##### Table of Contents



---

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



---

FORM 10-Q


---



|                                             |  |                                                                                         
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                  
|                                             |  |                                                                                         
|[X]                                          |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|                                             |  |                                                                                         
|FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
|                                             |  |                                                                                         
|OR                                           |  |                                                                                         
|                                             |  |                                                                                         
|[  ]                                         |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

COMMISSION FILE NUMBER: 333-13105

FIREARMS TRAINING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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

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

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

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 [  ]           No [X]

As of August 14, 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 5. OTHER INFORMATION                                                                    
|                                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                  
|Third Amendment to Restated Credit Agreement
|Section 906 Certification of the CEO        
|Section 906 Certification of the CFO        



---



##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC.
INDEX

|         |  |                                                                                       |  |                                                                                           |    |             |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ----------- | -- | 
|         |  |                                                                                       |  |                                                                                           |    | Page number
|         |  |                                                                                       |  |                                                                                           |    |            
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                           |    |            
|ITEM 1.  |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                          |  |                                                                                           |    |            
|         |  |                                                                                       |  | Condensed Consolidated Statements of Operations
Three months ended June 30, 2002 and 2001 |    |             | 3  | 
|         |  |                                                                                       |  | Condensed Consolidated Balance Sheets
June 30, 2002 and March 31, 2002                    |    |             | 4  | 
|         |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 2002 and 2001 |    |             | 5  | 
|         |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                      |    |             | 6  | 
|ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |                                                                                           | 10 |            
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES                                              |  |                                                                                           | 17 |            
|         |  |                                                                                       |  | ABOUT MARKET RISK                                                                         |    |             |    | 
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                           |    |            
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                     |  |                                                                                           | 17 |            
|ITEM 5.  |  | OTHER INFORMATION                                                                     |  |                                                                                           | 17 |            
|ITEM 6.  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |                                                                                           | 17 |            
|         |  |                                                                                       |  | SIGNATURES                                                                                |    |             | 18 | 

Page 2



---



##### 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)


|                                                     |                                              |                                   |        |       |       |      |        |       |       | 
|---------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------ | ----- | ----- | ---- | ------ | ----- | ----- | 
|                                                     |                                              |                                   |        | 2002  |       | 2001
|                                                     |                                              |                                   |        |       |       |     
|Revenues                                             |                                              | $                                 | 13,192 |       |       | $    | 11,639 |      
|Cost of Revenues                                     |                                              |                                   | 9,357  |       |       |      | 7,159  |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Gross margin                                         |                                              |                                   | 3,835  |       |       |      | 4,480  |      
|Operating expenses:                                  |                                              |                                   |        |       |       |      |        |      
|                                                     | Selling, general and administrative expenses |                                   |        | 2,441 |       |      |        | 2,645 |      
|                                                     | Research and development expenses            |                                   |        | 836   |       |      |        | 1,014 |      
|                                                     | Depreciation and amortization                |                                   |        | 265   |       |      |        | 480   |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|                                                     |                                              | Total operating expenses          |        |       | 3,542 |      |        |       | 4,139 | 
|Operating income                                     |                                              |                                   | 293    |       |       |      | 341    |      
|Other income (expense), net:                         |                                              |                                   |        |       |       |      |        |      
|                                                     | Interest income                              |                                   |        | 33    |       |      |        | 169   |      
|                                                     | Interest expense                             |                                   |        | (49   | )     |      |        | (24   | )    
|                                                     | Other income (expense), net                  |                                   |        | 73    |       |      |        | 33    |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|                                                     |                                              | Total other income (expense), net |        |       | 57    |      |        |       | 178   | 
|Income before provision for income taxes             |                                              |                                   | 350    |       |       |      | 519    |      
|Provision for income taxes                           |                                              |                                   | 119    |       |       |      | 296    |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Net income                                           |                                              |                                   | 231    |       |       |      | 223    |      
|Accretion of preferred stock                         |                                              |                                   | (72    | )     |       |      | (65    | )    
|                                                     |                                              |                                   |        |       |       |      |        |      
|Net income applicable to common shareholders         |                                              | $                                 | 159    |       |       | $    | 158    |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Foreign currency translation adjustment              |                                              |                                   | 87     |       |       |      | 34     |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Comprehensive income                                 |                                              | $                                 | 246    |       |       | $    | 192    |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Basic earnings per common share                      |                                              | $                                 | 0.00   |       |       | $    | 0.00   |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Diluted earnings per common share                    |                                              | $                                 | 0.00   |       |       | $    | 0.00   |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Weighted average common shares outstanding  basic   |                                              |                                   | 70,153 |       |       |      | 70,147 |      
|                                                     |                                              |                                   |        |       |       |      |        |      
|Weighted average common shares outstanding  diluted |                                              |                                   | 71,182 |       |       |      | 70,376 |      
|                                                     |                                              |                                   |        |       |       |      |        |      

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

Page 3



---



##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS


(unaudited and in thousands)


|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |        |   |         |  
|---------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | --------------------------- | ------ | -------- | ------- | --------- | ------ | - | ------- | -
|                                                           |                                                                             |                                             |                                       |                             |        | June 30, |         | March 31,
|                                                           |                                                                             |                                             |                                       |                             |        | 2002     |         | 2002     
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           |                                                                             |                                             |                                       | ASSETS                      |        |          |         |           |        |   |         |  
|Current assets:                                            |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           | Cash and cash equivalents                                                   |                                             | $                                     | 9,828                       |        |          | $       | 4,252     |       
|                                                           | Restricted cash                                                             |                                             |                                       | 470                         |        |          |         | 1,434     |       
|                                                           | Accounts receivable, net                                                    |                                             |                                       | 8,560                       |        |          |         | 10,500    |       
|                                                           | Income tax receivable                                                       |                                             |                                       |                            |        |          |         | 4,488     |       
|                                                           | Unbilled receivables                                                        |                                             |                                       | 435                         |        |          |         | 1,378     |       
|                                                           | Costs and estimated earnings in excess of billings on uncompleted contracts |                                             |                                       | 2,196                       |        |          |         | 1,816     |       
|                                                           | Inventories, net                                                            |                                             |                                       | 10,217                      |        |          |         | 9,434     |       
|                                                           | Prepaid expenses and other current assets                                   |                                             |                                       | 1,393                       |        |          |         | 1,444     |       
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           |                                                                             |                                             |                                       | Total current assets        |        |          | 33,099  |           |        |   | 34,746  |  
|Property and equipment, net                                |                                                                             |                                             | 1,684                                 |                             |        |          | 1,579   |          
|Other noncurrent assets                                    |                                                                             |                                             | 232                                   |                             |        |          | 26      |          
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |       
|                                                           |                                                                             |                                             |                                       | Total assets                |        | $        | 35,015  |           |        | $ | 36,351  |  
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           |                                                                             |                                             | LIABILITIES AND STOCKHOLDERS DEFICIT |                             |        |          |         |           |        |   |        
|Current liabilities:                                       |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           | Accounts payable                                                            |                                             | $                                     | 3,013                       |        |          | $       | 4,430     |       
|                                                           | Accrued liabilities                                                         |                                             |                                       | 4,439                       |        |          |         | 5,053     |       
|                                                           | Accrued interest                                                            |                                             |                                       | 883                         |        |          |         | 861       |       
|                                                           | Income taxes payable                                                        |                                             |                                       | 507                         |        |          |         |          |       
|                                                           | Deferred revenue                                                            |                                             |                                       | 1,028                       |        |          |         | 902       |       
|                                                           | Billings in excess of costs and estimated earnings on uncompleted contracts |                                             |                                       | 124                         |        |          |         | 285       |       
|                                                           | Warranty and contract costs provision reserve  current                     |                                             |                                       | 1,717                       |        |          |         | 2,258     |       
|                                                           | Current portion of capital lease obligations                                |                                             |                                       | 46                          |        |          |         |          |       
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |       
|                                                           |                                                                             |                                             |                                       | Total current liabilities   |        |          | 11,757  |           |        |   | 13,789  |  
|Long-term debt and capital lease obligations               |                                                                             |                                             | 42,930                                |                             |        |          | 42,977  |          
|Noncurrent deferred income taxes                           |                                                                             |                                             | 18                                    |                             |        |          | 22      |          
|Warranty and contract costs provision reserve  noncurrent |                                                                             |                                             | 1,890                                 |                             |        |          | 1,467   |          
|Other noncurrent liabilities                               |                                                                             |                                             | 585                                   |                             |        |          | 579     |          
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |       
|Total liabilities                                          |                                                                             |                                             | 57,180                                |                             |        |          | 58,834  |          
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |       
|Mandatory redeemable preferred stock                       |                                                                             |                                             | 27,391                                |                             |        |          | 27,319  |          
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |       
|Stockholders deficit:                                     |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           | Common stock                                                                |                                             |                                       |                            |        |          |         |          |       
|                                                           | Stock warrants                                                              |                                             |                                       | 613                         |        |          |         | 613       |       
|                                                           | Additional paid-in-capital                                                  |                                             |                                       | 122,314                     |        |          |         | 122,314   |       
|                                                           | Accumulated deficit                                                         |                                             |                                       | (172,191                    | )      |          |         | (172,350  | )     
|                                                           | Cumulative foreign currency translation adjustment                          |                                             |                                       | (292                        | )      |          |         | (379      | )     
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |           |       
|                                                           |                                                                             |                                             |                                       | Total stockholders deficit |        |          | (49,556 | )         |        |   | (49,802 | )
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |          
|                                                           |                                                                             | Total liabilities and stockholders deficit |                                       | $                           | 35,015 |          |         | $         | 36,351 |  
|                                                           |                                                                             |                                             |                                       |                             |        |          |         |          

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

Page 4



---



##### Table of Contents






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

|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |      |        |     |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ----- | ----- | ---- | ------ | --- | -
|                                                                                  |                                                            |                                                                             |                                                     |        | Three months ended
|                                                                                  |                                                            |                                                                             |                                                     |        | June 30,          
|                                                                                  |                                                            |                                                                             |                                                     |        |                   
|                                                                                  |                                                            |                                                                             |                                                     |        | 2002               |       | 2001 
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |      
|OPERATING ACTIVITIES:                                                             |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Net income (loss)                                                                 |                                                            | $                                                                           | 159                                                 |        |                    | $     | 158   |     
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  | Employee stock compensation plan - 401(k) plan             |                                                                             |                                                     | 0      |                    |       |       | 6    |       
|                                                                                  | Employee compensation  other                              |                                                                             |                                                     | 0      |                    |       |       | 1    |       
|                                                                                  | Noncash reduction of debt restructuring liability          |                                                                             |                                                     | (878   | )                  |       |       | (878 | )     
|                                                                                  | Accretion of mandatory redeemable preferred stock          |                                                                             |                                                     | 72     |                    |       |       | 65   |       
|                                                                                  | Depreciation                                               |                                                                             |                                                     | 265    |                    |       |       | 434  |       
|                                                                                  | Change in inventory reserve                                |                                                                             |                                                     | (1,355 | )                  |       |       | 562  |       
|                                                                                  | Change in warranty and contracts loss provision            |                                                                             |                                                     | (123   | )                  |       |       | (781 | )     
|                                                                                  | Amortizations                                              |                                                                             |                                                     | 45     |                    |       |       | 46   |       
|                                                                                  | Gain on disposal of assets                                 |                                                                             |                                                     | 0      |                    |       |       | (37  | )     
|                                                                                  | Deferred income taxes                                      |                                                                             |                                                     | (3     | )                  |       |       | (8   | )     
|                                                                                  | Changes in assets and liabilities:                         |                                                                             |                                                     |        |                    |       |       |      |       
|                                                                                  |                                                            | Accounts receivable, net                                                    |                                                     |        | 1,942              |       |       |      | (876   | )  
|                                                                                  |                                                            | Unbilled receivables                                                        |                                                     |        | 944                |       |       |      | 961    |    
|                                                                                  |                                                            | Costs and estimated earnings in excess of billings on uncompleted contracts |                                                     |        | (372               | )     |       |      | (591   | )  
|                                                                                  |                                                            | Inventories                                                                 |                                                     |        | 580                |       |       |      | (2,598 | )  
|                                                                                  |                                                            | Prepaid expenses and other current assets                                   |                                                     |        | (198               | )     |       |      | (581   | )  
|                                                                                  |                                                            | Accounts payable                                                            |                                                     |        | (1,419             | )     |       |      | 2,826  |    
|                                                                                  |                                                            | Accrued liabilities                                                         |                                                     |        | 64                 |       |       |      | 364    |    
|                                                                                  |                                                            | Income taxes payable/receivable                                             |                                                     |        | 5,049              |       |       |      | 1,237  |    
|                                                                                  |                                                            | Deferred revenue                                                            |                                                     |        | 125                |       |       |      | 58     |    
|                                                                                  |                                                            | Billings in excess of costs and estimated earnings on uncompleted contracts |                                                     |        | (169               | )     |       |      | 0      |    
|                                                                                  |                                                            | Noncurrent liabilities                                                      |                                                     |        | 161                |       |       |      | 187    |    
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  |                                                            |                                                                             | Total adjustments                                   |        |                    | 4,730 |       |      |        | 397 |  
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  |                                                            |                                                                             | Net cash provided by operating activities           |        |                    | 4,889 |       |      |        | 555 |  
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Cash flows from investing activities:                                             |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  | Change in restricted cash                                  |                                                                             |                                                     | 963    |                    |       |       | (30  | )     
|                                                                                  | Additions to property and equipment, net                   |                                                                             |                                                     | (357   | )                  |       |       | (76  | )     
|                                                                                  | Proceeds from disposal of property and equipment           |                                                                             |                                                     | 0      |                    |       |       | 37   |       
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  |                                                            |                                                                             | Net cash provided by (used in) investing activities |        |                    | 606   |       |      |        | (69 | )
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Cash flows from financing activities:                                             |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  | Repayments of long-term debt                               |                                                                             |                                                     | 0      |                    |       |       | (45  | )     
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  |                                                            |                                                                             | Net cash provided by (used in) financing activities |        |                    | 0     |       |      |        | (45 | )
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Effect of changes in foreign exchange rates                                       |                                                            |                                                                             | 81                                                  |        |                    |       | (24   | )   
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Net Increase in Cash and Cash Equivalents                                         |                                                            |                                                                             | 5,576                                               |        |                    |       | 417   |     
|Cash and Cash Equivalents at the Beginning of the Period                          |                                                            | $                                                                           | 4,252                                               |        |                    | $     | 1,864 |     
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Cash and Cash Equivalents at the End of the Period                                |                                                            | $                                                                           | 9,828                                               |        |                    | $     | 2,281 |     
|                                                                                  |                                                            |                                                                             |                                                     |        |                    |       |       |     
|Supplemental disclosures of cash paid (received) for:                             |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  | Interest                                                   |                                                                             | $                                                   | 186    |                    |       | $     | 290  |       
|                                                                                  | Income taxes                                               |                                                                             | $                                                   | (4,879 | )                  |       | $     | (899 | )     
|Non-cash transactions:                                                            |                                                            |                                                                             |                                                     |        |                    |       |       |     
|                                                                                  | Interest payments made through issuance of additional debt |                                                                             | $                                                   | 0      |                    |       | $     | 633  |       

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

Page 5



---



##### 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, 2002 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2003. For further
information, refer to the Companys consolidated financial statements and
footnotes thereto for the year ended March 31, 2002.



|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 6



---



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

Inventories consist of the following (in thousands):

|                |                    |   |          |        |           |   |        |        | 
|--------------- | ------------------ | - | -------- | ------ | --------- | - | ------ | ------ | 
|                |                    |   | June 30, |        | March 31,
|                |                    |   | 2002     |        | 2002     
|                |                    |   |          |        |          
|Raw materials   |                    | $ | 7,988    |        |           | $ | 8,874  |       
|Work in process |                    |   | 3,561    |        |           |   | 2,668  |       
|Finished Goods  |                    |   | 838      |        |           |   | 1,412  |       
|                |                    |   |          |        |           |   |        |       
|                | Inventories, gross |   |          | 12,387 |           |   |        | 12,954 | 
|Less reserves   |                    |   | (2,170   | )      |           |   | (3,520 | )     
|                |                    |   |          |        |           |   |        |       
|                | Inventories, net   |   | $        | 10,217 |           |   | $      | 9,434  | 
|                |                    |   |          |        |           |   |        |       



|4. |  | LONG-TERM CONTRACTS                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Costs and estimated earnings on uncompleted contracts and related amounts billed as of June 30, 2002 and March 31, 2002,
respectively, are as follows (in thousands):

|                                        |  |          |         |           |  |   |         |  
|--------------------------------------- |  | -------- | ------- | --------- |  | - | ------- | -
|                                        |  | June 30, |         | March 31,
|                                        |  | 2002     |         | 2002     
|                                        |  |          |         |          
|Costs incurred on uncompleted contracts |  | $        | 18,438  |           |  | $ | 14,305  |  
|Estimated earnings                      |  |          | 7,952   |           |  |   | 6,536   |  
|                                        |  |          |         |           |  |   |         |  
|                                        |  | $        | 26,390  |           |  | $ | 20,841  |  
|Less: billings to date                  |  |          | (24,318 | )         |  |   | (19,310 | )
|                                        |  |          |         |           |  |   |         |  
|                                        |  | $        | 2,072   |           |  | $ | 1,531   |  
|                                        |  |          |         |           |  |   |         |  



| |  | Such amounts are included in the following accounts:
| |  | ----------------------------------------------------

|                                                                            |  |          |       |           |  |   |       |  
|--------------------------------------------------------------------------- |  | -------- | ----- | --------- |  | - | ----- | -
|                                                                            |  | June 30, |       | March 31,
|                                                                            |  | 2002     |       | 2002     
|                                                                            |  |          |       |          
|Costs and estimated earnings in excess of billings
on uncompleted contracts |  | $        | 2,196 |           |  | $ | 1,816 |  
|Billings in excess of costs and estimated earnings
on uncompleted contracts |  |          | (124  | )         |  |   | (285  | )
|                                                                            |  |          |       |           |  |   |       |  
|                                                                            |  | $        | 2,072 |           |  | $ | 1,531 |  
|                                                                            |  |          |       |           |  |   |       |  



|5. |  | INTANGIBLE ASSETS
|-- |  | -----------------

The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, during the quarter ended June
30, 2002.

Intangible assets consist of the following:

|                              |                               |  |          |     |           |  |    |    |  
|----------------------------- | ----------------------------- |  | -------- | --- | --------- |  | -- | -- | -
|                              |                               |  | June 30, |     | March 31,
|                              |                               |  | 2002     |     | 2002     
|                              |                               |  |          |     |          
|Unamortized intangible assets |                               |  |          |     |           |  |    |   
|                              | Goodwill                      |  |          |    |           |  |    |   |  
|Amortized intangible assets   |                               |  |          |     |           |  |    |   
|                              | Non-compete agreements        |  |          | 33  |           |  |    | 33 |  
|                              | Deferred Financing Costs      |  |          | 251 |           |  |    |   |  
|                              | Less accumulated amortization |  |          | (52 | )         |  |    | (8 | )
|                              |                               |  |          |     |           |  |    |   
|                              |                               |  | 232      |     |           |  | 25 |   

Page 7



---



##### Table of Contents



Amortization expense for the period ended June 30, 2002 was $45,000.
Estimated amortization expense for the years ended March 31, 2003 will be
approximately $178,000.

The Company recorded a $971,000 impairment charge during the fiscal year
ended March 31, 2002, which reduced remaining goodwill to $0. Remaining gross
intangible assets at June 30, 2002 were comprised of approximately $251,000 in
deferred financing costs and approximately $33,000 in non-compete agreements.



|6. |  | LONG-TERM DEBT
|-- |  | --------------

At June 30, 2002 and March 31, 2002, long-term debt consisted of the
following (in thousands):

|                                                  |                                                   |   |          |        |           |   |        |        | 
|------------------------------------------------- | ------------------------------------------------- | - | -------- | ------ | --------- | - | ------ | ------ | 
|                                                  |                                                   |   | June 30, |        | March 31,
|                                                  |                                                   |   | 2002     |        | 2002     
|                                                  |                                                   |   |          |        |          
|Working capital  borrowings                      |                                                   | $ | 130      |        |           | $ | 130    |       
|Long-term debt  Senior                           |                                                   |   | 12,000   |        |           |   | 12,000 |       
|Long-term debt  Junior                           |                                                   |   | 28,010   |        |           |   | 27,334 |       
|Debt discount                                     |                                                   |   | 2,634    |        |           |   | 3,513  |       
|Capital lease obligations                         |                                                   |   | 202      |        |           |   | 0      |       
|                                                  |                                                   |   |          |        |           |   |        |       
|                                                  |                                                   | $ | 42,976   |        |           | $ | 42,977 |       
|Less: Current portion of capital lease obligation |                                                   |   | (46      | )      |           |   | 0      |       
|                                                  |                                                   |   |          |        |           |   |        |       
|                                                  | Total long-term debt and capital lease obligation |   | $        | 42,930 |           |   | $      | 42,977 | 
|                                                  |                                                   |   |          |        |           |   |        |       



|7. |  | RELATED PARTY TRANSACTIONS
|-- |  | --------------------------

The Company entered into a consulting agreement, dated October 4, 2000,
with Sugarman & Company, LLP, a company in which Randy Sugarman is the managing
partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
were performed on an hourly basis, plus out-of-pocket expenses, and the Company
was billed accordingly. From May 16, 2001 until August 9, 2002, Mr. Sugarman
served as Interim Chief Executive Officer and President of the Company. Mr.
Sugarman ceased to be an officer of the Company on August 9, 2002, in
connection with the conclusion of the Companys engagement of Sugarman &
Company LLP. As of June 30, 2002 and 2001, the Company incurred consulting fees
of $134,000 and $116,000, plus expenses of $30,000 and $22,000 for consulting
services under the agreement for the fiscal years 2003 and 2002, respectively.

Due to the Restructure Transaction completed in August 2000, the Companys
lenders, consisting of the Centre Entities and various financial institutions,
owned approximately 85.3% of the outstanding common stock as of March 31, 2002.
As a result, both the Centre Entities and various financial institutions
maintain a seat on the Board of Directors and have the ability to influence the
day-to-day operation of the Company.

Page 8



---



##### Table of Contents





|8. |  | NET INCOME PER COMMON SHARE                                                            
|-- |  | ---------------------------------------------------------------------------------------
|  
|   |  | Net income per share for the three months ended June 30, 2002 and 2001 were as follows:
|  
|   |  | (in thousands, except per share amounts)                                               

|                                                                                               |  |                    |        |                    |  |   |        | 
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------------ |  | - | ------ | 
|                                                                                               |  | Three months ended |        | Three months ended
|                                                                                               |  | June               |        | June              
|                                                                                               |  | 2002               |        | 2001              
|                                                                                               |  |                    |        |                   
|Basic:                                                                                         |  |                    |        |                    |  |   |        | 
|Net income attributable to common shareholders                                                 |  | $                  | 159    |                    |  | $ | 158    | 
|Weighted average common shares outstanding                                                     |  |                    | 70,153 |                    |  |   | 70,147 | 
|                                                                                               |  |                    |        |                    |  |   |        | 
|Per share amount                                                                               |  | $                  | 0.00   |                    |  | $ | 0.00   | 
|                                                                                               |  |                    |        |                    |  |   |        | 
|Diluted:                                                                                       |  |                    |        |                    |  |   |        | 
|Net income attributable to common shareholders                                                 |  | $                  | 159    |                    |  | $ | 158    | 
|Weighted average common shares outstanding                                                     |  |                    | 70,153 |                    |  |   | 70,147 | 
|Shares assumed issued upon exercise of dilutive stock
options using the treasury stock method  |  |                    | 371    |                    |  |   | 229    | 
|Shares assumed issued upon exercise of dilutive stock
warrants using the treasury stock method |  |                    | 658    |                    |  |   | 0      | 
|                                                                                               |  |                    |        |                    |  |   |        | 
|Total                                                                                          |  |                    | 71,182 |                    |  |   | 70,376 | 
|                                                                                               |  |                    |        |                    |  |   |        | 
|Per share amount                                                                               |  | $                  | 0.00   |                    |  | $ | 0.00   | 
|                                                                                               |  |                    |        |                    |  |   |        | 

The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the period,
as if exercised, by the average common share market price during the period.
The average common share market price used in the above calculation was $0.73
and $0.20, for the periods ended June 30, 2002 and 2001, respectively.

Options to purchase 943,477 shares of common stock and warrants to
purchase 3,246,164 shares of common stock were outstanding as of June 30, 2002
but were not included in the computation of the 2003 diluted EPS because the
exercise price of the options and warrants was greater than the average market
value of the common shares.

Options to purchase 2,757,447 shares of common stock and warrants to
purchase 5,246,164 shares of common stock were outstanding as of June 30, 2001
but were not included in the computation of the 2002 diluted EPS because the
exercise price of the options and warrants was greater than the average market
value of the common shares.



|9. |  | CONTINGENCIES AND COMMITMENTS
|-- |  | -----------------------------

Pursuant to applicable ATF regulations, the Company recently advised the
ATF that approximately 33 weapons that the Company believed were at customer
locations could not be accounted for after the Company conducted a physical
inventory of its weapons. The ATF responded that the Company should confirm the
number of missing weapons and file the formal report required by ATF
regulations. The Company conducted an investigation into this matter and
concluded that the number of weapons missing is 41. The Company has filed the
formal report with the ATF and local law enforcement authorities. The Company
anticipates that it will have further communication with the ATF and it is too
early to determine whether this matter will have a material adverse effect upon
the Company.



|10. |  | SUBSEQUENT EVENTS
|--- |  | -----------------

In August 2002, the Company successfully negotiated a reduction in the
earn-out payment due under an asset purchase agreement executed in fiscal year
1998 from $708,000, which was included in accrued liabilities at March 31,
2002, to $450,000.

On August 9, 2002, the Board of Directors of the Company elected Ronavan
Mohling as Chairman of the Board and Chief Executive Officer. Mr. Mohling has
been a Director since October 2000. Mr. Mohlings election as Chairman of the
Board and Chief Executive Officer comes in connection with the conclusion of
the Companys engagement of former interim Chief Executive Officer Randy
Sugarman of Sugarman & Company LLP, which had been retained by the Company to
manage the Companys transition following its financial restructuring in August
2000. Also, Mr. Mohling replaces Mr. Sugarman as the Companys Chairman of the
Board of Directors.

Page 9



---



##### 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, 2002.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2002 and 2001:

Net Revenues: Revenues increased $1.6 million, or 13.3%, to $13.2 million
for the three months ended June 30, 2002 as compared to $11.6 million for the
three months ended June 30, 2001. Sales to U.S. military customers for the
three months ended June 30, 2002, increased by $1.8 million, or 31.4%, to $7.5
million. The increase in military sales is due primarily to deliveries of items
to customers that were in the Companys backlog of sales as of March 31, 2002.
Sales to U.S. law enforcement customers for the three months ended June 30,
2002 decreased $0.4 million, or (25.3%) to $1.1 million due to a softened
demand from this sector. Sales to international customers for the three months
ended June 30, 2002 increased $0.3 million, or 7.2%, to $4.5 million as the
Company made delivery on items from its backlog of sales as of March 31, 2002.

Cost of Revenues: Cost of revenues increased $2.2 million, or 30.7%, to
$9.4 million for the three months ended June 30, 2002 as compared to $7.2
million for the three months ended June 30, 2001. As a percentage of revenues,
cost of revenues for the three months ended June 30, 2002 increased to 70.9% as
compared to 61.5% for the three months ended June 30, 2001. The increase in
cost of revenues as a percentage of revenues is attributable primarily to the
completion of certain military contracts during the quarter with lower profit
margins and a decline in law enforcement sales, which generally generate higher
profit margins.

Gross Profit: As a result of the foregoing, gross profit decreased $0.7
million, or (14.4%), to $3.8 million, or 29.1% of revenues, for the three
months ended June 30, 2002 as compared to $4.5 million, or 38.5% of revenues,
for the three months ended June 30, 2001.

Total Operating Expenses: Total operating expenses decreased $0.6 million,
or (14.4%), for the three months ended June 30, 2002. As a percentage of
revenues, total operating expenses decreased to 26.8% for the three months
ended June 30, 2002 as compared to 35.6% for the three months ended June 30,
2001. Selling, general and administrative (SG&A) expenses decreased to $2.4
million. As a percentage of revenues, SG&A expenses decreased to 18.5% for the
three months ended June 30, 2002 as compared to 22.7% for the three months
ended June 30, 2001. This decrease in SG&A is due primarily to a decrease 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 $0.2 million, or (17.6%), 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 $0.2 million, or (44.8%), due to the impairment of long-lived
assets in fiscal year 2002, which lowered the basis of long-lived assets and
goodwill.

Operating Income: As a result of the foregoing, operating income remained
constant at $0.3 million. As a percentage of revenues, operating income was
2.2% of revenues, for the three months ended June 30, 2002 as compared to 2.9%
of revenues for the three months ended June 30, 2001.

Other Income (Expense), net: Net interest expense totalled $16,000, or
(0.1%) of revenues for the three months ended June 30, 2002 as compared to
interest income of $145,000, or 1.3% of revenues for the three months ended
June 30, 2001. The increase in interest expense is attributable to amendment
fees and rate increases associated with the Second Amendment to the Second
Amended and Restated Credit Agreement and Partial Exchange Agreement. In
conjunction with the debt restructuring completed in August 2000, the Companys
outstanding indebtedness was exchanged for new borrowings, common stock, and
mandatory redeemable preferred stock. The sum of all future principal and
interest payments due under the new agreements exceeded the carrying value of
the old debt, and thus

Page 10



---



##### Table of Contents



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, 2002, the excess
amount allocated to debt was reduced by approximately $0.9 million, resulting
in a corresponding reduction of interest expense. Interest expense will
continue to be recognized at a much lower effective interest cost until the
debt matures in September 2003.

Provision for Income Taxes: The effective tax rate decreased to 34.0% of
income before taxes for the three months ended June 30, 2002 as compared to
57.0% of income before taxes for the three months ended June 30, 2001. The
decrease in the effective tax rate is due to the fact that in the quarter ended
June 30, 2001, the Company had 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 2002 and fiscal year 2001, resulting in additional tax
provisions.

Net Income: As a result of the foregoing, net income remained constant at
$0.2 million, or 1.8% of revenues for the three months ended June 30, 2002 and
2001.

Accretion of Preferred Stock: The expense for the accretion of the
preferred stock issued in August 2000 was a total of $72,000 for the three
months ended June 30, 2002 as compared to $65,000 for the three months ended
June 30, 2001. The exchange of the old and new credit facilities was accounted
for as a troubled debt restructuring in accordance with Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings (SFAS 15) in August 2000. Under SFAS 15, in a troubled
debt restructuring involving partial settlement of a payable through the
issuance of equity interests, the new obligation should be recorded at the
carrying amount of the prior obligation at the time of the restructuring, less
the fair value of equity interest received, unless the net carrying amount
exceeds the total future undiscounted cash payments specified by the new terms.
Thus, the common stock issued was recorded at the market value at the time of
issuance. The carrying value of the old credit facility and note, including
accrued interest and unamortized debt issuance costs, less the value of the
common stock received and face values of the new debt and preferred stock,
resulted in a debt restructuring liability of approximately $14.6 million. The
liability was allocated to the new debt and mandatory redeemable preferred
stock based on the relative face values of the instruments. As a result, the
Company will record future interest expense and accretion of preferred stock on
a discounted basis. The Company records accretion of preferred stock offset
against the amortization of the debt liability incurred during the restructure
transaction in August 2000. As a result, the Company incurred $0.6 million of
expense related to the accretion of preferred stock during the three months
ended June 30, 2002, which was off-set by ($0.5 million) of debt restructuring
liability amortization, thereby resulting in a net accretion of preferred stock
of $0.1 million for the three months ended June 30, 2002.

Net Income applicable to common shareholders: The net income applicable to
common shareholders remained constant at $0.2 million ($0.00 per share) or 1.5%
for the three months ended June 30, 2002 and 2001.

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, 2002, the Company had a backlog
of approximately $67.0 million, as compared to $55.5 million as of June 30,
2001, comprised of $42.9 million from international customers of FATS, $1.1
from Simtrans Canadian customers and $23.0 million from FATS U.S. military and
law enforcement customers. Approximately $34.6 million of the contracted orders
are scheduled for delivery during fiscal year 2003.

Page 11



---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2002, the Company had working capital of $21.3 million
compared to $16.5 million as of June 30, 2001. The net $4.8 million increase in
working capital is primarily the result of the $4.9 million federal income tax
refund received in the first quarter of fiscal year 2003, reduction of
inventories and reduction of accounts payable. The Companys spending
year-to-date as of June 30, 2002 for capital expenditures was $0.4 million.
Such expenditures include leasehold improvements, computer equipment and
software, marketing product demonstration equipment, and manufacturing
machinery. As of June 30, 2002, the Company was in compliance with covenants
within its debt agreements.

The Company had a net increase in cash and cash equivalents of $5.6
million for the three months ended June 30, 2002 compared to a net increase of
$0.4 million for the three months ended June 30, 2001. For the period ended
June 30, 2002, the Companys operating activities generated cash of
approximately $4.9 million. Cash flow from operations increased primarily due
to receipt of a tax refund that was due at March 31, 2002. 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 $0.4 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. On December 31, 2001,
the Company and its lenders amended the Credit Agreement thereby entering into
the First Amendment and Waiver to the Credit Agreement (the First Amendment),
which made the following changes: The quarterly limitations on capital
expenditures were removed, but the full year limitation on capital expenditures
for the Company remains at an amount equal to 20% of Parents EBITDA for such
fiscal year; the requirement of the Credit Agreement calling for payment of
interest in cash on the Junior Secured Loans for the interest periods ending on
March 31, 2001, June 30, 2001, September 30, 2001, December 31, 2001 and March
31, 2002 was waived and it was provided that interest due on the Junior Secured
Loans for such interest periods would be payable in kind by the delivery to
each of the lenders of additional Junior Secured Loans. On March 29, 2002, the
Company and its lenders further amended the Credit Agreement thereby entering
into the Second Amendment and Waiver to the Credit Agreement (the Second
Amendment), which made the following changes: Certain of the lenders agreed to
provide a $2,200,000 Support Letter of Credit Facility. This new facility has
first out rights in the Collateral; the Credit Agreement was amended to
provide that the lenders would continue to receive interest payments on the
Junior Secured Loans after March 31, 2002 by payment in kind by the delivery to
each of the lenders of additional Junior Secured Loans; the Support Letters of
Credit Facility be cash-collateralized; the amendment further provides that if
EBITDA exceeds 120% of the amount necessary for payment of interest on the
Loans (other than the Junior Secured Loans) plus the quarterly amount necessary
to cash-collateralize the Support Letters of Credit, the interest on the Junior
Secured Loans will be paid, to the extent of such excess, in cash and not in
kind; the negative pledge contained in the Credit Agreement was amended to
allow the Company and Borrower to deposit up to $2,310,000 in a cash collateral
account to secure the Support Letter of Credit; the Maturity Date of the Senior
Secured Loans, Junior Secured Loans and New Revolving Loans was extended from
March 31, 2003 to September 30, 2003; the Credit Agreement was amended to
provide that the interest rate on New Revolving Loans was raised to Prime Rate
plus 2% from Prime Rate plus 1%; the Credit Agreement was amended to provide
that the Company pay an unused commitment fee with respect to the unused
portion of the New Revolving Credit Commitment of 0.5% per annum; the Company
shall pay a non-refundable fronting fee for each New Letter of Credit issued in
an amount equal to 0.25% of the amount of the New Letter of Credit; an annual
non-refundable letter of credit commission for each New Letter of Credit equal
to 1.25% of the average daily aggregate amount of all New Letters of Credit
outstanding.

Page 12



---



##### Table of Contents



As a result of the Restructure Transaction in August 2000, as amended, 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 September 2003 unless otherwise extended at the option of
the Company.

On July 10, 2002, the Company and its lenders amended the Credit Agreement
thereby entering into the Third Amendment and Waiver to the Credit Agreement
(the Third Amendment), which made the following changes: the full year
limitation on Capital Expenditures for the Parent remains at an amount equal to
20% of Parents EBITDA for such fiscal year, except for the fiscal year ended
March 31, 2002, which may exceed 20% of the Parent EBITDA, on a consolidated
basis, but may not exceed $760,000; the Capital Expenditure Restrictions may be
amended with the written consent of the Required Lenders, the Parent and the
Borrower.

The Companys principal liquidity and capital needs are to fund working
capital, provide debt service, and make capital expenditures necessary to
support and grow its business. The Company entered into a restructured Credit
Agreement in August 2000 as discussed above under Restructure Transaction.
The Company amended the restructured Credit Agreement in December and March
2002 to provide additional working capital through a new $2.2 million letter of
credit commitment and the extension of the Companys option to pay interest on
the Companys Junior Secured Loans through the issuance of additional Junior
Secured Loans. In addition, the Company received a $4.9 million federal income
tax refund in April 2002 as a result of recent changes in the tax laws. The
amendments and federal tax refund received have provided additional working
capital for the Company in the near term. However, the Companys primary
source of liquidity and capital resources continues to be cash generated from
its operating activities. The Companys future operations will be constrained
unless it can continue to increase revenues and reduce costs improving
operating margins and generating adequate cash flow to finance working capital
needs.

The Company is subject to several business and market risks. The Company
must continue to achieve its revenue targets and cost reduction objectives in
the current fiscal year in order to generate adequate cash flow to fund working
capital needs and to service debt requirements; the Company must receive new
contracts for production to be delivered in the current fiscal year to meet its
revenue targets and to replenish existing backlog to sustain the revenue
targets in future periods; the Company must continue to negotiate favorable
repayment terms under the Credit Agreement which is currently scheduled to
mature in September 2003.

As a result of the business and market risks noted above, the Companys
continuation as a going concern is dependent on achieving the following
business objectives: (a) continue production work on existing contracts; (b)
obtain new contracts for delivery in the current period and future periods; 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 to assure operations are conducted
at the lowest cost possible; (2) remain focused on revenue maximization of
standard products and continue to seek out new contracts with higher margin
potentials and more favorable payment terms, primarily within the international
and military segments of the market; (3) minimize capital expenditures in
non-strategic areas; (4) continue to improve inventory turns and lower
inventory investment and; (5) continue to negotiate favorable repayment terms
with its lenders.

The Company believes that this business strategy may achieve positive
operating results and cash flows provided that the Company achieves the new
business revenue targets necessary to finance working capital needs. There can
be no assurances that this strategy, and the objectives cited above, will be
successful or that the new contracts will be awarded to the Company. In
addition, the Company could elect to pursue other business objectives that
include seeking strategic partnering, a secondary offering or merger or
acquisition transactions.

Page 13



---



##### Table of Contents



CONCENTRATION OF CREDIT RISK

At June 30, 2002, approximately $6.3 million in accounts receivable or
73.6% of total accounts receivable, net was due from the Companys top ten
customers, $0.9 million of which was secured by performance letters of credit.
The remaining $5.4 million is due from governmental entities.

CRITICAL ACCOUNTING POLICIES

The SEC has recently issued Financial Reporting Release No. 60,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies
(FRR 60), suggesting companies provide additional disclosure and commentary on
those accounting polices considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to the Companys financial
condition and results, and requires significant judgment and estimates on the
part of management in its application. Refer to footnote 2 in the disclosures
to the Companys financial statements included in Form 10-K for the fiscal year
ended March 31, 2002 for a complete listing of significant accounting policies.
Firearms Training Systems, Inc. believes the following represents the critical
accounting policies of the Company as contemplated by FRR 60.

Revenue Recognition

Customer contracts that require significant customization of the Companys
existing proprietary platform or require the development of new systems to meet
required customer specifications are accounted for under the percentage of
completion method, measured by the percentage of cost incurred to date to the
estimated total cost for each contract. Accounting for such contracts is
essentially a process of measuring the results of relatively long-term events
and allocating those results to relatively short-term accounting periods. This
involves considerable use of estimates in determining costs and profits and
thereby estimating the timing of revenue recognition, and in turn, assigning
the amounts to accounting periods. The process is complicated by the need to
evaluate continually the uncertainties inherent in the performance of contracts
and by the need to rely on estimates of revenues, costs, and the extent of
progress toward completion. The company continually monitors each of these
estimates based on the most current information available from the project
managers and project engineers assigned to the programs. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. These revisions could materially increase
or decrease profit margins on particular contracts in future periods.

Impairment of Long-Lived Assets

Management periodically assesses the recoverability of the Companys
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In assessing the
recoverability of long-lived assets management assesses the historical cash
flow associated with that asset in conjunction with undiscounted future cash
flow projections. The undiscounted future cash flow analysis is based on
numerous assumptions including, but not limited to, sales history and future
estimated sales demand. In the event the undiscounted cash flow analysis does
not support the underlying assets carrying value, the asset is written-down to
its estimated fair market value.

Inventory Reserve

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

Page 14



---



##### Table of Contents



Contract Cost Provision

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

Warranty Cost Provision

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

COMMITMENTS AND OTHER CONTRACTURAL OBLIGATIONS

Disclosure of Commitments and Other Contractural Obligations
June 30, 2002
(amounts in thousands)

|                              |  |       |        |        |  |             |       |             |  |         |        |       |  |   |       |  |  |   |     | 
|----------------------------- |  | ----- | ------ | ------ |  | ----------- | ----- | ----------- |  | ------- | ------ | ----- |  | - | ----- |  |  | - | --- | 
|                              |  |       |        |        |  | Less than   |       | Within      |  | Within  |        | After
|                              |  | Total |        | 1 year |  | 1 - 3 years |       | 4 - 5 years |  | 5 years
|                              |  |       |        |        |  |             |       |             |  |        
|Long-term debt                |  |       |        |        |  |             |       |             |  |         |        |       |  |   |       |  |  |   |     | 
|Working capital   borrowings |  | $     | 130    |        |  | $           | 0     |             |  | $       | 130    |       |  | $ | 0     |  |  | $ | 0   | 
|Long-term debt  Senior       |  |       | 12,000 |        |  |             | 0     |             |  |         | 12,000 |       |  |   | 0     |  |  |   | 0   | 
|Long-term debt  Junior       |  |       | 28,010 |        |  |             | 0     |             |  |         | 28,010 |       |  |   | 0     |  |  |   | 0   | 
|Debt discount *               |  |       | 2,634  |        |  |             | 2,634 |             |  |         | 0      |       |  |   | 0     |  |  |   | 0   | 
|Capital lease obligations     |  |       | 202    |        |  |             | 46    |             |  |         | 100    |       |  |   | 56    |  |  |   | 0   | 
|Other                         |  |       |        |        |  |             |       |             |  |         |        |       |  |   |       |  |  |   |     | 
|Operating lease obligations   |  |       | 4,194  |        |  |             | 926   |             |  |         | 1,588  |       |  |   | 1,400 |  |  |   | 280 | 
|Acquisition earn-out payment  |  |       | 708    |        |  |             | 0     |             |  |         | 708    |       |  |   | 0     |  |  |   | 0   | 

* Balance represents a non-cash debt restructuring liability, which is amortized to interest expense monthly.

Page 15



---



##### Table of Contents



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, 2002 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 entered into a consulting agreement, dated October 4, 2000,
with Sugarman & Company, LLP, a company in which Randy Sugarman is the managing
partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
were performed on an hourly basis, plus out-of-pocket expenses, and the Company
was billed accordingly. From May 16, 2001 until August 9, 2002, Mr. Sugarman
served as Interim Chief Executive Officer and President of the Company. Mr.
Sugarman ceased to be an officer of the Company on August 9, 2002, in
connection with the conclusion of the Companys engagement of Sugarman &
Company LLP. As of June 30, 2002 and 2001, the Company incurred consulting fees
of $0.1 million and $0.1 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 16



---



##### 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.

Pursuant to applicable ATF regulations, the Company recently advised the
ATF that approximately 33 weapons that the Company believed were at customer
locations could not be accounted for after the Company conducted a physical
inventory of its weapons. The ATF responded that the Company should confirm the
number of missing weapons and file the formal report required by ATF
regulations. The Company conducted an investigation into this matter and
concluded that the number of weapons missing is 41. The Company has filed the
formal report with the ATF and local law enforcement authorities. The Company
anticipates that it will have further communication with the ATF and it is too
early to determine whether this matter will have a material adverse effect upon
the Company.




ITEM 5.       OTHER INFORMATION

On August 9, 2002, the Board of Directors of the Company elected Ronavan
Mohling as Chairman of the Board and Chief Executive Officer. Mr. Mohling has
been a Director since October 2000. Mr. Mohlings election as Chairman of the
Board and Chief Executive Officer comes in connection with the conclusion of
the Companys engagement of former interim Chief Executive Officer Randy
Sugarman of Sugarman & Company LLP, which had been retained by the Company to
manage the Companys transition following its financial restructuring in August
2000. Also, Mr. Mohling replaces Mr. Sugarman as the Companys Chairman of the
Board of Directors.




ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K



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

|                 |  |   |  |                                                                                                                       
|---------------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit 10.28-02 |  | - |  | Third Amendment to the Second Amended and Restated Credit Agreement and Partial Exchange Agreement                    
|                 |  |   |  |                                                                                                                       
|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, 2002.
|--- |  | ----------------------------------------------------------------------------------
|   
|    |  | April 30, 2002  Change in Registrants Certifying Accountants                    

Page 17



---



##### 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 18