                          |  | .59                             |   |  | .84                           |   |  | 0.61   |   |  | 0.82   |  
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Total operating expenses                                               |  | 22.47                           |   |  | 29.72                         |   |  | 23.60  |   |  | 25.87  |  
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Operating income                                                       |  | 9.16                            |   |  | .46                           |   |  | 9.20   |   |  | 2.76   |  
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Other income (expense), net                                            |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Interest expense  debt, net                                           |  | (8.00                           | ) |  | (10.45                        | ) |  | (6.79  | ) |  | (8.48  | )
|Interest expense  dividends on mandatorily redeemable preferred stock |  | (3.88                           | ) |  | (5.47                         | ) |  | (4.05  | ) |  | (4.90  | )
|Other, net                                                             |  | (1.55                           | ) |  | (.45                          | ) |  | (2.16  | ) |  | (0.06  | )
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Total other expense                                                    |  | (13.43                          | ) |  | (16.37                        | ) |  | (13.00 | ) |  | (13.44 | )
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Loss before benefit for income taxes                                   |  | (4.27                           | ) |  | (15.91                        | ) |  | (3.80  | ) |  | (10.68 | )
|Benefit for income taxes                                               |  | (.27                            | ) |  | (3.54                         | ) |  | (0.04  | ) |  | (1.97  | )
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  
|Net loss                                                               |  | (4.00                           | ) |  | (12.37                        | ) |  | (3.76  | ) |  | (8.71  | )
|                                                                       |  |                                 |   |  |                               |   |  |        |   |  |        |  



Three Months Ended September 30,
2004 and 2003:



Net Revenues: Revenues increased $7.2
million, or 55.7%, to $20.1 million for the three months ended September 30, 2004, as compared to $12.9 million for the three months ended September 30, 2003. Sales to international customers for the three months ended September 30, 2004 increased
$.2 million, or 3.9%, to $5.7 million. Sales to U.S. military customers for the three months ended September 30, 2004 increased by $8.7 million, or 182.0%, to $13.4 million. The U.S. military increase is due primarily to the incremental sales and
system upgrades with existing customers and initial sales of I-FACT (Close Air Support Trainer) and VCCT (Virtual Combat Convoy Trainer). Sales to U.S. law enforcement customers for the three months ended September 30, 2004 decreased $1.7 million,
or 62.5%, to $1.0 million reflecting state and municipality budgeting shortfalls associated with diversion of funds to offset operational costs.



Cost of Revenues: Cost of revenues increased $4.7 million, or 52.5%, to $13.8 million for the three months ended September 30, 2004, as compared to $9.0
million for the three months ended September 30, 2003. As a percentage of revenues, cost of revenues for the three months ended September 30, 2004 decreased to 68.4%, as compared to 69.8% for the three months ended September 30, 2003. The decrease
in cost of revenues as a percentage of revenues is attributable primarily to the discipline of pursuing new business that reflects the corporate margin objective and continued internal cost control initiatives.



15



---

##### Table of Contents

Gross Profit: As a result of the foregoing, gross profit increased $2.5 million, or 63.1%, to $6.4
million, or 31.6% of revenues, for the three months ended September 30, 2004, as compared to $3.9 million, or 30.2% of revenues, for the three months ended September 30, 2003.



Total Operating Expenses: Total operating expenses increased $0.7 million, or 17.9%, to $4.5 million for the three months
ended September 30, 2004 as compared to $3.8 million for the three months ended September 30, 2003. As a percentage of revenues, total operating expenses decreased to 22.5% for the three months ended September 30, 2004, as compared to 29.7% for the
three months ended September 30, 2003. Selling, general and administrative (SG&A) expenses, which include bid and proposal activities, increased from $3.0 million for the three months ended September 30, 2003 to $3.7 million for the
three months ended September 30, 2004. This increase in SG&A is due primarily to legal fees associated with protecting intellectual property rights, increased emphasis in marketing costs, and costs associated with the severance of the former
CFO. Research and development (R&D) costs remained constant at $0.7 million, as well as depreciation and amortization expense, which remained constant at $0.1 million.



Operating Income: As a result of the foregoing, operating income increased $1.8 million to $1.8 million for the three months
ended September 30, 2004, as compared to $61,000 for the three months ended September 30, 2003. As a percentage of revenues, operating income was 9.1% of revenues for the three months ended September 30, 2004, as compared to 0.5% of revenues for the
three months ended September 30, 2003.



Other Income (Expense),
net: Other income (expense), net totaled $(2.7) million, or (13.4%) of revenues for the three months ended September 30, 2004, as compared to $(2.1) million, or (16.4%) of revenues for the three months ended September 30, 2003. Interest on debt
increased $0.3 or 19.2%, due primarily to the increased rates and amortization of financing costs related to an earlier extension of the Companys prior credit facility that was replaced by the New Credit Agreement on September 30, 2004.
Dividends on mandatorily redeemable preferred stock increased $74,000, or 10.5%, due to the compounding effect of the 10% dividends, which were paid in additional shares of the preferred stock. In addition, due to the weaker dollar, the foreign
currency exchange loss was $0.3 million for the three months ended September 30, 2004.



Loss Before Benefit for Income Taxes: As a result of the foregoing, the loss before benefit for income taxes decreased by $1.2 million from a loss of $2.1 million for the three months ended September 30, 2003 to a
loss of $0.9 million for the three months ended September 30, 2004.



Benefit for Income Taxes: The net taxable loss for the three months ended September 30, 2004 produced a tax benefit of $53,000, while the net taxable loss for the three months ended September 30, 2003 resulted in a tax benefit of $458,000.



Net Loss: As a result of the foregoing, the net loss
decreased by $0.8 million to $0.8 million, or $0.01 loss per share, for the three months ended September 30, 2004 from $1.6 million, or $0.02 loss per share, for the three months ended September 30, 2003.



Six Months Ended September 30, 2004 and 2003:



Net Revenues: Revenues increased $9.6 million, or 33.6%, to $38.1 million
for the six months ended September 30, 2004, as compared to $28.5 million for the six months ended September 30, 2003. Sales to international customers for the six months ended September 30, 2004 increased $1.1 million, or 8.3%, to $14.2 million.
Sales to U.S. military customers for the six months ended September 30, 2004 increased by $10.4 million, or 91.7%, to $21.8 million. The increase in U.S. military sales is due primarily to the incremental sales and system upgrades with existing
customers and initial sales of I-FACT (Close Air Support Trainer) and VCCT (Virtual Combat Convoy Trainer). Sales to U.S. law enforcement customers for the six months ended September 30, 2004 decreased $1.9 million, or (46.9)%, to $2.2 million
reflecting state and municipality budgeting shortfalls associated with diversion of funds to offset operational costs.



Cost of Revenues: Cost of revenues increased $5.3 million, or 25.8%, to $25.6 million for the six months ended September 30, 2004, as compared to $20.4
million for the six months ended September 30, 2003. As a percentage of revenues, cost of revenues for the six months ended September 30, 2004 decreased to 67.2%, as compared to 71.4% for the six months ended September 30, 2003. The decrease in cost
of revenues as a percentage of revenues is attributable primarily to the discipline of pursuing sales at or above the corporate margin objective, execution of existing contracts without margin erosion, and the positive results of continuing positive
cost control initiatives.



16



---

##### Table of Contents

Gross Profit: As a result of the foregoing, gross profit increased $4.3 million, or 53.1%, to $12.5
million, or 32.8% of revenues, for the six months ended September 30, 2004, as compared to $8.2 million, or 28.6% of revenues, for the six months ended September 30, 2003.



Total Operating Expenses: Total operating expenses increased $1.6 million, or 21.8%, to $9.0 million for the six months
ended September 30, 2004 as compared to $7.4 million for the six months ended September 30, 2003. As a percentage of revenues, total operating expenses decreased to 23.6% for the six months ended September 30, 2004 as compared to 25.9% for the six
months ended September 30, 2003. Selling, general and administrative (SG&A) expenses, which include bid and proposal activities, increased from $5.9 million for the six months ended September 30, 2003 to $7.0 million for the six
months ended September 30, 2004. This increase in SG&A is due primarily to increased emphasis in marketing, bid and proposal for new business, primarily related to the Singapore Police Coast Guard contract, and costs associated with the
severance of the former CFO. Research and development (R&D) costs increased $0.5 million, or 39.7%, to $1.7 million for the six months ended September 30, 2004, as compared to $1.2 million for the six months ended September 30, 2003, due
primarily to increases in developmental efforts related to Bluefire weapons, enhancements to our I-FACT product, and single platform initiative. Depreciation and amortization expense remained constant at $0.2 million.



Operating Income: As a result of the foregoing, operating income increased
$2.7 million to $3.5 million for the six months ended September 30, 2004, as compared to $0.8 million for the six months ended September 30, 2003. As a percentage of revenues, operating income was 9.2% of revenues for the six months ended September
30, 2004, as compared to 2.8% of revenues for the six months ended September 30, 2003.



Other Income (Expense), net: Other income (expense), net totaled $(5.0) million, or (13.0%) of revenues for the six months ended September 30, 2004 as compared to $(3.8) million, or (13.4%) of revenues for the six
months ended September 30, 2003. Interest on debt increased $0.6 or 24.3%, due primarily to the increased rates and amortization of financing costs related to the extension of the debt maturity date (related to the previous financing arrangement
prior to the most recent arrangement dated September 30, 2004 as discussed herein). Dividends on mandatorily redeemable preferred stock increased $145,000, or 10.4%, due to the compounding effect of the 10% dividends, which were paid in additional
shares of the preferred stock. In addition, due to the weaker dollar, the foreign currency exchange loss was $0.3 million for the six months ended September 30, 2004.



Loss Before Benefit for Income Taxes: As a result of the foregoing, the loss before benefit for income taxes decreased by
$1.6 million from a loss of $3.0 million for the six months ended September 30, 2003 to a loss of $1.4 million for the six months ended September 30, 2004.



Benefit for Income Taxes: The net taxable loss for the six months ended September 30, 2004 produced a tax benefit of $13,000 while the net taxable loss
for the six months ended September 30, 2003 resulted in tax benefit of $561,000.



Net Loss: As a result of the foregoing, the net loss decreased by $1.1 million to $1.4 million, or $0.02 loss per share, for the six months ended September 30, 2004 from $2.5 million, or $0.04 loss 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, 2004 and 2003, the Company had a backlog of approximately $47.3 and $65.1 million, respectively. As of September 30,
2004, the backlog was comprised of $28.8 million from international customers and $18.5 million from FATS U.S. military and law enforcement customers. Approximately $33.2 million of the contracted orders are scheduled for delivery during fiscal year
2005.



17



---

##### Table of Contents

Changes in backlog for the three and six-month periods ended September 30, 2004 and 2003 were as follows
(in thousands):



|                              |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months EndedSeptember 30, |         |   | Six Months EndedSeptember 30, |  
|                              |  | 2004                            |         |   | 2003                          |   |         | 2004 |  |   | 2003    |  
|Backlog  beginning of period |  | $                               | 53,073  |   |                               | $ | 60,368  |      |  | $ | 59,310  |   |  | $ | 64,346  |  
|New bookings                  |  |                                 | 14,361  |   |                               |   | 17,680  |      |  |   | 26,136  |   |  |   | 29,320  |  
|Revenue                       |  |                                 | (20,130 | ) |                               |   | (12,931 | )    |  |   | (38,142 | ) |  |   | (28,549 | )
|                              |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Backlog  end of period       |  | $                               | 47,304  |   |                               | $ | 65,117  |      |  | $ | 47,304  |   |  | $ | 65,117  |  
|                              |  |                                 |         |   |                               |   |         |      |  |   |         |   |  |   |         |  



LIQUIDITY AND CAPITAL RESOURCES



On September 30, 2004, the Company entered into a new
credit agreement (the New Credit Agreement) with CapitalSource Finance, LLC. The New Credit Agreement provides for a revolving facility up to $12 million; a term A loan facility in an aggregate maximum principal amount of $15 million; and a term B
loan facility in an aggregate maximum principal amount of $15 million. A more complete description of the terms of the New Credit Agreement is set forth in Note 7 to the Condensed Consolidated Financial Statements contained elsewhere in this report.



As of September 30, 2004, the Company had working capital of
$24.1 million compared to $22.1 million as of September 30, 2003. The net $2.0 million increase in working capital is primarily the result of improved results of operations for fiscal year 2005.



The Company had a net increase in cash and cash equivalents of $1.0 million
for the six months ended September 30, 2004 compared to a net decrease of cash and cash equivalents of $0.2 million for the six months ended September 30, 2003. For the period ended September 30, 2004, the Companys operating activities
generated cash of approximately $7.3 million compared to $1.1 million for the six months ended September 30, 2003. Cash flow from operations increased primarily due to the decreased net loss, decreases in costs and estimated earnings in excess of
billings on uncompleted contracts, and the increase in deferred revenue.



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 2000, the Company has
financed its operations and growth primarily through internally generated funds and income tax refunds. With the issuance of the New Credit Agreement, discussed above, management believes that funds provided by operations will be sufficient to fund
its cash needs and anticipated capital expenditures through at least the next twelve months.



The Company is subject to several business and market risks. The Company must continue to achieve its revenue targets and cost reduction objectives in the current fiscal year in order to generate adequate cash flow to
fund working capital needs and to service debt requirements. Also, 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.



CONCENTRATION OF CREDIT RISK



As of September 30, 2004, approximately $8.7 million in accounts receivable
or 59.3% of total net accounts receivable was due from the Companys top five customers,all of which are due from U.S., U.K. and Greek government contracts and subcontracts.



18



---

##### Table of Contents

COMMITMENTS AND OTHER CONTRACTURAL OBLIGATIONS



Disclosure of Commitments and Other Obligations

September 30, 2004

(amounts in thousands)



|                             |  |       |        |                 |   |                 |  |                 |        |               |   |        |  |   |  
|---------------------------- |  | ----- | ------ | --------------- | - | --------------- |  | --------------- | ------ | ------------- | - | ------ |  | - | -
|                             |  | Total |        | Less than1 year |   | Within1-3 years |  | Within4-5 years |        | After 5 years
|Long-term debt               |  |       |        |                 |   |                 |  |                 |        |               |   |        |  |   |  
|Working capital  borrowings |  | $     | 7,150  |                 | $ |                |  | $               |       |               | $ | 7,150  |  | $ | 
|Long-term debt  Senior      |  |       | 15,000 |                 |   | 2,125           |  |                 | 9,000  |               |   | 3,875  |  |   | 
|Long-term debt  Junior      |  |       | 15,000 |                 |   |                |  |                 |       |               |   | 15,000 |  |   | 
|Capital lease obligations    |  |       | 93     |                 |   | 56              |  |                 | 37     |               |   |       |  |   | 
|Other                        |  |       |        |                 |   |                 |  |                 |        |               |   |        |  |   |  
|Other purchase orders        |  |       | 6,781  |                 |   | 6,289           |  |                 | 492    |               |   |       |  |   |  
|Operating lease obligations  |  |       | 2,825  |                 |   | 899             |  |                 | 1,539  |               |   | 387    |  |   | 
|                             |  |       |        |                 |   |                 |  |                 |        |               |   |        |  |   |  
|Total                        |  | $     | 46,849 |                 | $ | 9,317           |  | $               | 11,120 |               | $ | 26,412 |  | $ | 
|                             |  |       |        |                 |   |                 |  |                 |        |               |   |        |  |   |  



OFF BALANCE SHEET ARRANGEMENTS



As of March 31, 2004, the Company did not have any
off-balance sheet financing transactions or arrangements other than disclosed in the table above.



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. 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 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, 2004.



As of September 30, 2004, the Company had
a total of approximately $37.1 million in variable rate debt at a range of interest rates (the greater of prime plus .5 to 6.0 percent or four and three-quarters to ten and one-quarter percent). 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.



19



---

##### Table of Contents

ITEM 4. CONTROLS AND PROCEDURES



The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (Exchange Act), that are designed to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC) and that such
information is accumulated and communicated to the Companys management, including its chief executive and chief financial officers, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation,
under the supervision and with the participation of its management, including its chief executive and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period
covered by this Report. Based on the evaluation of these disclosure controls and procedures, the chief executive and chief financial officer of the Company concluded that the Companys disclosure controls and procedures were effective as of the
end of the period covered by this Report.



There were no
changes in the Companys internal control over financial reporting during the Companys fiscal quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.



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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



The Company previously reported the sale of its shares of Series C preferred stock in exchange for its then outstanding shares of Series B preferred stock
in its Form 8-K filed October 6, 2004. Other than the exchange of these shares, the Company has made no repurchases of its securities in the quarter covered by this Report. The Companys ability to pay dividends on its capital stock is
restricted by the terms of the New Credit Agreement which requires, among other things, the Company be in compliance with its financial covenants and that no event of default have occurred or result therefrom.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



The Company held its 2004 annual meeting of stockholders on September 23, 2004. The stockholders were asked to reelect Ronavan Mohling to serve an additional term as a Class II director to serve on the Companys
Board of Directors until the 2007 annual meeting of stockholders.



The following votes were cast for and withheld from the election of Mr. Mohling as a Class II director: 54.7 million for / 0.3 withheld from. There were no Broker non-votes or abstentions. The following persons also continue to serve as
directors: Mary Ann Gilleece, as a Class III director whose term expires in 2005; and Scott Perekslis and Ronald C. Whitaker, as Class I directors whose terms expire in 2006. We continue to have one vacancy with respect to our Class II directors.



ITEM 6. EXHIBITS AND REPORT ON FORM 8-K



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



|     |  |                                                                                                                                                                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Certificate of Designations of Series C Preferred Stock of the Company setting forth the powers, preferences, rights, qualifications, limitations and restrictions of such series of Preferred
Stock, dated September 30, 2004 (filed as Exhibit 4.1 to the Form 8-K on October 6, 2004 and incorporated herein by reference)
|     | 
|10.1 |  | Revolving Credit, Term Loans and Security Agreement, dated as of September 30, 2004, among Firearms Training Systems, Inc., FATS, Inc. and CapitalSource Finance LLC (filed as Exhibit 10.1 to
the Form 8-K on October 6, 2004 and incorporated herein by reference)                                                         



20



---

##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.2 |  | Exchange Agreement, dated as of September 30, 2004, between the Company, Centre Capital Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II,
L.P., Centre Partners Coinvestment, L.P., Bank of America, N.A., U.S. Bank National Association and First Source Financial LLP (filed as Exhibit 10.2 to the Form 8-K on October 6, 2004 and incorporated herein by reference)
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                            
|     | 
|31.2 |  | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                              
|     | 
|32.1 |  | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                              
|     | 
|32.2 |  | Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                              



|(b) | The following report on Form 8-K was filed during the quarter ended September 30, 2004:
|--- | ---------------------------------------------------------------------------------------



On August 16, 2004, the Company furnished a current report on Form 8-K to disclose under Item 12 the issuance of its press
release announcing the Companys results of operations for the quarterly period ended June 30, 2004.



21



---

##### Table of Contents

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: November 15, 2004



FIREARMS TRAINING SYSTEMS, INC./S/ Gregory A. TonGregory A. TonChief Financial Officer and Treasurer(Principal Financial Officer and Duly Authorized Officer)




22