##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549



---

FORM 10-Q/A



---



(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, 2001

OR

o     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
(State or other jurisdiction of
incorporation or organization) |  | 57-0777018
(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   o   
No   x

As of August 13, 2001, there were 70,153,159 shares of the Registrants
Class A Common Stock outstanding.

Page 1



---

TABLE OF CONTENTS



|                                     |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION       
|                                     | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                                     |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                     |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                     |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                     |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                     | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                     | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION          
|                                     | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                     | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                          
|Section 906 Certification of the CEO
|Section 906 Certification of the CFO



---



##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC.
INDEX

|         |  |                                                                                       |  |                                                                                           |    |             |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ----------- | -- | 
|         |  |                                                                                       |  |                                                                                           |    | Page number
|         |  |                                                                                       |  |                                                                                           |    |            
|         |  |                                                                                       |  | EXPLANATORY NOTE                                                                          |    |             | 3  | 
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                           |    |            
|ITEM 1.  |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                          |  |                                                                                           |    |            
|         |  |                                                                                       |  | Condensed Consolidated Statements of Operations
Three months ended June 30, 2001 and 2000 |    |             | 4  | 
|         |  |                                                                                       |  | Condensed Consolidated Balance Sheets
June 30, 2001 and March 31, 2001                    |    |             | 5  | 
|         |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 2001 and 2000 |    |             | 6  | 
|         |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                      |    |             | 7  | 
|ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |                                                                                           | 12 |            
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |                                                                                           | 16 |            
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                           |    |            
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                     |  |                                                                                           | 16 |            
|ITEM 6.  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |                                                                                           | 16 |            
|         |  |                                                                                       |  | SIGNATURES                                                                                |    |             | 17 | 

Page 2



---



##### Table of Contents



EXPLANATORY NOTE

The Companys interim financial statements at June 30, 2001 and for the
three months ended June 30, 2001 have been restated from amounts previously
reported to apply the correct revenue recognition policy to certain of the
Companys sales contracts. Revenue under these contracts was previously
reported upon shipment and passage of title of the underlying systems and has
been revised to reflect the application of the percentage of completion method
of accounting (see Note 9 to the Notes to Condensed Consolidated Financial
Statements).

Page 3



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




FIREARMS TRAINING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except unaudited per share data)

|                                                     |                                              |                          |                                   |       |                    |     |        |        |       |        |  
|---------------------------------------------------- | -------------------------------------------- | ------------------------ | --------------------------------- | ----- | ------------------ | --- | ------ | ------ | ----- | ------ | -
|                                                     |                                              |                          |                                   |       | Three months ended
|                                                     |                                              |                          |                                   |       | June 30,          
|                                                     |                                              |                          |                                   |       |                   
|                                                     |                                              |                          |                                   |       | (Restated)         |     |        |        |      
|                                                     |                                              |                          |                                   |       | (Note 9)           |     |        |        |      
|                                                     |                                              |                          |                                   |       | 2001               |     | 2000  
|                                                     |                                              |                          |                                   |       |                    |     |       
|Revenues                                             |                                              | $                        | 11,639                            |       |                    | $   | 10,271 |       
|Cost of Revenues                                     |                                              |                          | 7,159                             |       |                    |     | 7,284  |       
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Gross margin                                         |                                              |                          | 4,480                             |       |                    |     | 2,987  |       
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Operating expenses:                                  |                                              |                          |                                   |       |                    |     |        |       
|                                                     | Selling, general and administrative expenses |                          |                                   | 2,645 |                    |     |        | 2,036  |      
|                                                     | Research and development expenses            |                          |                                   | 1,014 |                    |     |        | 1,320  |      
|                                                     | Depreciation and amortization                |                          |                                   | 480   |                    |     |        | 588    |      
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|                                                     |                                              | Total operating expenses |                                   |       | 4,139              |     |        |        | 3,944 |       
|Operating income (loss)                              |                                              |                          | 341                               |       |                    |     | (957   | )     
|Other income (expense), net:                         |                                              |                          |                                   |       |                    |     |        |       
|                                                     | Interest income                              |                          |                                   | 169   |                    |     |        | 15     |      
|                                                     | Interest expense                             |                          |                                   | (24   | )                  |     |        | (2,361 | )    
|                                                     | Other income (expense), net                  |                          |                                   | 33    |                    |     |        | (22    | )    
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|                                                     |                                              |                          | Total other income (expense), net |       |                    | 178 |        |        |       | (2,368 | )
|Income (loss) before provision for income taxes      |                                              |                          | 519                               |       |                    |     | (3,325 | )     
|Provision (benefit) for income taxes                 |                                              |                          | 296                               |       |                    |     | (116   | )     
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Net income (loss)                                    |                                              |                          | 223                               |       |                    |     | (3,209 | )     
|Accretion of preferred stock                         |                                              |                          | (65                               | )     |                    |     | (66    | )     
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Net income (loss) applicable to common shareholders  |                                              | $                        | 158                               |       |                    | $   | (3,275 | )     
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Basic earnings (loss) per common share               |                                              | $                        | 0.00                              |       |                    | $   | (0.16  | )     
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Diluted earnings (loss) per common share             |                                              | $                        | 0.00                              |       |                    | $   | (0.16  | )     
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Weighted average common shares outstanding  basic   |                                              |                          | 70,147                            |       |                    |     | 21,117 |       
|                                                     |                                              |                          |                                   |       |                    |     |        |       
|Weighted average common shares outstanding  diluted |                                              |                          | 70,376                            |       |                    |     | 21,117 |       
|                                                     |                                              |                          |                                   |       |                    |     |        |       

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

Page 4



---



##### Table of Contents






FIREARMS TRAINING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)

|                                                           |                                                                             |                                             |        |            |         |           |        |          |         |  
|---------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------- | ------ | ---------- | ------- | --------- | ------ | -------- | ------- | -
|                                                           |                                                                             |                                             |        | (Restated) |         |           |        |         
|                                                           |                                                                             |                                             |        | (Note 9)   |         |           |        |         
|                                                           |                                                                             |                                             |        | June 30,   |         | March 31,
|ASSETS                                                     |                                                                             | 2001                                        |        | 2001      
|                                                           |                                                                             |                                             |        |           
|Current assets:                                            |                                                                             |                                             |        |            |         |           |        |         
|                                                           | Cash and cash equivalents                                                   |                                             | $      | 2,281      |         |           | $      | 1,864    |        
|                                                           | Restricted cash                                                             |                                             |        | 658        |         |           |        | 628      |        
|                                                           | Accounts receivable, net                                                    |                                             |        | 9,478      |         |           |        | 8,591    |        
|                                                           | Costs and estimated earnings in excess of billings
on uncompleted contracts |                                             |        | 591        |         |           |        | 1,480    |        
|                                                           | Unbilled receivables                                                        |                                             |        | 1,933      |         |           |        | 1,355    |        
|                                                           | Income tax receivable                                                       |                                             |        | 0          |         |           |        | 809      |        
|                                                           | Inventories, net                                                            |                                             |        | 14,572     |         |           |        | 12,526   |        
|                                                           | Prepaid expenses and other current assets                                   |                                             |        | 1,699      |         |           |        | 1,117    |        
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|                                                           |                                                                             | Total current assets                        |        |            | 31,212  |           |        |          | 28,370  |  
|Property and equipment, net                                |                                                                             |                                             | 2,297  |            |         |           | 2,647  |         
|Other noncurrent assets                                    |                                                                             |                                             | 33     |            |         |           | 0      |         
|Goodwill, net                                              |                                                                             |                                             | 1,110  |            |         |           | 1,156  |         
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|                                                           |                                                                             | Total assets                                |        | $          | 34,652  |           |        | $        | 32,173  |  
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|LIABILITIES AND STOCKHOLDERS DEFICIT                      |                                                                             |                                             |        |            |         |           |        |         
|Current liabilities:                                       |                                                                             |                                             |        |            |         |           |        |         
|                                                           | Accounts payable                                                            |                                             | $      | 5,744      |         |           | $      | 2,902    |        
|                                                           | Accrued liabilities                                                         |                                             |        | 3,668      |         |           |        | 3,895    |        
|                                                           | Accrued interest                                                            |                                             |        | 942        |         |           |        | 954      |        
|                                                           | Income tax payable                                                          |                                             |        | 429        |         |           |        | 0        |        
|                                                           | Billings in excess of costs and estimated
earnings on uncompleted contracts |                                             |        | 0          |         |           |        | 277      |        
|                                                           | Deferred revenue                                                            |                                             |        | 1,967      |         |           |        | 1,633    |        
|                                                           | Warranty and
contract costs provision reserve  current                     |                                             |        | 1,988      |         |           |        | 2,816    |        
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|                                                           |                                                                             | Total current liabilities                   |        |            | 14,738  |           |        |          | 12,477  |  
|Long-term debt                                             |                                                                             |                                             | 43,676 |            |         |           | 43,990 |         
|Noncurrent deferred income taxes                           |                                                                             |                                             | 215    |            |         |           | 223    |         
|Warranty and
contract costs provision reserve  noncurrent |                                                                             |                                             | 1,780  |            |         |           | 1,724  |         
|Other noncurrent liabilities                               |                                                                             |                                             | 982    |            |         |           | 796    |         
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|Total liabilities                                          |                                                                             |                                             | 61,391 |            |         |           | 59,210 |         
|Mandatory redeemable preferred stock                       |                                                                             |                                             | 27,114 |            |         |           | 27,049 |         
|Stockholders deficit:                                     |                                                                             |                                             |        |            |         |           |        |         
|                                                           | Common stock                                                                |                                             |        | 0          |         |           |        | 0        |        
|                                                           | Stock warrants                                                              |                                             |        | 613        |         |           |        | 613      |        
|                                                           | Additional paid-in-capital                                                  |                                             |        | 122,314    |         |           |        | 122,273  |        
|                                                           | Accumulated deficit                                                         |                                             |        | (176,528   | )       |           |        | (176,686 | )      
|                                                           | Cumulative foreign currency translation adjustment                          |                                             |        | (252       | )       |           |        | (286     | )      
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|                                                           |                                                                             | Total stockholders deficit                 |        |            | (53,853 | )         |        |          | (54,086 | )
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        
|                                                           |                                                                             | Total liabilities and stockholders deficit |        | $          | 34,652  |           |        | $        | 32,173  |  
|                                                           |                                                                             |                                             |        |            |         |           |        |          |        

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

Page 5



---



##### Table of Contents






FIREARMS TRAINING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |        |        |       |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | ---- | ------------------ | --- | ------ | ------ | ------ | ----- | -
|                                                                                         |                                                   |                                                                             |                                           |      | Three months ended
|                                                                                         |                                                   |                                                                             |                                           |      | June 30,          
|                                                                                         |                                                   |                                                                             |                                           |      |                   
|                                                                                         |                                                   |                                                                             |                                           |      | (Restated)         |     |        |        |       
|                                                                                         |                                                   |                                                                             |                                           |      | (Note 9)           |     |        |        |       
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |        |       
|                                                                                         |                                                   |                                                                             |                                           |      | 2001               |     | 2000  
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |       
|OPERATING ACTIVITIES:                                                                    |                                                   |                                                                             |                                           |      |                    |     |        |       
|Net income (loss)                                                                        |                                                   | $                                                                           | 158                                       |      |                    | $   | (3,275 | )     
|Adjustments to reconcile net
income (loss) to net cash provided
by operating activities: |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         | Employee stock compensation plan - 401(k) plan    |                                                                             |                                           | 6    |                    |     |        | 16     |       
|                                                                                         | Employee compensation  other                     |                                                                             |                                           | 1    |                    |     |        | 0      |       
|                                                                                         | Noncash reduction of debt restructuring liability |                                                                             |                                           | (878 | )                  |     |        | 0      |       
|                                                                                         | Amortization of deferred stock-based compensation |                                                                             |                                           | 0    |                    |     |        | 66     |       
|                                                                                         | Accretion of mandatory redeemable preferred stock |                                                                             |                                           | 65   |                    |     |        | 66     |       
|                                                                                         | Depreciation                                      |                                                                             |                                           | 434  |                    |     |        | 519    |       
|                                                                                         | Amortization of goodwill                          |                                                                             |                                           | 46   |                    |     |        | 69     |       
|                                                                                         | Amortization of loan costs                        |                                                                             |                                           | 0    |                    |     |        | 201    |       
|                                                                                         | Gain on disposal of assets                        |                                                                             |                                           | (37  | )                  |     |        | (13    | )     
|                                                                                         | Deferred income taxes                             |                                                                             |                                           | (8   | )                  |     |        | 7      |       
|                                                                                         | Changes in assets and liabilities:                |                                                                             |                                           |      |                    |     |        |        |       
|                                                                                         |                                                   | Accounts receivable, net                                                    |                                           |      | (876               | )   |        |        | (3,580 | )    
|                                                                                         |                                                   | Costs
and estimated earnings in excess of billings on uncompleted contracts |                                           |      | (591               | )   |        |        | 0      |      
|                                                                                         |                                                   | Unbilled receivables                                                        |                                           |      | 961                |     |        |        | 1,772  |      
|                                                                                         |                                                   | Inventories                                                                 |                                           |      | (2,036             | )   |        |        | 812    |      
|                                                                                         |                                                   | Prepaid expenses and other current assets                                   |                                           |      | (581               | )   |        |        | 38     |      
|                                                                                         |                                                   | Accounts payable                                                            |                                           |      | 2,826              |     |        |        | 760    |      
|                                                                                         |                                                   | Accrued liabilities                                                         |                                           |      | 364                |     |        |        | 2,167  |      
|                                                                                         |                                                   | Income taxes payable / receivable                                           |                                           |      | 1,237              |     |        |        | 1,142  |      
|                                                                                         |                                                   | Deferred revenue                                                            |                                           |      | 58                 |     |        |        | (25    | )    
|                                                                                         |                                                   | Warranty and contracts
costs provision reserve                              |                                           |      | (781               | )   |        |        | 0      |      
|                                                                                         |                                                   | Noncurrent liabilities                                                      |                                           |      | 187                |     |        |        | (93    | )    
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         |                                                   |                                                                             | Total adjustments                         |      |                    | 397 |        |        |        | 3,924 |  
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         |                                                   |                                                                             | Net cash provided by operating activities |      |                    | 555 |        |        |        | 649   |  
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|Cash flows from investing activities:                                                    |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         | Change in restricted cash                         |                                                                             |                                           | (30  | )                  |     |        | 2      |       
|                                                                                         | Additions to property and equipment, net          |                                                                             |                                           | (76  | )                  |     |        | 0      |       
|                                                                                         | Proceeds from disposal of property and equipment  |                                                                             |                                           | 37   |                    |     |        | (142   | )     
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         |                                                   |                                                                             | Net cash used in investing activities     |      |                    | (69 | )      |        |        | (140  | )
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|Cash flows from financing activities:                                                    |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         | Repayments of long-term debt                      |                                                                             |                                           | (45  | )                  |     |        | 0      |       
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         |                                                   |                                                                             | Net cash used in financing activities     |      |                    | (45 | )      |        |        | 0     |  
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|Effect of changes in foreign exchange rates                                              |                                                   |                                                                             | (24                                       | )    |                    |     | (25    | )     
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|Net Increase in Cash and Cash Equivalents                                                |                                                   |                                                                             | 417                                       |      |                    |     | 484    |       
|Cash and Cash Equivalents at the Beginning of the Period                                 |                                                   | $                                                                           | 1,864                                     |      |                    | $   | 1,886  |       
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|Cash and Cash Equivalents at the End of the Period                                       |                                                   | $                                                                           | 2,281                                     |      |                    | $   | 2,370  |       
|                                                                                         |                                                   |                                                                             |                                           |      |                    |     |        |       
|Supplemental disclosures of cash paid (received) for:                                    |                                                   |                                                                             |                                           |      |                    |     |        |       
|                                                                                         | Interest                                          |                                                                             | $                                         | 290  |                    |     | $      | 0      |       
|                                                                                         | Income taxes                                      |                                                                             | $                                         | (899 | )                  |     | $      | (1,442 | )     

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

Page 6



---



##### Table of Contents






FIREARMS TRAINING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION.

The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2002. For further
information, refer to the Companys consolidated financial statements and
footnotes thereto for the year ended March 31, 2001.

For fiscal year 2002, the Company began classifying commissions paid to
its agents in cost of revenues. The corresponding amount of $204,000 for the
three ended June 30, 2001 and 2000 has been reclassified from selling, general,
and administrative expenses to cost of revenues.

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.

Page 7



---



##### Table of Contents



3. 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 basis or market. Cost includes materials, labor, and
factory overhead. Market is defined as net realizable value.

Inventories consist of the following (in thousands):

|                |                    |   |            |        |           |   |        |        | 
|--------------- | ------------------ | - | ---------- | ------ | --------- | - | ------ | ------ | 
|                |                    |   | (Restated) |        |           |   |       
|                |                    |   | (Note 9)   |        |           |   |       
|                |                    |   | June 30,   |        | March 31,
|                |                    |   | 2001       |        | 2001     
|                |                    |   |            |        |          
|Raw materials   |                    | $ | 8,889      |        |           | $ | 7,997  |       
|Work in process |                    |   | 5,251      |        |           |   | 3,998  |       
|Finished Goods  |                    |   | 1,748      |        |           |   | 1,559  |       
|                |                    |   |            |        |           |   |        |       
|                | Inventories, gross |   |            | 15,888 |           |   |        | 13,554 | 
|Less reserves   |                    |   | (1,316     | )      |           |   | (1,028 | )     
|                |                    |   |            |        |           |   |        |       
|                | Inventories, net   |   | $          | 14,572 |           |   | $      | 12,526 | 
|                |                    |   |            |        |           |   |        |       

4. LONG-TERM CONTRACTS

Costs and estimated earnings on uncompleted contracts and related amounts billed as of June 30, 2001 and March 31, 2001,
respectively, are as follows (in thousands):

|                                        |  |            |        |           |  |   |        |  
|--------------------------------------- |  | ---------- | ------ | --------- |  | - | ------ | -
|                                        |  | (Restated) |        |           |  |  
|                                        |  | (Note 9)   |        |           |  |  
|                                        |  | June 30,   |        | March 31,
|                                        |  | 2001       |        | 2001     
|                                        |  |            |        |          
|Costs incurred on uncompleted contracts |  | $          | 3,998  |           |  | $ | 2,459  |  
|Estimated earnings                      |  |            | 2,465  |           |  |   | 1,568  |  
|                                        |  |            |        |           |  |   |        |  
|                                        |  | $          | 6,463  |           |  | $ | 4,027  |  
|Less: billings to date                  |  |            | (5,872 | )         |  |   | (2,824 | )
|                                        |  |            |        |           |  |   |        |  
|                                        |  | $          | 591    |           |  | $ | 1,203  |  
|                                        |  |            |        |           |  |   |        |  

Such amounts are included in the following accounts:

|                                                                            |  |          |     |           |  |   |       |  
|--------------------------------------------------------------------------- |  | -------- | --- | --------- |  | - | ----- | -
|                                                                            |  | June 30, |     | March 31,
|                                                                            |  | 2001     |     | 2001     
|                                                                            |  |          |     |          
|Costs and estimated earnings in excess of
billings on uncompleted contracts |  | $        | 591 |           |  | $ | 1,480 |  
|Billings in excess of costs and estimated
earnings on uncompleted contracts |  |          | 0   |           |  |   | (277  | )
|                                                                            |  |          |     |           |  |   |       |  
|                                                                            |  | $        | 591 |           |  | $ | 1,203 |  
|                                                                            |  |          |     |           |  |   |       |  

Page 8



---



##### Table of Contents



5. LONG-TERM DEBT

At June 30, 2001 and March 31, 2001, long-term debt consisted of the
following (in thousands):

|                             |       |   |          |        |           |   |        |        | 
|---------------------------- | ----- | - | -------- | ------ | --------- | - | ------ | ------ | 
|                             |       |   | June 30, |        | March 31,
|                             |       |   | 2001     |        | 2001     
|                             |       |   |          |        |          
|Working capital  borrowings |       | $ | 155      |        |           | $ | 200    |       
|Long-term debt  Senior      |       |   | 12,000   |        |           |   | 12,000 |       
|Long-term debt  Junior      |       |   | 25,374   |        |           |   | 24,765 |       
|Debt
discount                |       |   | 6,147    |        |           |   | 7,025  |       
|                             |       |   |          |        |           |   |        |       
|                             | Total |   | $        | 43,676 |           |   | $      | 43,990 | 
|                             |       |   |          |        |           |   |        |       

As of June 30, 2001, the Company was out of compliance with the capital
expenditure covenants of its debt agreements. The Company has obtained a waiver
from the banks.

6. RELATED PARTY TRANSACTIONS

The Company has entered into a consulting agreement, dated October 4,
2000, with Sugarman & Company, LLP, a company in which Randy Sugarman is the
managing partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
are performed on an hourly basis, plus out-of-pocket expenses, and the Company
is billed accordingly. Since May 16, 2001, Mr. Sugarman has served as Interim
Chief Executive Officer and President of the Company. As of June 30, 2001 and
2000, the Company incurred consulting fees of $116,000 and $0, plus expenses of
$22,000 and $0 for consulting services under the agreement for the fiscal years
2002 and 2001, respectively.

7. NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141)
and Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).

SFAS No. 141 addresses financial accounting and reporting for business
combinations. This statement requires the purchase method of accounting to be
used for all business combinations, and prohibits the pooling-of-interests
method of accounting. This statement is effective for all business combinations
initiated after June 30, 2001 and supercedes APB Opinion No. 16, Business
Combinations as well as FASB Statement of Financial Accounting Standards No.
38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises.

SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill
to be periodically reviewed for impairment rather than amortized, for fiscal
years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets. As of June 30, 2001, the Company has $1,110,000 of
recorded net goodwill, which will be subject to the new standards. The Company
is currently recording goodwill amortization expense of $182,000 per year. Such
amortization expense will no longer be recorded upon adoption of this statement
and impairment testing will be required to assess its carrying value going
forward. The Company will adopt this standard in the first quarter of fiscal
year 2003. However, the Company will continue to assess the carrying value of
goodwill prior to the adoption of this statement on a quarterly basis.

SFAS No. 143 addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. In June 2001 the Financial Accounting
Standards Board approved Statement of Financial Accounting Standard No. 143,
Accounting for Asset Retirement Obligations. The statement is effective for
the Companys 2004 fiscal year and is not expected to have a material effect on
its financial position or results of operations.

SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and establishes a single accounting
model for the impairment or disposal of long-lived assets. In August 2001 the
Financial Accounting Standards Board approved Statement of Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. The statement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of and supercedes accounting and reporting under APB Opinion
No. 30 for the disposal of a segment of a business. The statement is effective
for the Companys 2003 fiscal year and is not expected to have a material
effect on its financial position or results of operations.

Page 9



---



##### Table of Contents



8. NET INCOME (LOSS) PER COMMON SHARE

Net income
(loss) per share for the three months ended June 30, 2001 and 2000 were as follows:
(in thousands, except per share amounts)

|                                                                                               |  |                    |        |                    |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------------ |  | - | ------ | -
|                                                                                               |  | (Restated)         |        |                    |  |  
|                                                                                               |  | (Note 9)           |        |                    |  |  
|                                                                                               |  | Three months ended |        | Three months ended
|                                                                                               |  | June               |        | June              
|                                                                                               |  | 2001               |        | 2000              
|                                                                                               |  |                    |        |                   
|Basic:                                                                                         |  |                    |        |                    |  |   |        |  
|Net income (loss) attributable to common shareholders                                          |  | $                  | 158    |                    |  | $ | (3,275 | )
|Weighted average common shares outstanding                                                     |  |                    | 70,147 |                    |  |   | 21,117 |  
|                                                                                               |  |                    |        |                    |  |   |        |  
|Per share amount                                                                               |  | $                  | 0.00   |                    |  | $ | (0.16  | )
|                                                                                               |  |                    |        |                    |  |   |        |  
|Diluted:                                                                                       |  |                    |        |                    |  |   |        |  
|Net income (loss) attributable to common shareholders                                          |  | $                  | 158    |                    |  | $ | (3,275 | )
|Weighted average common shares outstanding                                                     |  |                    | 70,147 |                    |  |   | 21,117 |  
|Shares assumed issued upon exercise of dilutive
stock warrants using the treasury stock method |  |                    | 229    |                    |  |   | 0      |  
|                                                                                               |  |                    |        |                    |  |   |        |  
|Total                                                                                          |  |                    | 70,376 |                    |  |   | 21,117 |  
|                                                                                               |  |                    |        |                    |  |   |        |  
|Per share amount                                                                               |  | $                  | 0.00   |                    |  | $ | (0.16  | )
|                                                                                               |  |                    |        |                    |  |   |        |  

Basic and diluted earnings per common share were computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the year. Stock options to purchase 2,596,253 shares of common stock as
well as warrants to purchase 5,246,164 shares of common stock were excluded for
the three months ended June 30, 2001 as they were all anti-dilutive. The effect
of all of the stock options and warrants was excluded for the three months
ended June 30, 2000 as a loss was recorded and amounts were anti-dilutive.

Page 10



---



##### Table of Contents



9. RESTATEMENT

The Companys interim financial statements at June 30, 2001 and for the
three months ended June 30, 2001 have been restated from amounts previously
reported to apply the correct revenue recognition policy to certain of the
Companys sales contracts. Revenue under these contracts was previously
reported upon shipment and passage of title of the underlying systems and has
been revised to reflect the application of the percentage of completion method
of accounting as these contracts call for significant customization of the
Companys proprietary system. The following table shows the line items that
have been restated in the Companys Condensed Consolidated Statements of
Operations, Condensed Consolidated Balance Sheets and Condensed Consolidated
Statements of Cash Flows:

SUMMARY OF CHANGES



---

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)



---



|                                      |  |                    |        |          |  |               |        | 
|------------------------------------- |  | ------------------ | ------ | -------- |  | ------------- | ------ | 
|                                      |  | Three months ended
|                                      |  | June 30, 2001     
|                                      |  |                   
|                                      |  |                    |        |          |  | As previously
|                                      |  | Restated           |        | reported
|                                      |  |                    |        |         
|Revenues                              |  |                    | 11,639 |          |  |               | 11,048 | 
|Cost of Revenues                      |  |                    | 7,159  |          |  |               | 6,789  | 
|Gross Margin                          |  |                    | 4,480  |          |  |               | 4,259  | 
|Operating income                      |  |                    | 341    |          |  |               | 120    | 
|Income before taxes                   |  |                    | 519    |          |  |               | 298    | 
|Provision for income taxes            |  |                    | 296    |          |  |               | 221    | 
|Net income                            |  |                    | 223    |          |  |               | 77     | 
|Net income applicable to shareholders |  |                    | 158    |          |  |               | 12     | 
|Earnings per share  basic            |  |                    | 0.00   |          |  |               | 0.00   | 
|Earnings per share  diluted          |  |                    | 0.00   |          |  |               | 0.00   | 

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)



---



|                                                                           |  |               |          |          |  |               |          |  
|-------------------------------------------------------------------------- |  | ------------- | -------- | -------- |  | ------------- | -------- | -
|                                                                           |  | June 30, 2001
|                                                                           |  |              
|                                                                           |  |               |          |          |  | As previously
|                                                                           |  | Restated      |          | reported
|                                                                           |  |               |          |         
|Cost
and estimated earnings in excess of billings on uncompleted contracts |  |               | 591      |          |  |               |         |  
|Inventories, net                                                           |  |               | 14,572   |          |  |               | 14,942   |  
|Total assets                                                               |  |               | 34,652   |          |  |               | 34,431   |  
|Income taxes payable                                                       |  |               | 429      |          |  |               | 355      |  
|Accumulated deficit                                                        |  |               | (176,528 | )        |  |               | (176,674 | )
|Total stockholders deficit                                                |  |               | (53,853  | )        |  |               | (53,999  | )
|Total liabilities and equity                                               |  |               | 34,652   |          |  |               | 34,431   |  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)



---



|                     |  |               |        |          |  |               |        |  
|-------------------- |  | ------------- | ------ | -------- |  | ------------- | ------ | -
|                     |  | June 30, 2001
|                     |  |              
|                     |  |               |        |          |  | As previously
|                     |  | Restated      |        | reported
|                     |  |               |        |         
|Net income (loss)    |  |               | 158    |          |  |               | 12     |  
|Inventories          |  |               | (2,036 | )        |  |               | (2,405 | )
|Income taxes payable |  |               | 1,237  |          |  |               | 1,163  |  

Page 11



---



##### 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, 2001.

The Company has restated its financial statements for the three months
ended June 30, 2001 as further discussed in Note 9 to the Consolidated
Condensed Financial Statements.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2001 and 2000:

Net Revenues: Revenues increased $1.3 million, or 13.3%, to $11.6 million
for the three months ended June 30, 2001 as compared to $10.3 million for the
three months ended June 30, 2000. Sales to U.S. military customers for the
three months ended June 30, 2001, increased by $4.1 million, or 263.9%, to $5.7
million. The increase in military sales is due to several large deliveries of
items to customers that were in the Companys backlog of sales as of March 31,
2001. Sales to U.S. law enforcement customers for the three months ended June
30, 2001 decreased $1.0 million, or (40.6%) to $1.5 million. Sales to
international customers for the three months ended June 30, 2001 decreased $1.5
million, or (26.6%), to $4.2 million due to several large deliveries of items
to customers that were in the Companys backlog of sales as of June 30, 2001.

Cost of Revenues: Cost of revenues increased $0.1 million, or (1.7%), to
$7.2 million for the three months ended June 30, 2001 as compared to $7.3
million for the three months ended June 30, 2000. As a percentage of revenues,
cost of revenues for the three months ended June 30, 2001 decreased to 61.5% as
compared to 70.9% for the three months ended June 30, 2000. The decrease in
cost of revenues as a percentage of revenues is attributable to a higher volume
of revenues to cover fixed costs. For fiscal year 2002, the Company began
classifying commissions paid to its agents in cost of revenues. The
corresponding amount of $204,000 for the three months ended June 30, 2000 has
been reclassified from selling, general, and administrative expenses to cost of
revenues.

Gross Profit: As a result of the foregoing, gross profit increased $1.5
million, or 50.0%, to $4.5 million, or 38.5% of revenues, for the three months
ended June 30, 2001 as compared to $3.0 million, or 29.1% of revenues, for the
three months ended June 30, 2000.

Total Operating Expenses: Total operating expenses increased $0.2 million,
or 4.9%, for the three months ended June 30, 2001. As a percentage of revenues,
total operating expenses decreased to 35.6% for the three months ended June 30,
2001 as compared to 38.3% for the three months ended June 30, 2000. Selling,
general and administrative (SG&A) expenses increased $0.6 million, or 29.9%.
This increase in SG&A is due primarily to an increase in employee compensation
expenses related to the recording of severance costs of approximately $0.3
million related to the resignation of the Chief Executive Officer during the
three months ended June 30, 2001. Research and development expenses decreased
$0.3 million, or 23.2%, primarily attributable to the Companys reduction in
expenditures for research and development activities relating to new products
and product lines. Depreciation and amortization expense decreased $0.1 million
due to the impairment of long-lived assets in fiscal year 2001, which lowered
the basis of long-lived assets and goodwill.

Operating Income: As a result of the foregoing, operating income increased
$1.3 million to an income of $0.3 million, or 2.9% of revenues, for the three
months ended June 30, 2001 as compared to an operating loss of $1.0 million or
(9.3%) of revenues, for the three months ended June 30, 2000.

Other Income
(Expense), net: Net interest income totalled $0.1 million, or
1.2% of revenues for the three months ended June 30, 2001 as compared to
interest expense of $2.3 million, or (22.8%) of revenues for the three months
ended June 30, 2000. The reduction in interest expense is attributable to the
debt restructuring completed by the Company in August 2000. In conjunction with
the debt restructuring, the Companys outstanding indebtedness was exchanged
for new borrowings, common stock, and mandatory redeemable preferred stock. The
sum of all

Page 12



---



##### Table of Contents



future principal and interest payments due under the new agreements
exceeded the carrying value of the old debt, and thus no gain was recognized on
the transaction in accordance with SFAS No. 15. The excess of the carrying
amount of the old borrowings exceeded the fair value of the new borrowings,
common stock, and mandatory redeemable preferred stock and was allocated
proportionately to the new debt and preferred stock. During the three months
ended June 30, 2001, the excess amount allocated to debt was reduced by
approximately $0.9 million, resulting in a corresponding reduction of interest
expense. Interest expense for the three months ended June 30, 2000 also
included fees associated with the debt restructuring of approximately $0.6
million. Interest expense will continue to be recognized at a much lower
effective interest cost until the debt matures in March of 2003.

Provision for Income Taxes: The effective tax rate increased to 57.0% of
income before taxes for the three months ended June 30, 2001 as compared to
3.5% of loss before taxes for the three months ended June 30, 2000. The Company
has not recorded a tax benefit for the majority of its operating losses due to
uncertainty of future realization in both periods; however, certain of the
Companys foreign subsidiaries had higher operating income in fiscal year 2001
and fiscal year 2002, resulting in additional tax provisions.

Net Income: As a result of the foregoing, net income increased $3.4
million to a net income of $0.2 million, or 1.9% of revenues for the three
months ended June 30, 2001 as compared to a net loss of $3.2 million, or
(31.2%) of revenues for the three months ended June 30, 2000.

Accretion of Preferred Stock: The expense for the accretion of the
preferred stock issued in August 2000 was a total of $65,000 for the three
months ended June 30, 2001 as compared to $66,000 for the three months ended
June 30, 2000 for the preferred stock issued in November, 1998 and exchanged in
August 2000 for new preferred stock..

Net Income applicable to common shareholders: The net income applicable to
common shareholders increased $3.4 million to $0.2 million ($0.00 per share) or
1.4% of revenue. This compares to a loss of $3.2 million ($0.16 per share) or
(31.9%) of revenue for the three months ended June 30, 2000.

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, 2001, the Company had a backlog
of approximately $55.5 million, as compared to $26.5 million as of June 30,
2000, comprised of $21.5 million from international customers of FATS, $1.9
from Simtrans Canadian customers, $31.9 million from FATS U.S. military and
law enforcement customers and $0.2 million from FATS Hunter and Sports
customers. Approximately $40.7 million of the contracted orders are scheduled
for delivery during fiscal year 2002.

LIQUIDITY AND CAPITAL RESOURCES AND GOING CONCERN CONSIDERATIONS

The Companys continuation as a going concern is dependent upon its
ability to (a) continue production work on existing contracts; (b) obtain new
contracts for future delivery; and (c) generate sufficient cash flow to meet
working capital obligations on a timely basis.

Managements plans in response to the above objectives are to (1) continue
to reinforce cost control measures through implementation of Lean Enterprise
concepts. Lean Enterprises is an integrated set of industrial principles and
methods first developed out of a groundbreaking study of the post-World War II
Japanese automobile industry. The Lean Enterprise concept enables companies to
find the best way to specify value for the customer, to identify the value
stream for each product, to cause the product to flow smoothly from concept to
customer, to permit the customer to pull value as needed from the producer, and
to make a move toward perfection. The concepts of value, value stream, flow,
pull, and perfectionare deployed by means of lean techniquesfor product
development, production, purchasing, and customer support; (2) remain focused
on revenue maximization of standard products with higher margin potentials
within the domestic and international law enforcement business segment; (3)
minimize capital expenditures in non-strategic areas; (4) continue to improve
inventory turns and lower inventory investment; and (5) continually negotiate
more favorable contract terms and conditions to reduce extended or prolonged
payment cycles.

Page 13



---



##### Table of Contents



As of June 30, 2001, the Company had working capital of $16.5 million
compared to $18.5 million as of June 30, 2000. The net $2.0 million decrease in
working capital is primarily the result of the Companys increase in
expenditures for inventories. The Companys spending year-to-date as of June
30, 2001 for capital expenditures was $0.1 million. The expenditures were
primarily for manufacturing machinery, data processing equipment and software.
As of June 30, 2001, the Company was out of compliance with the capital
expenditure covenants of its debt agreements.

The Company had a net increase in cash and cash equivalents of $0.4
million for the three months ended June 30, 2001 compared to a net increase of
$0.5 million for the three months ended June 30, 2000. For the period ended
June 30, 2001, the Companys operating activities generated cash of
approximately $0.1 million. Cash flow from operations increased despite the
increase in expenditures for inventory in the current fiscal year as compared
to the same period in the prior fiscal year. Also, the Company is recording a
reduced amount of interest expense as discussed in the Other Income (Expense),
net section under RESULTS OF OPERATIONS. The Companys investing activities
used cash of approximately $0.1 million for capital expenditures.

In August 2000, the Company restructured its debt agreements (the
Restructure Transaction) by entering into a Second Amended and Restated
Credit Agreement (the New Credit Agreement) and Partial Exchange Agreement
with Bank of America, N.A. and other lenders. The New Credit Agreement replaced
the Companys previous credit facility, including the Tranche A and B loans and
Revolving credit facility. In accordance with the New Credit Agreement, the
unpaid principal of approximately $70,772,000 and accrued interest of
approximately $5,312,000 under the old facility was converted to 40,235,548
shares of Class A common stock, 20,463.716 shares of Series B mandatory
redeemable preferred stock, approximately $11,496,000 in senior secured loans,
and approximately $22,034,000 of junior secured loans. All borrowings under the
new agreements mature on March 31, 2003 but may be extended for one additional
year at the Companys option for a 1.0% fee. The senior loans bear interest at
prime plus 1.0%, payable quarterly in cash. The junior loans bear interest at
10.0%, payable quarterly in cash or in PIK (Paid In Kind) notes payable with
the same terms, depending on interest coverage ratios, as defined.

As a result of the Restructure Transaction in August 2000, the Company is
not currently paying interest or principal, other than interest on its Senior
Debt and a portion of the Junior Debt, in cash. The remaining interest on
Junior Debt is being recorded as additional notes payable. This debt will
mature in March 2003 unless otherwise extended at the option of the Company.

CONCENTRATION OF CREDIT RISK

At June 30, 2001, approximately $6.9 million in accounts receivable or
72.3% of total accounts receivable was due from the Companys top ten
customers, all of which was secured by performance letters of credit.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141)
and Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).

SFAS No. 141 addresses financial accounting and reporting for business
combinations. This statement requires the purchase method of accounting to be
used for all business combinations, and prohibits the pooling-of-interests
method of accounting. This statement is effective for all business combinations
initiated after June 30, 2001 and supercedes APB Opinion No. 16, Business
Combinations as well as FASB Statement of Financial Accounting Standards No.
38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises.

SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill
to be periodically reviewed for impairment rather than amortized, for fiscal
years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets. As of June 30, 2001, the Company has

Page 14



---



##### Table of Contents



$1,110,000 of recorded net goodwill, which will be subject to the new
standards. The Company is currently recording goodwill amortization expense of
$182,000 per year. Such amortization expense will no longer be recorded upon
adoption of this statement and impairment testing will be required to assess
its carrying value going forward. The Company will adopt this standard in the
first quarter of fiscal year 2003. However, the Company will continue to assess
the carrying value of goodwill prior to the adoption of this statement on a
quarterly basis.

SFAS No. 143 addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. In June 2001 the Financial Accounting
Standards Board approved Statement of Financial Accounting Standard No. 143,
Accounting for Asset Retirement Obligations. The statement is effective for
the Companys 2004 fiscal year and is not expected to have a material effect on
its financial position or results of operations.

SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and establishes a single accounting
model for the impairment or disposal of long-lived assets. In August 2001 the
Financial Accounting Standards Board approved Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets. The statement supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and supercedes accounting and reporting under APB Opinion No. 30 for the
disposal of a segment of a business. The statement is effective for the
Companys 2003 fiscal year and is not expected to have a material effect on its
financial position or results of operations.

RELATED PARTIES AND TRANSACTIONS

A group of entities affiliated with Centre Partners Management LLC (the
Centre Entities) are among the Companys largest shareholders. Centre
Entities holds a seat on the Companys Board of Directors. In addition, the
Centre Entities were party to the debt restructuring further discussed in the
footnotes to the Companys financial statements included in the Form 10-K for
the period ended March 31, 2001 and continue to be one of the Companys primary
lenders. As a result, the Centre Entities have the ability to influence the
operations of the Company.

The Company has entered into a consulting agreement, dated October 4,
2000, with Sugarman & Company, LLP, a company in which Randy Sugarman is the
managing partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
are to be performed on an hourly basis, plus out-of-pocket expenses, and the
Company is billed accordingly. Since May 16, 2001, Mr. Sugarman has served as
Interim Chief Executive Officer and President of the Company. For the three
months ended June 30, 2001 and 2000, respectively, the Company incurred
consulting fees of $0.1 million and $0.0 million that were included in
operating expenses.

CERTAIN FORWARD LOOKING STATEMENTS

Certain statements in this filing, and elsewhere (such as in other filings
by the Company with the Commission, press releases, presentations by the
Company or its management and oral statements) constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, (i) those
described above including the timing and size of, and the Companys success in
competing for, new contracts awarded by military and other government
customers; (ii) significant variability in the Companys quarterly revenues and
results of operations as a result of variations in the number and size of the
Companys shipments in a particular quarter while a significant percentage of
its operating expenses are fixed in advance; (iii) concentrations of revenues
from a few large customers who vary from one period to the next; (iv) the high
percentage of sales to military and law enforcement authorities whose orders
are subject to extensive government regulations and termination for a variety
of factors and budgetary constraints; (v) a significant proportion of
international sales which may be subject to political, monetary and economic
risks, including greater credit risks; (vi) the potential for increased
competition; (vii) the Companys ability to attract and retain key
personnel and adapt to changing technologies; and (viii) other factors
described in the Companys Form 10-K for the fiscal year ended March 31, 2001
under the caption Part I. No assurance can be given that actual revenues,
operating income or net income will not be materially different than those
reported above. Prospective investors are cautioned that actual results and
experience may differ materially from the forward-looking statements as a
result of many factors, possibly including changes in economic conditions,
competition, fluctuations in raw materials, and other unanticipated events and
conditions.

Page 15



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to a number of market risks in the ordinary course
of business, such as foreign currency exchange risk in the fulfillment of
international contracts and interest rate risk associated with the interest
rate cost of its outstanding long-term liabilities. The majority of the
Companys contracts are denominated in U.S. dollars, thus reducing foreign
exchange risk. The Companys net exposure to interest rate risk consists of its
floating rate senior debt and working capital borrowings which are tied to
changes in the prime rate.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|    |  |                                                                                    |  |                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits                                                                          
|   
|    |  | Exhibit 99.1                                                                      |  | Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|   
|    |  | Exhibit 99.2                                                                      |  | Certification Pursuant to 18 U.S.C. Section 1350, as
adopted 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 June 30, 2001.
|   
|    |  | May 18, 2001  Resignation of the President and CEO.                              

Page 16



---



##### 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: August 14, 2002 |  |                                                                                                   
|                      
|                       |  | FIREARMS TRAINING SYSTEMS, INC.
(Registrant)                                                      
|                      
|                       |  | /s/ Ronavan Mohling                                                                               
|                       |  |                                                                                                   
|                       |  | Ronavan Mohling
Chairman of the Board of Directors and Chief Executive Officer                    
|                      
|                       |  | /s/ John A. Morelli                                                                               
|                       |  |                                                                                                   
|                       |  | John A. Morelli
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

Page 17