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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-Q



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(Mark One)

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



FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004



OR



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



COMMISSION FILE NUMBER: 333-13105



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FIREARMS TRAINING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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



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



As of August 13, 2004, there were 70,205,639 shares of the Registrants
Class A Common Stock outstanding.



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##### Table of Contents

FIREARMS TRAINING SYSTEMS, INC.

INDEX



|         |  |                                                                                                       |  |            
|-------- |  | ----------------------------------------------------------------------------------------------------- |  | -----------
|         |  |                                                                                                       |  | Page number
|PART I.  |  | FINANCIAL INFORMATION                                                                                 |  |            
|         |  |                                                                                                      
|ITEM 1.  |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                                          |  |            
|         |  |                                                                                                      
|         |  | Condensed Consolidated Statements of Operations Three months ended June 30, 2004 and 2003 (unaudited) |  | 3          
|         |  |                                                                                                      
|         |  | Condensed Consolidated Balance Sheets June 30, 2004 (unaudited) and March 31, 2004                    |  | 4          
|         |  |                                                                                                      
|         |  | Condensed Consolidated Statements of Cash Flows Three months ended June 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                 |  | 12         
|         |  |                                                                                                      
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                            |  | 18         
|         |  |                                                                                                      
|ITEM 4.  |  | CONTROLS AND PROCEDURES                                                                               |  | 18         
|         |  |                                                                                                      
|PART II. |  | OTHER INFORMATION                                                                                     |  |            
|         |  |                                                                                                      
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                                     |  | 19         
|         |  |                                                                                                      
|ITEM 5.  |  | OTHER INFORMATION                                                                                     |  | 19         
|         |  |                                                                                                      
|ITEM 6.  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                      |  | 19         
|         |  |                                                                                                      
|         |  | SIGNATURES                                                                                            |  | 20         



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share
amounts)



|                                                    |  |                            |        |   |      |   |        |  
|--------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Three Months Ended June 30 |       
|                                                    |  | 2004                       |        |   | 2003 |  
|Revenue                                             |  | $                          | 18,012 |   |      | $ | 15,618 |  
|Cost of revenue                                     |  |                            | 11,866 |   |      |   | 11,347 |  
|                                                    |  |                            |        |   |      |   |        |  
|Gross margin                                        |  |                            | 6,146  |   |      |   | 4,271  |  
|                                                    |  |                            |        |   |      |   |        |  
|Operating expenses                                  |  |                            |        |   |      |   |        |  
|Selling, general and administrative                 |  |                            | 3,339  |   |      |   | 2,897  |  
|Research and development                            |  |                            | 1,018  |   |      |   | 523    |  
|Depreciation and amortization                       |  |                            | 112    |   |      |   | 125    |  
|                                                    |  |                            |        |   |      |   |        |  
|Total operating expenses                            |  |                            | 4,469  |   |      |   | 3,545  |  
|                                                    |  |                            |        |   |      |   |        |  
|Operating income                                    |  |                            | 1,677  |   |      |   | 726    |  
|                                                    |  |                            |        |   |      |   |        |  
|Other income (expense), net                         |  |                            |        |   |      |   |        |  
|Interest expense, net                               |  |                            |        |   |      |   |        |  
|Debt, net                                           |  |                            | (1,399 | ) |      |   | (1,070 | )
|Dividends on mandatorily redeemable preferred stock |  |                            | (762   | ) |      |   | (691   | )
|Other, net                                          |  |                            | (90    | ) |      |   | 42     |  
|                                                    |  |                            |        |   |      |   |        |  
|Total other expense                                 |  |                            | (2,251 | ) |      |   | (1,719 | )
|                                                    |  |                            |        |   |      |   |        |  
|Loss before provision (benefit) for income taxes    |  |                            | (574   | ) |      |   | (993   | )
|Provision (benefit) for income taxes                |  |                            | 40     |   |      |   | (103   | )
|                                                    |  |                            |        |   |      |   |        |  
|Net loss                                            |  |                            | (614   | ) |      |   | (890   | )
|                                                    |  |                            |        |   |      |   |        |  
|Loss per share                                      |  |                            |        |   |      |   |        |  
|Basic and diluted loss per share                    |  | $                          | (0.01  | ) |      | $ | (0.01  | )
|                                                    |  |                            |        |   |      |   |        |  
|Weighted average common shares outstanding - basic  |  |                            | 70,154 |   |      |   | 70,153 |  



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



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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                      |  |                |          |   |                |   |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | -
|                                                                                                                      |  | June 30, 2004  |          |   | March 31, 2004 |  
|                                                                                                                      |  | (in thousands) |         
|                                                                                                                      |  | (unaudited)    |          |   |                |  
|ASSETS                                                                                                                |  |                |          |   |                |   |          |  
|Current assets                                                                                                        |  |                |          |   |                |   |          |  
|Cash and cash equivalents                                                                                             |  | $              | 2,321    |   |                | $ | 2,367    |  
|Restricted cash                                                                                                       |  |                | 2,484    |   |                |   | 2,502    |  
|Accounts receivable, net of allowance of $350                                                                         |  |                | 22,759   |   |                |   | 23,317   |  
|Income taxes receivable                                                                                               |  |                | 91       |   |                |   | 104      |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                           |  |                | 5,891    |   |                |   | 4,268    |  
|Unbilled receivables                                                                                                  |  |                | 1,816    |   |                |   | 62       |  
|Inventories, net                                                                                                      |  |                | 11,102   |   |                |   | 12,221   |  
|Deferred income taxes                                                                                                 |  |                | 770      |   |                |   | 770      |  
|Prepaid expenses and other current assets                                                                             |  |                | 2,991    |   |                |   | 1,020    |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Total current assets                                                                                                  |  |                | 50,225   |   |                |   | 46,631   |  
|                                                                                                                      |  |               
|Property and equipment, net                                                                                           |  |                | 2,288    |   |                |   | 2,398    |  
|                                                                                                                      |  |               
|Other noncurrent assets                                                                                               |  |                |          |   |                |   |          |  
|Deferred income taxes                                                                                                 |  |                | 1,941    |   |                |   | 2,004    |  
|Deferred financing costs, net                                                                                         |  |                | 504      |   |                |   | 187      |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Total assets                                                                                                          |  | $              | 54,958   |   |                | $ | 51,220   |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                 |  |                |          |   |                |   |          |  
|Current liabilities                                                                                                   |  |                |          |   |                |   |          |  
|Long-term debt due within one year                                                                                    |  | $              | 3,555    |   |                | $ | 2,953    |  
|Accounts payable                                                                                                      |  |                | 5,008    |   |                |   | 3,679    |  
|Accrued liabilities                                                                                                   |  |                | 6,824    |   |                |   | 7,002    |  
|Accrued interest                                                                                                      |  |                | 958      |   |                |   | 949      |  
|Income taxes payable                                                                                                  |  |                | 158      |   |                |   | 214      |  
|Billings in excess of costs and estimated earnings on uncompleted contracts                                           |  |                | 1,322    |   |                |   | 1,428    |  
|Deferred revenue                                                                                                      |  |                | 4,044    |   |                |   | 1,239    |  
|Warranty and contract cost provision reserve - current                                                                |  |                | 818      |   |                |   | 1,074    |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Total current liabilities                                                                                             |  |                | 22,687   |   |                |   | 18,538   |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Long-term debt                                                                                                        |  |                | 37,689   |   |                |   | 38,168   |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Warranty and contract cost provision reserve - noncurrent                                                             |  |                | 325      |   |                |   | 356      |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Other noncurrent liabilities                                                                                          |  |                | 645      |   |                |   | 587      |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Manditorily redeemable preferred stock                                                                                |  |                | 31,247   |   |                |   | 30,485   |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Commitments and contingencies                                                                                         |  |                |          |   |                |   |          |  
|                                                                                                                      |  |               
|Stockholders deficit                                                                                                 |  |                |          |   |                |   |          |  
|Class A common stock, $0.000006 par value; 100,000 shares authorized, 70,206 and 70,153 shares issued and outstanding |  |                |         |   |                |   |         |  
|Additional paid-in capital                                                                                            |  |                | 123,244  |   |                |   | 123,215  |  
|Stock warrants                                                                                                        |  |                | 613      |   |                |   | 613      |  
|Accumulated deficit                                                                                                   |  |                | (161,795 | ) |                |   | (161,181 | )
|Accumulated other comprehensive income                                                                                |  |                | 303      |   |                |   | 439      |  
|                                                                                                                      |  |                |          |   |                |   |          |  
|Total stockholders deficit                                                                                           |  |                | (37,635  | ) |                |   | (36,914  | )
|                                                                                                                      |  |                |          |   |                |   |          |  
|Total liabilities and stockholders deficit                                                                           |  | $              | 54,958   |   |                | $ | 51,220   |  
|                                                                                                                      |  |                |          |   |                |   |          |  



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



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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)



|                                                                            |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended June 30, |       
|                                                                            |  | 2004                        |        |   | 2003 |  
|Cash flows from operating activities                                        |  |                             |        |   |      |   |        |  
|Net loss                                                                    |  | $                           | (614   | ) |      | $ | (890   | )
|                                                                            |  |                             |        |   |      |   |        |  
|Adjustments for non-cash items                                              |  |                             |        |   |      |   |        |  
|Non-cash interest and financing costs                                       |  |                             | 1,212  |   |      |   | 799    |  
|Depreciation and amortization                                               |  |                             | 237    |   |      |   | 269    |  
|Change in inventory reserve                                                 |  |                             | 104    |   |      |   | 96     |  
|Change in warranty and contract cost provision reserve                      |  |                             | (287   | ) |      |   | (288   | )
|Gain (loss) on sale of assets                                               |  |                             | 1      |   |      |   | (5     | )
|Deferred income taxes                                                       |  |                             | 38     |   |      |   |       |  
|Changes in assets and liabilities                                           |  |                             |        |   |      |   |        |  
|Accounts receivable, net                                                    |  |                             | 558    |   |      |   | 6,602  |  
|Income taxes receivable                                                     |  |                             | 13     |   |      |   | 459    |  
|Costs and estimated earnings in excess of billings on uncompleted contracts |  |                             | (1,623 | ) |      |   | (1,417 | )
|Unbilled receivables                                                        |  |                             | (1,754 | ) |      |   | 45     |  
|Inventories                                                                 |  |                             | 1,015  |   |      |   | 40     |  
|Prepaid expenses and other current assets                                   |  |                             | (1,971 | ) |      |   | 213    |  
|Accounts payable                                                            |  |                             | 1,329  |   |      |   | (2,133 | )
|Accrued liabilities                                                         |  |                             | (574   | ) |      |   | (159   | )
|Income taxes payable                                                        |  |                             | (56    | ) |      |   | (157   | )
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |                             | (106   | ) |      |   | 57     |  
|Deferred revenue                                                            |  |                             | 2,805  |   |      |   | (1,005 | )
|Noncurrent liabilities                                                      |  |                             | 58     |   |      |   | 27     |  
|                                                                            |  |                             |        |   |      |   |        |  
|Total adjustments                                                           |  |                             | 999    |   |      |   | 3,443  |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash provided by operating activities                                   |  |                             | 385    |   |      |   | 2,553  |  
|                                                                            |  |                             |        |   |      |   |        |  
|Cash flows from investing activities                                        |  |                             |        |   |      |   |        |  
|Change in restricted cash                                                   |  |                             | 18     |   |      |   | (1,607 | )
|Purchase of property and equipment                                          |  |                             | (146   | ) |      |   | (293   | )
|Proceeds from disposal of property and equipment                            |  |                             | 1      |   |      |   | 5      |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash used by investing activities                                       |  |                             | (127   | ) |      |   | (1,895 | )
|                                                                            |  |                             |        |   |      |   |        |  
|Cash flows from financing activities                                        |  |                             |        |   |      |   |        |  
|Proceeds from long-term debt                                                |  |                             | 295    |   |      |   |       |  
|Payments on long-term debt                                                  |  |                             | (534   | ) |      |   | (19    | )
|Payment of deferred financing costs                                         |  |                             |       |   |      |   | (409   | )
|Exercise of stock options                                                   |  |                             | 29     |   |      |   |        |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash used by financing activities                                       |  |                             | (210   | ) |      |   | (428   | )
|                                                                            |  |                             |        |   |      |   |        |  
|Effect of exchange rate changes on cash                                     |  |                             | (94    | ) |      |   | 253    |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                        |  |                             | (46    | ) |      |   | 483    |  
|Cash and cash equivalents, beginning of period                              |  |                             | 2,367  |   |      |   | 3,457  |  
|                                                                            |  |                             |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                           | 2,321  |   |      | $ | 3,940  |  
|                                                                            |  |                             |        |   |      |   |        |  



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



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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



1. Basis of presentation



The unaudited condensed consolidated financial statements of Firearms Training Systems, Inc. and subsidiaries (the Company) have been prepared
in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended June 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.



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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:



|                          |  |                             |  |        |  
|------------------------- |  | --------------------------- |  | ------ | -
|                          |  | Three Months Ended June 30, | 
|                          |  | 2004                        |  | 2003   |  
|Risk-free interest rate   |  | N/A                         |  | 2.28   | %
|Expected dividend yield   |  | N/A                         |  | 0      |  
|Expected lives (in years) |  | N/A                         |  | 3.5    |  
|Expected volatility       |  | N/A                         |  | 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. No options were granted during the three-month
period ended June 30, 2004, and accordingly, the assumptions are not applicable for that period.



The weighted average grant-date fair value of options granted during the three months ended June 30, 2003 was computed as approximately $2.2 million or
$0.38 per share under option. That value and the value computed for unvested options granted in prior years is being amortized on a pro forma basis over the vesting period of the options. Pro forma information (in thousands, except per share
amounts) regarding net loss and loss per share as if the Company had accounted for options using the fair value method is as follows:



|                                                 |  |                                          |       |   |      |   |       |  
|------------------------------------------------ |  | ---------------------------------------- | ----- | - | ---- | - | ----- | -
|                                                 |  | Three Months Ended June 30,              |      
|                                                 |  | 2004                                     |       |   | 2003 |  
|                                                 |  | (in thousands, except per share amounts) |      
|Net loss                                         |  |                                          |       |   |      |   |       |  
|As reported                                      |  | $                                        | (614  | ) |      | $ | (890  | )
|Fair value based compensation cost, net of taxes |  |                                          | (88   | ) |      |   | (43   | )
|                                                 |  |                                          |       |   |      |   |       |  
|Pro forma net loss                               |  | $                                        | (702  | ) |      | $ | (933  | )
|                                                 |  |                                          |       |   |      |   |       |  
|Basic and diluted loss per share                 |  |                                          |       |   |      |   |       |  
|As reported                                      |  | $                                        | (0.01 | ) |      | $ | (0.01 | )
|Pro forma                                        |  | $                                        | (0.01 | ) |      | $ | (0.01 | )



4. Inventory



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



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Inventories consist of the following (in thousands):



|                                          |  |              |        |   |               |   |        |  
|----------------------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | -
|                                          |  | June 30,2004 |        |   | March 31,2004 |  
|Raw materials                             |  | $            | 6,471  |   |               | $ | 6,293  |  
|Work in process                           |  |              | 3,082  |   |               |   | 3,918  |  
|Finished goods                            |  |              | 2,346  |   |               |   | 2,703  |  
|                                          |  |              |        |   |               |   |        |  
|Inventories, gross                        |  |              | 11,899 |   |               |   | 12,914 |  
|Reserve for excess and obsolete inventory |  |              | (797   | ) |               |   | (693   | )
|                                          |  |              |        |   |               |   |        |  
|Inventories, net                          |  | $            | 11,102 |   |               | $ | 12,221 |  
|                                          |  |              |        |   |               |   |        |  



5. Long-term contracts



|                                                                            |  |              |         |   |               |   |         |  
|--------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | -
|                                                                            |  | June 30,2004 |         |   | March 31,2004 |  
|Costs incurred on uncompleted contracts                                     |  | $            | 36,325  |   |               | $ | 34,322  |  
|Estimated earnings                                                          |  |              | 14,536  |   |               |   | 13,007  |  
|                                                                            |  |              |         |   |               |   |         |  
|                                                                            |  |              | 50,861  |   |               |   | 47,329  |  
|Less: billings to date                                                      |  |              | (46,292 | ) |               |   | (44,489 | )
|                                                                            |  |              |         |   |               |   |         |  
|                                                                            |  | $            | 4,569   |   |               | $ | 2,840   |  
|                                                                            |  |              |         |   |               |   |         |  
|Such amounts are included in the following accounts (in thousands):         |  |              |         |   |               |   |         |  
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $            | 5,891   |   |               | $ | 4,268   |  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |              | (1,322  | ) |               |   | (1,428  | )
|                                                                            |  |              |         |   |               |   |         |  
|                                                                            |  | $            | 4,569   |   |               | $ | 2,840   |  
|                                                                            |  |              |         |   |               |   |         |  



6. Other noncurrent assets



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



|                             |  |               |       |   |               |   |      |  
|---------------------------- |  | ------------- | ----- | - | ------------- | - | ---- | -
|                             |  | June 30, 2004 |       |   | March 31,2004 |  
|Non-compete agreement        |  | $             | 33    |   |               | $ | 33   |  
|Deferred financing costs     |  |               | 1,064 |   |               |   | 659  |  
|                             |  |               |       |   |               |   |      |  
|                             |  |               | 1,097 |   |               |   | 692  |  
|Accumulated amortization     |  |               | (593  | ) |               |   | (505 | )
|                             |  |               |       |   |               |   |      |  
|Other noncurrent assets, net |  | $             | 504   |   |               | $ | 187  |  
|                             |  |               |       |   |               |   |      |  



Deferred financing
costs as of June 30, 2004, includes approximately $405,000, which is payable on September 30, 2004, relating to a June 23, 2004 amendment to the Companys credit agreement which extended the maturity date from October 15, 2004 to October 15,
2005. If the Company refinances the credit agreement prior to September 30, 2004, the liability for the financing costs will be reduced to approximately $203,000.



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Amortization expense for the period ended June 30, 2004 was $88,000. Amortization expense for the year
ending March 31, 2005, is expected to be approximately $380,000.



7.
Long-term debt



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



|                             |  |               |        |   |                |   |        |  
|---------------------------- |  | ------------- | ------ | - | -------------- | - | ------ | -
|                             |  | June 30, 2004 |        |   | March 31, 2004 |  
|Working capital - borrowings |  | $             | 525    |   |                | $ | 230    |  
|Long-term debt - Senior      |  |               | 11,061 |   |                |   | 11,582 |  
|Long-term debt - Junior      |  |               | 29,552 |   |                |   | 29,190 |  
|Capital lease obligations    |  |               | 106    |   |                |   | 119    |  
|                             |  |               |        |   |                |   |        |  
|                             |  |               | 41,244 |   |                |   | 41,121 |  
|                             |  |              
|Due within one year          |  |               | (3,555 | ) |                |   | (2,953 | )
|                             |  |               |        |   |                |   |        |  
|Long-term debt               |  | $             | 37,689 |   |                | $ | 38,168 |  
|                             |  |               |        |   |                |   |        |  



On June 23, 2004, the
Company and its lenders agreed to amend the Companys New Credit Agreement extending the maturity date of the Senior and Junior Secured Loans and the Revolving Loans and Letters of Credit from October 15, 2004 to October 15, 2005. Under the
terms of the amendment, principal payments of $2,000,000, $400,000 and $1,100,000 on the Senior Secured Loans are scheduled to occur on August 31, 2004, December 31, 2004 and June 30, 2005, respectively.



8. Mandatorily redeemable preferred stock



In August 2000, the board of directors approved an amendment to the articles
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 are 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 10K for the year ended March 31, 2004). Accretion related to dividends earned during the years ended March
31, 2002, 2003 and 2004 totaled approximately $2,353,000, $2,597,000 and $2,867,000. As discussed in Note 3, 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.



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The preferred stock is subject to mandatory redemption on the latest maturity date (October 15, 2005, as
of June 30, 2004) of the Senior Secured Loans at the liquidation value thereof. As discussed in Note 7, subsequent to March 31, 2004, the Company and its lenders agreed to amend the New Credit Agreement to extend the maturity date of the Senior
Secured Loans to October 15, 2005. Accordingly, the date on which the Series B preferred stock is subject to redemption was also extended to October 15, 2005. Accordingly, the mandatorily redeemable preferred stock is not classified as a current
liability as of June 30, 2004. Delaware law prohibits the redemption of shares out of impaired capital. Since the Company has a total stockholders deficit of approximately ($37,635,000) and is generating net income of approximately $5 to $7
million per year, the law precludes the Company from redeeming any of the mandatorily redeemable preferred stock for the next several years.



9. Related party transactions



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



10.
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 months ended June 30, 2004 and 2003.



Options to purchase 6,692,333 and 7,133,738 shares of common stock, respectively, and warrants to purchase 5,246,164 shares of common stock were
outstanding as of June 30, 2004 and 2003, but were not included in the computation of the diluted EPS because their effect would have been anti-dilutive, thereby decreasing net loss per share.



11. Contingencies and commitments



Product Warranty Reserve



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



Changes in the product warranty accrual for the three months ended June 30,
2004 and 2003 were as follows (in thousands):



|                                                            |  |                             |     |   |      |   |     |  
|----------------------------------------------------------- |  | --------------------------- | --- | - | ---- | - | --- | -
|                                                            |  | Three Months Ended June 30, |    
|                                                            |  | 2004                        |     |   | 2003 |  
|Balance - beginning of year                                 |  | $                           | 214 |   |      | $ | 704 |  
|                                                            |  |                            
|Change in liability for warranties issued during the period |  |                             | (57 | ) |      |   | 38  |  
|Change in liabilities for preexisting warranties            |  |                             | 9   |   |      |   | (70 | )
|                                                            |  |                             |     |   |      |   |     |  
|Balance - end of period                                     |  | $                           | 166 |   |      | $ | 672 |  
|                                                            |  |                             |     |   |      |   |     |  



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##### Table of Contents

12. Supplemental cash flow disclosures



|                          |  |                            |     |      |   |      |  
|------------------------- |  | -------------------------- | --- | ---- | - | ---- | -
|                          |  | Three Months EndedJune 30, |    
|                          |  | 2004                       |     | 2003 |  
|Cash paid (received) for: |  |                            |     |      |   |      |  
|Interest                  |  | $                          | 940 |      | $ | 836  |  
|Income taxes              |  | $                          | 75  |      | $ | (358 | )



13. Comprehensive loss



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



|                                         |  |                             |      |   |      |   |      |  
|---------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                         |  | Three Months Ended June 30, |     
|                                         |  | 2004                        |      |   | 2003 |  
|Net loss                                 |  | $                           | (614 | ) |      | $ | (890 | )
|Foreign currrency translation adjustment |  |                             | (136 | ) |      |   | 253  |  
|                                         |  |                             |      |   |      |   |      |  
|Comprehensive income                     |  | $                           | (750 | ) |      | $ | (637 | )
|                                         |  |                             |      |   |      |   |      |  



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



| |  | our ability to successfully restructure our outstanding debt obligations in a timely manner,
| | - | --------------------------------------------------------------------------------------------



| |  | 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### 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.



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##### 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:



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME



|                                                          |  |                            |   |  |        |  
|--------------------------------------------------------- |  | -------------------------- | - |  | ------ | -
|                                                          |  | Three Months Ended June 30 |  
|                                                          |  | 2004                       |   |  | 2003   |  
|Revenue                                                   |  | 100.00                     | % |  | 100.00 | %
|Cost of revenue                                           |  | 65.88                      |   |  | 72.65  |  
|                                                          |  |                            |   |  |        |  
|Gross margin                                              |  | 34.12                      |   |  | 27.35  |  
|                                                          |  |                            |   |  |        |  
|Operating expenses                                        |  |                            |   |  |        |  
|Selling, general and administrative                       |  | 18.54                      |   |  | 18.55  |  
|Research and development                                  |  | 5.65                       |   |  | 3.35   |  
|Depreciation and amortization                             |  | 0.62                       |   |  | 0.80   |  
|                                                          |  |                            |   |  |        |  
|Total operating expenses                                  |  | 24.81                      |   |  | 22.70  |  
|                                                          |  |                            |   |  |        |  
|Operating income                                          |  | 9.31                       |   |  | 4.65   |  
|                                                          |  |                            |   |  |        |  
|Other income (expense), net                               |  |                            |   |  |        |  
|Interest expense - debt, net                              |  | (7.77                      | ) |  | (11.28 | )
|Interest expense - mandatorily redeemable preferred stock |  | (4.23                      | ) |  |       |  
|Other, net                                                |  | (0.50                      | ) |  | 0.27   |  
|                                                          |  |                            |   |  |        |  
|Total other income (expense)                              |  | (12.50                     | ) |  | (11.01 | )
|                                                          |  |                            |   |  |        |  
|Loss before provision (benefit) for income taxes          |  | (3.19                      | ) |  | (6.36  | )
|Provision (benefit) for income taxes                      |  | 0.22                       |   |  | (0.66  | )
|                                                          |  |                            |   |  |        |  
|Net loss                                                  |  | (3.41                      | ) |  | (5.70  | )
|                                                          |  |                            |   |  |        |  



Three Months Ended June 30, 2004
and 2003:



Net Revenues: Revenues increased $2.4 million,
or 15.3%, to $18.0 million for the three months ended June 30, 2004 as compared to $15.6 million for the three months ended June 30, 2003. Sales to international customers for the three months ended June 30, 2004 increased $0.8 million, or 11.4%, to
$8.5 million largely due to increased sales in Europe and the Middle East offset slightly by reductions in sales in the Pacific and Latin America. Sales to U.S. military customers for the three months ended June 30, 2004 increased by $1.7 million,
or 26.4%, to $8.3 million. The increase in U.S. military sales is due primarily to the completion during the three months ended June 30, 2004 of two major military sales contracts. Sales to U.S. law enforcement customers for the three months ended
June 30, 2004 decreased $0.2 million, or (16.0)%, to $1.1 million reflecting the law enforcement markets current concentration on Homeland Security efforts and delays in orders pending final development of our Bluefire weapons systems.



Cost of Revenues: Cost of revenues increased $0.5 million, or
4.6%, to $11.8 million for the three months ended June 30, 2004 as compared to $11.3 million for the three months ended June 30, 2003. As a percentage of revenues, cost of revenues for the three months ended June 30, 2004 decreased to 65.9% as
compared to 72.6% for the three months ended June 30, 2003. The decrease in cost of revenues as a percentage of revenues is attributable primarily to the completion of certain international and military contracts during the quarter with higher
profit margins and the positive results of previously undertaken cost control initiatives.



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##### Table of Contents

Gross Profit: As a result of the foregoing, gross profit increased $1.9 million, or 43.9%, to $6.1
million, or 34.1% of revenues, for the three months ended June 30, 2004 as compared to $4.3 million, or 27.4% of revenues, for the three months ended June 30, 2003.



Total Operating Expenses: Total operating expenses increased $0.9 million or 26.1% to $4.5 million for the three months
ended June 30, 2004 as compared to $3.5 million for the three months ended June 30, 2003. As a percentage of revenues, total operating expenses increased to 24.8% for the three months ended June 30, 2004 as compared to 22.7% for the three months
ended June 30, 2003. Selling, general and administrative (SG&A) expenses, which include bid and proposal activities, increased from $2.9 million for the three months ended June 30, 2003 to $3.3 million for the three months ended June
30, 2004. This increase in SG&A is due primarily to costs associated with the capture of new business. Research and development (R&D) costs increased $0.5 million or 94.7% to 1.0 million for the three months ended June 30, 2004 as compared
to $0.5 million for the three months ended June 30, 2003, due primarily to increases in developmental efforts related to Bluefire weapons and enhancements to our I-FACT product. Depreciation and amortization expense remained constant at $0.1
million.



Operating Income: As a result of the foregoing,
operating income increased $1.0 million or 131.0% to $1.7 million for the three months ended June 30, 2004 as compared to $0.7 million for the three months ended June 30, 2003. As a percentage of revenues, operating income was 9.3% of revenues for
the three months ended June 30, 2004 as compared to 4.6% of revenues for the three months ended June 30, 2003.



Other Income (Expense), net: Interest expense totaled $2.2 million, or (12.0%) of revenues for the three months ended June 30, 2004 as compared to $1.8
million, or (11.3%) of revenues for the three months ended June 30, 2003. Interest on debt increased $329,000, or 30.6%, due primarily to the increased rates and amortization of financing costs related to the extension of the debt maturity date from
September 15, 2003 to October 15, 2004. Dividends on mandatorily redeemable preferred stock increased $71,000, or 10.4%, due to the compounding effect of the 10% dividends, which are paid in additional shares of the preferred stock.



Loss Before Provision for Income Taxes: As a result of the foregoing, the
loss before provision for income taxes decreased by $419,000 from ($993,000) for the three months ended June 30, 2003 to ($574,000) for the three months ended June 30, 2004.



Provision for Income Taxes: The net taxable loss for the three months ended June 30, 2003 produced a tax benefit of
($103,000) while net taxable income for the three months ended June 30, 2004 resulted in tax expense of $40,000 for the current period. Taxable income for the three months ended June 30, 2004 is primarily the result of nontaxable dividends on
preferred stock in excess of the loss before provision for income taxes.



Net Loss: As a result of the foregoing, net loss decreased by $276,000 from ($890,000) or ($0.01) per share for the three months ended June 30, 2003 to ($614,000) or ($0.01) per share for the three months ended June
30, 2004.



ANALYSIS OF BACKLOG



Backlog represents customer orders that have been contracted for future
delivery. Accordingly, these orders have not yet been recognized as revenue, but represent potential revenue. As of June 30, 2004 and 2003, the Company had a backlog of approximately $53.0 and $60.4 million, respectively. As of June 30, 2004 the
backlog is comprised of $30.6 million from international customers and $22.5 million from FATS U.S. military and law enforcement customers. Approximately $41.1 million of the contracted orders are scheduled for delivery during fiscal year 2005.



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##### Table of Contents

Changes in backlog for the three months ended June 30, 2004 and 2003 were as follows (in thousands):



|                            |  |                             |         |   |      |   |         |  
|--------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                            |  | Three Months Ended June 30, |        
|                            |  | 2004                        |         |   | 2003 |  
|Backlog - beginning of year |  | $                           | 59,310  |   |      | $ | 64,346  |  
|New bookings                |  |                             | 11,775  |   |      |   | 11,640  |  
|Revenue                     |  |                             | (18,012 | ) |      |   | (15,618 | )
|                            |  |                             |         |   |      |   |         |  
|Backlog  end of period     |  | $                           | 53,073  |   |      | $ | 60,368  |  
|                            |  |                             |         |   |      |   |         |  



LIQUIDITY AND CAPITAL RESOURCES



In August 2000, the Company entered into a Second Amended
and Restated Credit Agreement (the New Credit Agreement) and Partial Exchange Agreement with its lenders. In accordance with the New Credit Agreement, the unpaid principal and accrued interest under the old facility was converted into
shares of common stock, shares of Series B mandatorily redeemable preferred stock, Senior Secured Loans, and Junior Secured Loans. The New Credit Agreement also provides for a New Revolving Credit Commitment comprised of available Revolving Loans
and Letters of Credit. Aggregate borrowings under the New Revolving Credit Commitment are limited to $882,000, with borrowings under the Letters of Credit subject to a sub limit of $828,000. During March, 2002, the Company and its lenders further
amended the New Credit Agreement to, among other amendments, provide a $2,200,000 Support Letter of Credit Facility and extend the maturity date of the Senior Secured Loans, Junior Secured Loans and New Revolving Loans from March 31, 2003 to
September 30, 2003. During the year ended March 31, 2004, the Company voluntarily reduced the availability under the Support Letter of Credit Facility to approximately $793,000.



On June 26, 2003, and again on June 23, 2004, the Company and its lenders agreed to further amend the New Credit Agreement
extending the maturity date of the Senior and Junior Secured Loans and the Revolving Loans and Letters of Credit first from September 30, 2003 to October 15, 2004, and subsequently to October 15, 2005. The extension also extended to October 15,
2005, the date on which the Companys Series B mandatorily redeemable preferred stock becomes redeemable by the holders.



Under the terms of the June 26, 2003 amendment, we paid an amendment fee of approximately $409,000 in July 2003, reduced the outstanding balance of the
Senior Secured Loans by approximately $400,000 as of December 31, 2003, and were scheduled to reduce the outstanding balance by an additional amount of approximately $1,100,000 on June 30, 2004. The interest rate on the Senior Secured Loans
increased from prime plus 1% to prime plus 2.5% for the period from June 2, 2003 through December 31, 2003 and then to prime plus 3.5% for the period from January 1, 2004 until the maturity date. The interest rate on the Junior Secured Loans
increased from 10% to 15% for the period from June 2, 2003 through the maturity date, with 10% payable in cash and 5% payable in additional notes with the same terms. All other terms and conditions of the New Credit Agreement remain unchanged.



Under the terms of the June 23, 2004 amendment, if we have not
refinanced the New Credit Agreement prior to September 30, 2004, we will pay an amendment fee of approximately $405,000 on September 30, 2004. If we have refinanced the New Credit Agreement by September 30, 2004, the amendment fee is reduced to
approximately $203,000. Also under the terms of the June 23, 2004 amendment, the June 30, 2004 principal payment on the Senior Secured Loans was reduced to $500,000 and additional principal payments of $2,000,000, $400,000 and $1,100,000 are
scheduled to occur on August 31, 2004, December 31, 2004 and June 30, 2005, respectively. All other terms and conditions in effect as of March 31, 2004 remain unchanged.



We are currently in final negotiations with two new lenders, one of which has begun the due diligence procedures necessary
to provide new financing to enable the Company to repay the existing New Credit Agreement. Proposals from both of these lenders would significantly improve the Companys current debt structure. The Companys current lenders are also
cooperating in the refinancing process. However, there can currently be no assurance that such a refinancing will be completed on terms that would be favorable to the Company, if at all.



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##### Table of Contents

As of June 30, 2004, the Company had working capital of $27.2 million compared to $22.5 million as of
June 30, 2003. The net $4.7 million increase in working capital is primarily the result of significantly improved results of operations for fiscal year 2004, offset by a $2.0 million increase in long-term debt due within one year. As of June 30,
2004, the Company was in compliance with all covenants within its debt agreements.



The Company had a net decrease in cash and cash equivalents of $46,000 for the three months ended June 30, 2004 compared to a net increase of cash and cash equivalents of $483,000 for the three months ended June 30,
2004. For the period ended June 30, 2004, the Companys operating activities generated cash of approximately $0.4 million compared to $2.6 million for the three months ended June 30, 2003. Cash flow from operations decreased primarily due to
increases in costs and estimated earnings in excess of billings on uncompleted contracts, unbilled receivables and prepaid expenses, which were reduced somewhat by increases in accounts payable and accrued expenses.



The Companys principal liquidity and capital needs are to fund working
capital, provide debt service, and make capital expenditures necessary to support and grow its business. Since August of 2000, the Company has financed its operations and growth primarily through internally generated funds and income tax refunds.
With the extension of the Companys Senior and Junior Secured Loans and Revolving Loans and Letters of Credit through October 15, 2005, as 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, and the Company must negotiate favorable repayment terms under the Credit Agreement which is currently scheduled to mature in October 2005.



CONCENTRATION OF CREDIT RISK



As of June 30, 2004, approximately $16.1 million in accounts receivable or 70.7% of total accounts receivable, net was due from the Companys top 5
customers,all of which is due from U.S., U.K. and Italian government contracts and subcontracts.



COMMITMENTS AND OTHER CONTRACTUAL OBLIGATIONS



Disclosure of Commitments and Other Contractual Obligations

June 30, 2004

(amounts in thousands)



|                                       |  |       |        |                 |   |                   |  |                  |        |              |   |     |  |   |       
|-------------------------------------- |  | ----- | ------ | --------------- | - | ----------------- |  | ---------------- | ------ | ------------ | - | --- |  | - | ------
|                                       |  | Total |        | Less than1 year |   | Within 1 -3 years |  | Within4 -5 years |        | After 5years
|Long-term debt                         |  |       |        |                 |   |                   |  |                  |        |              |   |     |  |   |       
|Working capital - borrowings           |  | $     | 525    |                 | $ |                  |  | $                | 525    |              | $ |    |  | $ |      
|Long-term debt - Senior                |  |       | 11,061 |                 |   | 3,500             |  |                  | 7,561  |              |   |    |  |   |      
|Long-term debt - Junior                |  |       | 29,552 |                 |   |                  |  |                  | 29,552 |              |   |    |  |   |      
|Capital lease obligations              |  |       | 106    |                 |   | 55                |  |                  | 51     |              |   |    |  |   |      
|Mandatorily Redeemable Preferred Stock |  |       | 31,247 |                 |   |                  |  |                  |       |              |   |    |  |   | 31,247
|Other                                  |  |       |        |                 |   |                   |  |                  |        |              |   |     |  |   |       
|Other purchase orders                  |  |       | 9,868  |                 |   | 9,128             |  |                  | 643    |              |   | 37  |  |   | 60    
|Operating lease obligations            |  |       | 3,011  |                 |   | 904               |  |                  | 1,573  |              |   | 534 |  |   |      
|                                       |  |       |        |                 |   |                   |  |                  |        |              |   |     |  |   |       
|Total                                  |  | $     | 85,370 |                 | $ | 13,587            |  | $                | 39,905 |              | $ | 571 |  | $ | 31,307
|                                       |  |       |        |                 |   |                   |  |                  |        |              |   |     |  |   |       



OFF BALANCE SHEET ARRANGEMENTS



As of June 30, 2004, we did not have any off-balance sheet financing
transactions or arrangements other than disclosed in the table above.



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RELATED PARTIES AND TRANSACTIONS



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



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Companys major market risk exposure arises from changes in interest rates and its impact on variable rate debt instruments. In addition, the
Company has interest rate risk associated with fixed rate debt at maturity. The Companys objectives in interest rate risk management are to limit the impact of interest rate changes on earnings and cash flows, and to lower overall borrowing
costs. To achieve its objectives, the Company borrows at fixed rates when it believes it is in its best interests to do so, and may enter into derivative financial instruments, such as interest rate swaps and caps, in order to limit its exposure to
interest rate fluctuations. The Company does not enter into derivative or interest rate transactions for speculative purposes. There were no derivative contracts in effect at June 30, 2004.



As of June 30, 2004, the Company had a total of approximately $29.6 million
in fixed rate debt at an interest rate of 15%, which will mature on October 15, 2005. The Company also has a total of approximately $11.6 million in variable rate debt at an interest rate of prime plus primarily 3.5% (7.75% as of June 30, 2004). If
interest rates on the Companys existing variable rate debt were to increase by 10% over the next twelve months, management believes there would be no material adverse impact on the Companys results of operations.



ITEM 4. CONTROLS AND PROCEDURES



We maintain 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 June 30, 2004 that have materially affected, or are reasonably likely to materially effect, the Companys internal control over financial
reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



ITEM 5. OTHER INFORMATION



On
August 3, 2004, John A. Morelli left the Company. Gregory A. Ton was subsequently employed as Chief Financial Officer and Treasurer of the Company.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|        |  |                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1  - |  | Sixth Amendment to Second Amended and Restated Credit Agreement and Partial Exchange Agreement dated June 23, 2004 (filed as Exhibit 10.38 to the Companys Form 10-K for the fiscal year
ended March 31, 2004)
|        | 
|10.2*-  |  | Separation Agreement between the Company and John A. Morelli effective August 3, 2004                                                                                                                          
|        | 
|31.1  - |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                             
|        | 
|31.2  - |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                             
|        | 
|32.1  - |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             
|        | 
|32.2  - |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             

---

|* | Indicates management contract or compensation plan arrangement.
|- | ---------------------------------------------------------------



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



June 25, 2004  Press release announcing financial results for the quarter and year ended March 31, 2004



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SIGNATURES



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



|                       |  |                                                          
|---------------------- |  | ---------------------------------------------------------
|DATED: August 13, 2004 |  |                                                          
|                       | 
|                       |  | FIREARMS TRAINING SYSTEMS, INC.                          
|                       | 
|                       |  | /S/ Gregory A. Ton                                       
|                       |  | Gregory A. Ton                                           
|                       |  | Chief Financial Officer and Treasurer                    
|                       |  | (Principal Financial Officer and Duly Authorized Officer)



20