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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549



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FORM 10-K



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|           |  |                                                                                                                              
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                              
|           |  |                                                                                                                              
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 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
(State or other jurisdiction of
Incorporation or organization) |  | 57-0777018
(I.R.S. Employer Identification No.)
|                                                                       
|7340 MCGINNIS FERRY ROAD
(Address of principal executive offices)       |  | SUWANEE, GEORGIA 30024
(Zip Code)              

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

Name of exchange on which registered: NONE

Securities pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $0.000006 PAR VALUE PER SHARE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ü.

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 10, 2002: $7,396,698 (based on 10,273,192 shares of
non-affiliates Common Stock outstanding at $0.72 per share; the last sale price
on the Over-The-Counter Bulletin Board (OTC:BB) on July 10, 2002)

As of July 10, 2002, there were issued and outstanding 70,153,139 shares
of Common Stock, par value $0.000006 per share.

THIS ANNUAL REPORT ON FORM 10-K INCLUDES UNAUDITED FINANCIAL STATEMENTS IN
LIEU OF AUDITED FINANCIAL STATEMENTS BECAUSE THE REGISTRANT DISMISSED ITS PRIOR PUBLIC ACCOUNTANTS, ARTHUR ANDERSEN LLP, IN APRIL 2002
AND ELECTED NOT TO HAVE ARTHUR ANDERSEN LLP ISSUE A MANUALLY SIGNED AUDIT
REPORT IN RESPECT OF THESE FINANCIAL STATEMENTS. SEE ITEM 6. SELECTED
FINANCIAL DATA AND ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.



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TABLE OF CONTENTS



|                                                  |  |  |  |  |  |  |  | 
|------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                           
|PART II                                          
|PART III                                         
|INDEX TO FINANCIAL STATEMENTS                    
|REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|SIGNATURES                                       
|POWER OF ATTORNEY AND SIGNATURES                 
|FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT   
|SECOND AMENDMENT TO CREDIT AGREEMENT             
|SUBSIDIARIES OF THE COMPANY                      
|CONSENT OF ARTHUR ANDERSEN LLP                   



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PART I

Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
1995 Act). Such forward-looking statements made by or on behalf of Firearms
Training Systems, Inc. (the Company) from time to time, including statements
contained in the Companys filings with the Commission and its reports to
stockholders, involve known and unknown risks and other factors which may cause
the Companys actual results in future periods to differ materially from those
expressed in any forward-looking statements. Any such statement is qualified by
reference to the risks and factors discussed below under the headings Business
 Customers,  Research and Development,  Proprietary Operating System;
Raw Materials and Suppliers,  Government Contracts and Regulations and
Managements Discussion and Analysis of Financial Condition and Results of
Operation  General, and  Liquidity and Capital Resources and in the
Companys filings with the Commission, which are available from the Commission
or which may be obtained upon request from the Company. The Company cautions
that the factors and risks discussed herein and therein are not exclusive. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.

ITEM 1. BUSINESS

Restructure Transaction

On August 25, 2000, the Company, its lenders and its largest shareholders
(a group of entities affiliated with Centre Partners Management LLC (the
Centre Entities) completed a restructuring transaction, which significantly
reduced the Companys outstanding indebtedness.

In connection with the restructuring, the Company and holders of its
outstanding debt and preferred stock exchanged all such debt and preferred
stock for the following:



| |  | A new senior secured revolving credit line in the amount of
approximately $882,000 to support existing letters of credit and
future working capital requirements.                                                                                                                                     
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | $12 million of senior secured debt with cash interest payable at prime
plus 1% and no principal payments due until maturity in 2003, with a
one year extension at the Companys option.                                                                                                               
| 
| |  | $23 million of junior secured debt with 10% interest payable in
additional notes or cash, depending on the Companys profitability,
and no principal payments until maturity in 2003, with a one year
extension at the Companys option.                                                              
| 
| |  | Approximately $21 million of new preferred stock with a 10% cumulative
dividend rate payable in additional shares of preferred stock. This
new preferred stock must be redeemed by the Company when junior
secured debt is repaid.                                                                    
| 
| |  | 48,695,212 additional shares of Class A Voting Common Stock (the Common
Stock). As a result of this share issuance, the Companys senior lenders
have the power to vote a majority of the Companys voting common stock.
See Change of Control.                                                     
| 
| |  | Warrants to purchase 2,000,000 shares of Common Stock with an exercise price of $0.25 issued to the Centre Entities.                                                                                                                                                                                  
| 
| |  | Amended warrants already held by the Centre Entities to purchase 3,246,164 shares of Common Stock at $1.00 per share by
providing for payment of the exercise price in cash rather than the Series A Preferred Stock and making a slight adjustment
in the original exercise price of $1.03 per share.

Certain of the securities described above were issued to the Centre
Entities. See Item 13 Certain Relationships and Related Transactions.




On December 31,
2001 and March 29, 2002, the Company and its lenders amended
the Companys senior credit agreement (the Credit
Agreement)




See Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital Resources  and
Item 13. Certain Relationships and Related
Transactions.

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Change of Control

In connection with the Restructure, 40,235,548 shares of Common Stock
constituting 58.53% of the Common Stock as of August 31, 2000 were issued to
the Lenders under the Companys senior credit
agreement (the Credit
Agreement), as partial consideration of the exchange by the Lenders of the
Companys senior indebtedness at March 31, 2000 as follows:

|                                |  |                                |  |                      |  |                       |       |  
|------------------------------- |  | ------------------------------ |  | -------------------- |  | --------------------- | ----- | -
|                                |  |                                |  | (3) Number of Shares |  | (4) Percent of Class 
|(1) Class A Voting Common Stock |  | (2) Name of Beneficial Owner   |  | Beneficially Owned   |  | as of August 31, 2000
|                                |  |                                |  |                      |  |                      
|Class A Voting Common Stock     |  | Bank of America1               |  | 12,307,203 shares    |  |                       | 17.90 | %
|Class A Voting Common Stock     |  | BHF (USA) Capital Corporation1 |  | 7,100,391 shares     |  |                       | 10.33 | %
|Class A Voting Common Stock     |  | U.S. Bank National Association |  | 4,260,375 shares     |  |                       | 6.20  | %
|Class A Voting Common Stock     |  | First Source Financial LLP1    |  | 9,467,188 shares     |  |                       | 13.77 | %
|Class A Voting Common Stock     |  | Centre Entities2               |  | 7,100,391 shares     |  |                       | 10.33 | %



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| |  | 1 Form 13-Ds filed by the three listed entities below on September 6, 2000
indicate that the following additional entities affiliated with the respective
named party also claim beneficial ownership of such entitys shares: (a) Bank
of America, N.A.: Bank of America Corporation and NB Holdings Corporation; (b)
BHF (USA) Capital Corporation: ING Groep NV, BHF Bank Aktiengesellschaft, and
BHF (USA) Holdings, Inc.; and (c) First Source Financial LLP: Dominion
Resources, Inc., Dominion Capital, Inc., Virginia Financial Ventures, Inc., and
N.H. Capital, Inc.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2The foregoing shares are registered in the names of various of the Centre
Entities and were received as a result of the acquisition by such entities of
the senior obligations held by one member of the original Lender group.                                                                                                                                                                                                                                                                                                                                               

All of the foregoing shares are held pursuant to a Voting and Stock
Restriction Agreement dated as of April 1, 2000 (the Voting Agreement) and
entered into on August 25, 2000 whereby the Lenders agreed to vote such shares
as determined by Lenders holding a majority of the commitments to provide
revolving credit advances (the Required Lenders) and granted an irrevocable
proxy to Bank of America, N.A., the Agent, to vote as so directed. In
addition, three of the four Directors of the Company affiliated with the Centre
Entities resigned. The Required Lenders agreed for so long as the Voting
Agreement was in effect to vote their shares for election of one qualified
person affiliated with the Centre Entities nominated by the Centre Entities to
the Board of Directors such that one such person was serving on the Board at
all times. The Centre Entities also agreed to cooperate with the Lenders to
identify and urge the selection of mutually acceptable, qualified candidates to
constitute a majority of the current Board of Directors to serve in the interim
before the next election of Directors. In addition, all parties agreed to
cooperate to identify and urge the selection of a mutually acceptable,
qualified candidate to serve as an active Chairman of the Board of Directors
and to give due consideration in that regard to selection of a representative
of the management consultant required to be retained by the Company pursuant to
the Senior Credit Agreement.

Company Overview

Over its 18-year history, FATS® has developed over 200 types of simulated
weapons, manufactured and delivered over 30,000 simulated weapons, developed
over 1,000 training scenarios, and delivered over 4,000 simulators to 50
countries. FATS is a world leader in the development and production of
interactive simulation systems designed to provide training for and in the use
of small and supporting arms for dismounted and mounted military operations,
and training for judgmental use of force for law enforcement and military
peacekeeping activities. The Company has broadened its array of products to
accommodate the current tactics, training and equipment available to both law
enforcement and military communities. Examples include the provision of
simulators and courseware to support indirect fire, less than lethal weapon
applications, and multiple room engagements. Every system features embedded
capabilities to support customer authoring of scenarios and comprehensive
performance evaluation. Keeping pace with national and international concerns,
FATS has added significant improvements to courseware and software that focus
on situations that require extraordinary judgment  including operations in
peace keeping/making, crowd control and hostage negotiations. Additional
emphasis has been placed on night operations in all environments  in most
cases allowing the customers to utilize their organic night vision equipment.

FATS software and hardware technologies have evolved along with advances
in the computer industry. Recognizing that commercial technological
capabilities are moving faster than any one company can replicate, the Company
takes advantage of commercially available off the shelf (COTS) components
that ensure reuse and upgrade capability as well as commonality and the ability
to integrate with other simulation systems. This philosophy seeks to provide
each customer the best technical and economical solutions for its training
needs while providing options for life cycle management of their systems. FATS
also partners with each customer to ensure that each training solution is
complete, integrated and functional from the embedded technology and courseware
to the unique language requirements. The goal is to ensure that each simulated
firearm or weapons

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system is integrated and compatible with the customers training programs
and replicates precise weapon ballistic data, desired environmental effects,
and target damage realism. The Company has focused its sales efforts for small
arms simulators primarily in the U.S. and international military and law
enforcement market through its principal facilities near Atlanta, Georgia.
Larger gunnery simulation systems are developed and manufactured by its Canada
based subsidiary, Simtran Technologies, Inc. (Simtran) located in Montreal,
Canada. Simtran contracts to develop and deliver five unique products: an air
defense missile trainer; an appended armored vehicle crew trainer; a
stand-alone armored vehicle crew trainer: and, an appended light armored
vehicle crew trainer. Other smaller subsidiaries located in the United Kingdom,
the Netherlands, Singapore and Australia provide sales, service and limited
manufacturing support.

Industry Overview

Many companies in simulation technology have principally been focused on
large weapon systems such as flight simulators and large, expensive mainframe
computing simulations, FATS has focused on the application of affordable
technology for individual and small unit gunnery and use of force requirements.
FATS has developed low cost simulators with high fidelity graphics that provide
training in realistic environments. During the last few years, rapid
advancements in commercial computer technology have allowed replacement of
FATS-proprietary approach with commercial technology that supports the need to
meet contemporary combat training objectives. FATS simulators use highly
interactive three-dimensional computer-generated scenarios that allow battles
to take place in virtual environments with computer-generated semi-automated
forces.

FATS has teamed with law enforcement agencies to develop courseware and
training tools that assist first responders for todays challenges with
techniques that seek to teach a measured correct response.

FATS understands that the current military climate of joint and combined
operations is very complex, and has developed, and continues to improve its
capability to interface with other types of simulators through the use of
networking techniques as confirmed by the Companys continued certification as
High Level Architecture (HLA) compliant. Management believes that no company is
better suited for this  given FATS international deployment of systems. FATS
currently enables forces of varied countries to rehearse incident reaction at
home station prior to deployment to areas where peacekeeping and law
enforcement types of actions can easily escalate to full-scale military
operations. FATS systems have proven well suited for these situations as
evidenced through the several years of use by numerous customers before and
during deployments to theaters of operation including Somalia, Bosnia, Kosovo
and areas of the former Soviet Union.

More military and law enforcement agencies are deployed throughout the
world today than at any other time in history, with different missions and
methods to respond. Management believes that the focus of the Company on
simulation of state of the art munitions, weaponry and tactics will increase
the use of simulation both in preparation for operations and for sustainment
training once deployed. In the law enforcement arena, social issues centered
on levels of force used by police and increased school violence all require
extraordinary training. Political and social unrest, expansive media coverage
coupled with the increasing application of technology to apply measured
responses are adding daily challenges to operating force personnel. Today, the
professionals put in these environments have more tools available than they
have time to train, making simulation more a necessity than a desired
supplement. Management believes that FATS is well positioned to take advantage
of these conditions.

Products

The corporation offers an entire spectrum of products to meet the training
needs of our customers, ranging from small handguns to light armored vehicles
and missile system weaponry. Appropriate software, courseware and scenarios
accompany all our products. The entire product line has evolved and now uses
the latest technology that allows customers to develop their own training
materials or courseware using the simulator. COTS components ensure that each
product is capable of being upgraded as technology advances by means of the
most affordable and cost effective strategy for the customer. Each user
interface is customized to the owner requirements incorporating operator
friendly applications common to computing such as keyboard and mouse actions by
following simple prompts during operation and training on the system.

Simulators. The major simulator products encompass Law Enforcement
Judgmental Trainers, Military Small Arms Trainers, Indirect Fire Trainers,
deployable appended and stand alone Armored Vehicle Trainers, Missile Trainers,
Naval Shipboard Trainers (including large bore cannons), Live Fire systems, and
Sportsman Archery and Firearms Handling Trainers.

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Hardware and software components have been standardized across multiple
FATS product lines to ensure system compatibility and supportability are
maximized. The Company has the capability to utilize many means to deliver
visual imagery including laser disc, DVD and computer-generated imagery.
Images can be displayed on standard computer monitors or on large screens
ranging from 10 to 50 feet wide and surround screens with a
field of view up to 150 degrees laterally and 45 degrees
vertically.

Small Arms Trainer.The FATS small arms trainer (SAT), the core product,
allows training from individual marksmanship to unit collective training on
weapons ranging from pistols through anti-tank missiles. Capabilities encompass
archery, sports shooting, live fire, non-lethal weaponry/munitions to include
the non-lethal mortar round, pepper spray (Oleoresin Capsicum),
batons, rubber bullets and bean bag shotgun rounds. To address the wide range of
customer training needs, the SAT offers multiple training modes, including the
Marksmanship, Judgmental Video, and 3-D Computer Generated Imagery (CGI)
Collective Training Mode, all of which capitalize on the strengths of various
display formats, media, and varying levels of scenario interactivity. This is a
versatile trainer offering individual, team, unit and leadership
training in safety, basic marksmanship, fire discipline, fire coordination and
judgmental decision-making.

Indirect Fire Trainer.The indirect fire
trainer (IFT) has the
capability to accurately portray the call for fire procedures and effects of
all artillery, mortars, naval gunfire, close air support, and attack helicopter
supporting arms platforms. These systems may be integrated into a combined arms
battle space while conducting direct fire engagements against simulated
forces. The IFT package further supports the training with real or simulated
fire direction center personnel and equipment, and facilitates the use of fully
simulated 60mm and 81mm mortars. Forward Observer training is conducted in the
3-dimensional CGI terrain database using all the associated tools available to
the observer (maps, modified military binoculars, laser range finders and laser
target markers).

Law Enforcement Trainer.This simulator provides training to the Law
Enforcement community from the individual patrolman through the team/section
and SWAT teams applying the entire force continuum spectrum of options. Weapons
include small arms, semi-automatic weapons, shotguns and non-lethal munitions.
Systems range from the 100DP  low end limited features 
to the high end Weapons Team
Engagement Trainer that allows multiple room team engagements. Courseware spans
the spectrum of conflict that an officer may encounter, from marksmanship, to
hostage rescue/negotiations, to domestic encounters all requiring judgment and
measured response. Each system has complete diagnostics and data feedback.

Weaponry.FATS has fielded over 200 types of simulated weapons with
features ranging from stand-alone weapons using simple laser inserts to fully
sensored weapons that detect user behavior by measuring data collected from
butt pressure, cant of the firearm, trigger pressure, and the actual dispersion
of the rounds. Fully-sensored weapons with recoil are available with backpacks
allowing the student to move more freely than the tethered versions.

Simtran. Simtran offers five unique products: a hand held/shoulder
launched anti-armor missile trainer, the Eryx© Video Interactive Gunnery
Simulator (EVIGS) and the Tube launched, Optically tracked, Wire-command link
(TOW) Video Interactive Gunnery Simulator; a stand-alone classroom armored
vehicle crew trainer, the Cougar Crew Gunnery Trainer; an air defense crew
missile trainer, the Javelin Detachment Trainer; an appended light armored
vehicle crew trainer; and, contract software development and programming.
Simtran is also under contract to upgrade the EVIGS system to include thermal
imagery. Simtrans primary focus is on heavy weapons/systems for the military
and scenarios are developed and tailored to the customer and are provided in
the medium (interactive video, CGI, Dynamic CGI) requested. Simtrans
engineering group seeks to control obsolescence and sustain all systems
throughout their life cycle. The Company believes the market is not as
substantial as once thought and is now in decline.

Dart. The Dart product line of video simulation technology is a part of
the shooting sports industry, which includes portable and mobile firearms and
archery applications. Dart plays a role in hunter and sportsman development and
training. The Company believes opportunities still exist in the hunter and
sports training component of the market.

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Target Markets

The Company currently targets three principal market components: (i) U.S.
military; (ii) U.S. law enforcement; and (iii) international, which includes
military and law enforcement authorities outside the U.S. or its territories.
The following table sets forth dollar amounts (in thousands) and percentages
of sales for each of the Companys major markets on an historic basis for the
fiscal years ended March 31st.

|                     |  |        |        |        |  |        |       |   |  |       |        |   |  |  |       |   |  |   |        |  |  |  |       |  
|-------------------- |  | ------ | ------ | ------ |  | ------ | ----- | - |  | ----- | ------ | - |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|                     |  | Actual |        | Actual |  | Actual
|                     |  | FY02   |        | FY01   |  | FY00  
|                     |  |        |        |        |  |       
|                     |  | Sales  |        | %      |  | Sales  |       | % |  | Sales |        | %
|                     |  |        |        |        |  |        |       |   |  |       |        |  
|International        |  | $      | 23,809 |        |  |        | 40.3  | % |  | $     | 21,875 |   |  |  | 52.7  | % |  | $ | 27,419 |  |  |  | 70.5  | %
|U.S. Military        |  |        | 27,836 |        |  |        | 47.1  | % |  |       | 11,224 |   |  |  | 27.0  | % |  |   | 4,268  |  |  |  | 11.0  | %
|U.S. Law Enforcement |  |        | 6,669  |        |  |        | 11.3  | % |  |       | 7,419  |   |  |  | 17.9  | % |  |   | 5,560  |  |  |  | 14.3  | %
|Hunter / Sports      |  |        | 743    |        |  |        | 1.3   | % |  |       | 983    |   |  |  | 2.4   | % |  |   | 1,642  |  |  |  | 4.2   | %
|                     |  |        |        |        |  |        |       |   |  |       |        |   |  |  |       |   |  |   |        |  |  |  |       |  
|Total                |  | $      | 59,057 |        |  |        | 100.0 | % |  | $     | 41,501 |   |  |  | 100.0 | % |  | $ | 38,889 |  |  |  | 100.0 | %
|                     |  |        |        |        |  |        |       |   |  |       |        |   |  |  |       |   |  |   |        |  |  |  |       |  

International. The Company believes that many international military and
law enforcement agencies recognize the benefits of cost-effective and realistic
small arms simulation training. The Company has sold FATS systems to customers
in more than 40 countries, including Canada, Great Britain, the Netherlands,
Italy, Australia, and Singapore. Interest in the Companys products tends to be
greatest in countries in which limited land is available for live fire training
or in which budgetary constraints or interest in technological upgrades
supports a decision to purchase the Companys systems. Recent procurement
decisions have been supported by FATS expanded capabilities, particularly in
the areas that are supported by the Companys introduction of the IFT product
and the HLA networking capabilities. See Customers. Unlike the U.S., most
other countries have centralized law enforcement organizations. As a result,
procurement and purchasing decisions for both military and law enforcement are
typically centralized and in some instances both functions are managed through
the same command structure. The procurement processes vary substantially
depending upon the requirements of the particular jurisdiction.

For fiscal 2002, 40.1% of the Companys total revenues were attributable
to sales to military and law enforcement authorities outside the U.S. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 of Notes to Consolidated Financial Statements.

U.S. Military. The desires to provide realistic training and
significantly reduce costs have been the primary reasons for the adoption of
simulation for small and supporting arms training by U.S. military authorities.
The relatively high costs of live fire training considering the use of
ammunition, wear and tear on weapons, the need to transport soldiers and
equipment to the firing range and legal requirements for remediation of
environmental damage to the firing range encourages military forces to use
simulation to ensure proper readiness. Moreover, according to budget estimates
of the U.S. Department of Defense (DOD) for the Governments fiscal year
2001, certain elements of the U.S. armed forces have accumulated a substantial
shortfall relative to desired inventory levels of ammunition, which shortfall
has provided an impetus to certain organizations within the U.S. armed forces
to adopt or expand simulation training.

While all the U.S. military forces have embraced the use of simulation,
each major branch of the U.S. military is at a different stage of
implementation. The U.S. Marine Corps has adopted simulation as a fundamental
part of its small arms training activities. In fiscal years 1990, 1995 and
2001, through competitive bidding, the Company was awarded contracts by the
U.S. Marine Corps for the supply of small and supporting arms simulators. The
U.S. Army has also purchased systems under the U.S. General Services
Administration (GSA), competitive awards and the Companys contract with the
U.S. Marine Corps while the U.S. Air Force has purchased systems from the
Company through the procedures of the GSA. The Company believes that it has
been the primary supplier of interactive small and supporting arms simulation
systems to the U.S. Marine Corps, the U.S. Air Force and the U.S. Army. The
past year has seen a significant growth in support of the U.S. Army in Europe
where the Company now maintains and supports simulators in support of the
Armys Deployed Operational Group. The Company is part of a contractor team
that was selected for a multi-year contract to support the U.S. Army Engagement
Skills Trainer (EST) procurement with ECC International, Inc. (ECC), an
Orlando, Florida based simulation company, that

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holds the prime, or direct, contract with the U.S. Government; FATS is the
sole provider of weapon simulators to ECC for this contract.

For fiscal 2002, 47.1% of the Companys total revenues and 79.0% of the
Companys U.S. revenues were attributable to sales to U.S. military
authorities. See Managements Discussion and Analysis of Financial Condition
and Results of Operations.

U.S. Law Enforcement. The U.S. law enforcement segment of the market is
highly diversified but can be divided into four principal components: (i) U.S.
government entities including the U.S. Department of Treasury (including its
agencies and bureaus such as the Federal Law Enforcement Training Center,
Secret Service, Bureau of Alcohol, Tobacco and Firearms and the Internal
Revenue Service), the U.S. Postal Service, the Federal Bureau of Investigation,
the Drug Enforcement Administration and the Central Intelligence Agency; (ii)
state and local law enforcement departments such as the Los Angeles and New
York City Police Departments, and smaller urban and rural counterparts, (iii)
colleges and universities offering criminal justice training programs; and (iv)
federal, state, and private correctional facilities. The federal agencies
generally use a centralized procurement process and are typically headquartered
in or near Washington, D.C. By contrast, the state and local law enforcement
agencies are widely dispersed, with more than 17,000 different law enforcement
departments in the U.S. Given this diversity, the procurement process varies
substantially depending upon the requirements of the particular jurisdiction.
The Company believes that its most likely potential local law enforcement
customers may be found among the approximately 3,600 law enforcement agencies
and departments with more than 25 officers. With only approximately
1,300
systems sold to U.S. federal and local law enforcement authorities to date (of
which approximately 1,100 are FATS systems), the Company believes that this
market can provide additional opportunities to the Company in the future. Law
enforcement authorities face increasing budgetary constraints as well as
increasing threats of litigation and damage awards relating to claims
concerning the excessive or improper use of force, lethal or otherwise, by law
enforcement personnel. Accordingly, the Company believes that there are
opportunities for increased sales to U.S. law enforcement and correctional
authorities of cost-effective simulation products designed to enhance tactical
skills and judgment and to lower liability costs.

For fiscal 2002, 11.3% of the Companys total revenues and 18.9% of the
Companys U.S. revenues were attributable to sales to U.S. law enforcement
authorities. See Managements Discussion and Analysis of Financial Condition
and Results of Operations.

Hunter and Sports Training. The Company has reduced its focus on the
hunter and sports training components of the market in the United States. The
customers for firearms training in this market component include state and
federal hunting agencies, various state agencies and several conservation
associations. Given the existence of more than 16,000 firearms dealers in the
U.S., the widespread interest in the ownership and use of firearms and the
growing desire to find ways of better assuring the safe use of firearms, the
Company believes opportunities still exist in the hunter and sports training
component of the market.

For fiscal 2002, 1.3% of the Companys total revenues were attributable to
sales in the hunter and sports training component of the market. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

Sales and Marketing

The Companys marketing and sales efforts are organized to service its
principal customers. The Companys marketing strategy focuses on developing
relationships with potential customers very early in their decision-making
processes and educating them about the benefits of training through simulation.
The Company then works with training and procurement personnel to identify and
develop solutions for each customers specific training needs.

By becoming involved with customers at an early stage in their analysis of
potential training solutions, the Company can often sell its training systems
without any significant competition from other providers. In addition, the
Company often has an advantage in competitive situations because the Companys
systems provide standard specifications that are frequently incorporated into
the request for proposal used by the customer in soliciting bids from suppliers
of small and supporting arms simulators. The Companys consultative approach
with customers has often helped it achieve favorable results in competitive
bidding situations.

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Marketing staffs for FATS and Simtran develop business opportunities,
capture plans and provide appropriate collateral material. FATS international
sales staff is responsible for FATS products as well as Simtran as both
companies serve the same customer base. FATS continues its support of the
international sales effort with a network of agents and business
representatives.

Customers

The Companys principal customers historically have been in the public
sector of the U.S., including the federal, state and local governments, and in
the public sectors of a number of other countries. Approximately 40.1% of the
Companys revenues for fiscal 2002 were attributable to sales to military and
law enforcement authorities internationally, 47.3% were attributable to sales
to military authorities in the U.S. and 11.3% were attributable to sales to law
enforcement authorities in the U.S. Sales to public sector customers are
subject to a multiplicity of detailed regulatory requirements and public
policies. Such contracts may be conditioned upon the continuing availability of
public funds, which in turn depends upon lengthy and complex budgetary
procedures, and may be subject to certain pricing constraints. Moreover, U.S.
government contracts and those of many international government customers may
generally be terminated for a variety of factors when it is in the best
interests of the government. There can be no assurance that these factors or
others unique to government contracts will not have a material adverse effect
on the Companys future results of operations and financial condition.

The following table lists certain of the Companys customers in fiscal
2002 in each of its principal market components:

|                                           |  |                                                |  |                                                   
|------------------------------------------ |  | ---------------------------------------------- |  | --------------------------------------------------
|U.S. Military                              |  | U.S. Law Enforcement                           |  | International                                     
|                                           |  |                                                |  |                                                   
|Defense Threat Reduction Agency            |  | New York City Police Department                |  | Public Works and Government
Services Center Canada
|                                           |  |                                                |  |                                                   
|United States Air Force
Air National Guard |  | Connecticut Peace Officers
Standards Training |  | Canadian Department
of National Defense           
|                                           |  |                                                |  |                                                   
|United States Marine Corps                 |  | R.C.M.P.  Edmonton                            |  | British Army                                      

In fiscal 2002, the Companys five largest customers accounted for
approximately 40.0% of the Companys revenues, with two customers accounting
for more than 10% of revenues. In fiscal 2001, the Companys five largest
customers accounted for approximately 34.9% of the Companys revenues, with no
customer accounting for more than 10% of revenues. Given the nature of the
Companys contracts, revenues attributable to specific customers are likely to
vary from year to year, and a significant customer in one year may not be a
significant customer in a subsequent year. In order to reach its growth
objectives, the Company will be required to seek contracts from new domestic
and international customers as well as orders from existing customers for
additional types of simulated firearms or increased quantities of previously
ordered systems and simulated weapons. A significant decrease in demand by or
the loss of one or more significant customers could have a material adverse
effect on the Companys results of operations or financial condition. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 of Notes to Consolidated Financial Statements.

Research and Development

The Company engages in the research and development (R&D) of new and
enhanced simulation and training technology using internally generated funds.
Software and hardware R&D expenditures totaled $4.1 million, $4.8 million
and $4.0 million in fiscal 2002, 2001, and 2000, respectively. The Companys
R&D efforts are divided into four separate disciplines: electronics,
mechanical, training, and audio-visual. The continued success of the Company
will depend on its ability to incorporate in its products changing technologies
in such areas and to develop and introduce new technology that meets the
increasingly sophisticated training needs of the Companys customers. Although
the Company continuously pursues research and development, there can be no
assurance that it will be successful in adapting technology in a timely
fashion.

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The role of mechanical R&D is to design and develop specialized assemblies
as required for specific training scenarios per customer needs. Within this
discipline are motion platforms training stations, which realistically simulate
the movement of various land, sea, and air vehicles. Also, the development of
specialized system packages as well as electrode/mechanical camera and lens
drives controlling flexible lighting environments, which expand and enhance
training scenarios.

Management believes that FATS small arms weapon simulators excel in the
simulation industry for fidelity and reliability. The FATS weapon R&D team of
engineers and technicians carefully evaluates the operational characteristics
and functions inherent in each live weapon to be converted for simulation.
These operational characteristics are then replicated within the simulator so
as to provide the utmost degree of realism in form, fit, and function. The post
development process includes test evaluation to ensure long-term reliability
and cost effectiveness.

R&D combines the engineering disciplines of system, software,
hardware, and embedded software design as well as other electro-optical fields
to produce programs and equipment responsive to specific training needs. The
Companys electrical R&D capabilities include real-time system hardware design,
object-oriented software design, simulation system development, video and
audio, interactive computer generated graphics, High Level Architecture (HLA),
display technologies, video special effects, lasers, weapon ballistics, optics,
image processing, target modeling and motion simulations. On an ongoing basis,
the engineering staff works with training development personnel (subject matter
experts) and customers to improve continuously the technology and features of
the Companys various product lines and associated training modes offered.




Training R&D focuses on the interpretation and translation of customer
training requirements into quantifiable objectives and the development of
simulation programs to meet those objectives. The training department
of FATS is staffed by experienced and knowledgeable weapon training
and shooting specialists, many of whom have been successful at
international-level shooting competitions and each of whom has
extensive military or law enforcement experience. Specialized experience on
the part of the Companys employees in such areas as the U.S. military, law
enforcement, hunting and competitive shooting helps ensure an understanding of
customer requirements.




Audio-visual R&D focuses on the production of specialized audio-visual
programs and a range of media support activities, from full production of
training programs to customer assistance in user-produced programs. The
Companys audio-visual technology is very important for creating a life-like
training environment. The Company has assembled a team of experienced
audio-visual engineers, cinematographers and specialists who have pioneered the
use of multi-screen projection in small arms simulation.

Manufacturing Operations

The Companys manufacturing operations are conducted primarily at its
Suwanee headquarters near Atlanta, Georgia, and to a limited extent at the
facility of its U.K. subsidiary, Firearms Training Systems Ltd. in
Lincolnshire, England. Simtrans products are manufactured at its facility in
Montreal, Canada. Atlanta manufacturing operations are divided into two groups,
systems manufacturing and weapons manufacturing. The systems manufacturing
group assembles the simulator components of the FATS systems. As the components
are completed, they are tested for both function and durability and are
subjected to a comprehensive ISO 9000 certified, quality assurance program.
Systems manufacturing occur at the Companys headquarters where electrical
assemblers and technicians can assemble 30 primary simulation computers and
other unique simulator components per month on a single-shift basis. The
Company believes that this capacity can be expanded to 75 simulation computers
per month by adding additional personnel, using a second shift or to an even
greater capacity by acquisition of the requisite workstations and floor space
for manufacturing and warehouse operations.




Weapons manufacturing involves the production of simulated firearms and
non-lethal simulators by either modifying actual firearms and other devices
into simulators or assembling simulators from kits manufactured to the
Companys specifications by a variety of outside sources. The assembly process
encompasses the fitting of modified weapons or kits with the Companys
pneumatic and electrical components, followed by the functional testing of the
completed assembly. The combined weapons manufacturing activities in the U.S.
and the U.K. have a capacity to more than meet production requirements
per month on a
single-shift basis. As with systems manufacturing, this capacity can readily be
expanded by using additional shifts and/or by acquiring additional
facilities and workstations.




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Product Support

The Company has established a worldwide customer service network
consisting of personnel at its Suwanee, Georgia headquarters near Atlanta,
Georgia and a Field Service Office on the West Coast. The Companys
subsidiaries, subcontractors and agents provide worldwide support. Accessories,
parts, service, system upgrades/enhancements and training are available through
the 24-hour customer service hotline, or through the customer service
electronic mail, either direct or through the Companys web site. The Companys
headquarters, and the Companys U.K., Netherlands, Singapore and Australian
subsidiaries, maintains an inventory of repair parts, tools, test equipment,
and trained technicians to respond to customer requirements. Simtran maintains
a fully equipped service department to support its individual product lines and
is equipped and trained to support the full Company product line in Canada.
Technical assistance is available through the FATS Helpdesk hotline. The
Company seeks to provide customer service quickly. In addition to its traditional service role, the
Companys service department administers a U.S. Government-owned inventory of
spare components. This assures that when a customer experiences a failure, they are returned to service within forty-eight
hours by express shipping a spare component from this inventory. This same
concept has been applied successfully to support the British Ministry of
Defense, the Royal Netherlands Land Army, the Belgian Army, the Swiss Army, the
Canadian Department of National Defense, the Australian Department of Defense
and the Singapore Military through local subsidiaries.

Proprietary Operating System; Raw Materials and Suppliers

The Company currently purchases from numerous suppliers on both a
competitive bid and long-term contract basis. The Companys current products
use a Microsoft Windows-based operating system; however, some of the Companys earlier
model simulators use a software operating system known as OS-9, which is an
operating system developed and owned by Microware Corporation. The Company
licensed the OS-9 system from Microware on a non-exclusive, royalty-paying
basis for a term that expired on October 31, 2001. The expiration of the
license has had no effect on the Companys business operations or financial
condition. The Company believes it has enough licensed copies of the OS-9
software in inventory to cover any future new sales or warranty replacements
for existing customers. The Company believes that there are viable alternative
sources for all of its raw materials. In addition, the Company has a
sophisticated machine shop in which it can convert actual weapons into
simulated weapons and produce certain weapon and simulator parts. This ability
provides the Company with the flexibility to produce a large portion of its
principal components if they become unavailable or it becomes economically
advantageous to do so.

Backlog

As of March 31,
2002, the Company had a backlog of approximately $59.6
million compared with $55.4 million as of March 31, 2001. Management expects
that approximately $28.3 million of backlog will be delivered in fiscal 2003.
Revenue from sales of standard products is recorded when title transfers, which
is typically upon shipment. Revenue from development programs under contract is
recorded on the percentage-of-completion method of accounting, which approximates contract
performance to date (see Note 3 to the accompanying consolidated financial
statements). Contracts with U.S. and other governments may generally be
terminated by the customer, in whole or in part, for default or convenience if
such termination would be in the best interest of the customer. Accordingly,
there can be no assurance that the Companys backlog will result in future
revenues. However, these contracts generally provide for reimbursement of
actual cost incurred through the date of termination.

Competition

The recent increase in sales and acceptance of small arms simulation
products has brought about an increase in competition from both domestic and
international companies. The Company competes with divisions or subsidiaries of
larger companies solely dedicated to simulation for sales of the Companys
small and supporting arms simulation products, which currently include indirect
fire, air defense and armored vehicles. In the military market, FATS
faces a number of major competitors. They are Thales, CAE and ECC
International. The Thales product is a combination of Thales Training
and Simulation, formerly Thomson Training and Simulation of the UK,
Cergy of France, Thales Air Defence of Northern Ireland, formerly
Shorts and Thales Elektronic Systeme in Koblenz, Germany. CAE, a
Canadian owned company, has a subsidiary operating out of the UK,
which specializes in indirect fire training systems. In the U.S. law
enforcement and commercial component of the market, the Companys principal
competitors include, among others, Advanced Interactive Systems and I.E.S.,

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Incorporated. The international law enforcement component of the market
has also seen an increase in competition from small European companies. The
growing awareness of simulation budgets, combined with the competitive nature
of the marketplace, have contributed to the formation of teaming arrangements
by competitors that present potent competitive challenges. Many of the
Companys current and potential competitors have significantly greater
financial, technical and marketing resources than FATS.

Employees

As of March 31, 2002, the Company and its subsidiaries employed 388
employees, of which 275 were employed at FATS, Inc., 48 were employed at
Simtran, 35 were employed at FATS-Australia, and 30 were employed by
FATS-Europe. Unions represent none of the Companys employees. The Company
considers relations with its employees to be satisfactory.

Government Contracts and Regulation

Sales to public sector customers are subject to a multiplicity of detailed
regulatory requirements and public policies that may affect the ability of the
Company to increase or even maintain such sales. In particular, the choice of a
contractor by a customer may be affected by the size of the contractor, the
place of manufacture of the contractors products or whether the contractor is
given preferential consideration based upon socioeconomic factors. Furthermore,
contracts with government agencies are conditioned upon the continuing
availability of public funds, which in turn depends upon lengthy and complex
public budgetary procedures whose outcome is difficult to predict. In
particular, contracts with the U.S. Government are conditioned upon the
continuing availability of Congressional appropriations.

The U.S. Government or the relevant agency in whole or in part for its
convenience may generally terminate government contracts if such termination
would be in the best interest of the U.S. Government. Furthermore, any
contractor who is suspected of, or found to have engaged in, commission of
fraud or a criminal offense in connection with a government contract or
subcontract, a serious violation of the terms of a government contract or
subcontract, unfair trade practices, or any other offense indicating moral
turpitude or a lack of business integrity or business honesty faces the
possibility of being suspended or debarred from all further government
contracting. The decision to suspend or debar a contractor is generally at the
discretion of the government. Any such suspension or debarment could have a
material adverse effect on the Companys future results of operations and
financial condition. See Legal Proceedings.

The type of government contracts awarded to the Company in the future may
affect its financial performance. A number of the Companys contracts have been
obtained on a sole source basis while others were obtained through a
competitive bidding process. The extent to which the Companys contracts and
orders are obtained through a competitive bidding process rather than as sole
source contracts may affect the Companys profit margins. There can be no
assurance that changes in the type of government contracts and other contracts
entered into by the Company in the future will not have a material adverse
effect on future results of operations or financial condition of the Company.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations.

The Company is subject to export licensing jurisdiction of the U.S.
Department of State (State Department) and the U.S. Department of Commerce
(Commerce Department) with respect to the temporary or permanent export of
certain of its products and the import of certain other products based on the
Arms Export Control Act and the Export Administration Act which, though
expired, is carried out by Presidential Executive Order issued under the
auspices of the International Emergency Economic Powers Act. In addition to
application to transfer of information and products to customers, such
regulations also may from time to time require a license for the transfer of
technical information from the Company to its foreign subsidiaries, such as
information necessary to enable a subsidiary to modify simulated weapons for
use in systems being supplied by the subsidiary to customers. The respective
jurisdictional statutes provide the State Department and the Commerce
Department with the discretion to change their policies with respect to whether
particular products can be licensed for export to particular countries. In
certain circumstances, export licenses and other authorizations may be revoked,
suspended or amended without notice. Both the State Department and the Commerce
Department have the authority in certain circumstances to debar persons or deny
them export privileges. Such action may be taken for, among other reasons,
commission of civil violations and criminal offenses in connection with
exports. Any loss, suspension or revocation of the Companys export licenses
could have a material adverse effect on the Companys future results of
operations and financial condition.

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The Company has a license from the U.S. Treasury Departments Bureau of
Alcohol, Tobacco and Firearms (ATF) to import destructive devices and certain
other materials. This license also authorizes the Company to be a dealer in
regulated firearms and other destructive devices. The Company also has a
license from ATF that authorizes it to be a manufacturer of destructive devices
and certain other materials. The Company is registered with the Director of ATF
as a person engaged in the business of importing articles enumerated on the
U.S. Munitions Import List. ATF may revoke licenses or deny their renewal for
failure to follow the prescribed regulations or as a result of the commission
of criminal offenses. Certain of the Companys subsidiaries also have similar
licenses in their jurisdictions of incorporation. Any revocation of or refusal
to renew the Companys ATF license or any such foreign license could have a
material adverse effect on the conduct of the Companys operations and
financial condition since it must possess such licenses and comply with ATF
regulations in order to import, possess and modify the authentic firearms used
in its FATS systems. See Legal Proceedings.

Certain FATS simulation systems use laser-emitting devices to locate the
users aiming point in relation to the target. Such products must be
manufactured and operated in accordance with safety standards adopted to
protect human eyesight. In the United States, such standards are included as
part of Food and Drug Administration regulations currently administered by the
Center for Devices and Radiological Health. Systems sold to many international
customers, including those in Europe and Canada, however, must comply with
international standard IEC 825-1, which contains more rigorous criteria than
the present U.S. standards. Depending on the amount of laser energy emitted,
room safety precautions, warning signs and labels, special shut-off devices,
special training for personnel and related safety measures may be required,
which increase costs and can create administrative concerns for the Companys
customers.

ITEM 2. PROPERTIES

|               |  |                          |  |          |  |         |        |            |  |            |      |  |  |         
|-------------- |  | ------------------------ |  | -------- |  | ------- | ------ | ---------- |  | ---------- | ---- |  |  | --------
|               |  |                          |  | Owned or |  | Square  |        | Lease      |  | Month of  
|Facility       |  | Location                 |  | Leased   |  | Footage |        | Expiration |  | Expiration
|               |  |                          |  |          |  |         |        |            |  |           
|FATS, INC      |  | Suwanee, Georgia         |  | Leased   |  |         | 98,100 |            |  |            | 2008 |  |  | May     
|FATS, LTD      |  | Lincolnshire, England    |  | Leased   |  |         | 12,000 |            |  |            | 2003 |  |  | July    
|FATS, B.V      |  | Waardenburg, Netherlands |  | Leased   |  |         | 4,800  |            |  |            | 2002 |  |  | August  
|SIMTRAN        |  | Montreal, Canada         |  | Leased   |  |         | 25,129 |            |  |            | 2012 |  |  | February
|FATS AUSTRALIA |  | Lavington, Australia     |  | Leased   |  |         | 10,005 |            |  |            | 2005 |  |  | February

The Company has a lease at its Netherlands based subsidiary, FATS B.V.,
which expires in August 2002; the Company intends to renew the lease with the
same terms and conditions as in the expiring lease. The Company has a lease at
its U.K. based subsidiary, FATS U.K., which expires in July 2003; the Company
is contemplating relocating to a larger facility in the same area, however,
that has yet to be determined.

The Company believes its manufacturing, warehouse, and office facilities
are suitable, adequate, and afford sufficient manufacturing capacity for
current and anticipated requirements. The Company believes it maintains
adequate insurance coverage for its properties and their contents.

ITEM 3. LEGAL PROCEEDINGS

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 is in the process of conducting an investigation into
this matter and intends to file the formal report with the ATF and local law
enforcement authorities as soon as the investigation is completed. 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.

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

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

No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year.

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PART II

ITEM 5. MARKET COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of Firearms Training Systems, Inc. is traded on the
Over-The-Counter Bulletin Board (OTC:BB) under the symbol FATS. Prior to March
8, 2000, the Companys common stock was traded on the NASDAQ Small Cap Market.
The listing of the common stock was moved from the NASDAQ Small Cap Market as
the Companys stock price performance fell below NASDAQ criteria for market
capitalization and minimum share price value. During the period August 23, 2000
to October 31, 2000 the Companys common stock for the Second and Third
Quarters of fiscal year 2001 was not eligible for listing on the OTC:BB and
quotations listed were obtained from the web site:
http://table.finance.yahoo.com, based on information supplied by Commodity
Systems, Inc. (CSI). As of July 10, 2002, there were 176 holders of record of
the Companys common stock. The Company believes that there are several
thousand additional beneficial stockholders based on broker dealer demand for
proxy materials in 2001.

The table shows the high and low closing prices of the common stock during
the period from April 1, 2000 through the year ended March 31, 2002:

Quarterly Stock Price Range

|               |  |      |      |     |  |  |      | 
|-------------- |  | ---- | ---- | --- |  |  | ---- | 
|               |  | High |      | Low
|               |  |      |      |    
|FISCAL 2001    |  |      |      |     |  |  |      | 
|First Quarter  |  |      | 0.59 |     |  |  | 0.14 | 
|Second Quarter |  |      | 0.55 |     |  |  | 0.09 | 
|Third Quarter  |  |      | 0.34 |     |  |  | 0.08 | 
|Fourth Quarter |  |      | 0.27 |     |  |  | 0.13 | 
|FISCAL 2002    |  |      |      |     |  |  |      | 
|First Quarter  |  |      | 0.23 |     |  |  | 0.14 | 
|Second Quarter |  |      | 0.60 |     |  |  | 0.18 | 
|Third Quarter  |  |      | 0.54 |     |  |  | 0.23 | 
|Fourth Quarter |  |      | 0.64 |     |  |  | 0.27 | 

The Company did not
pay cash dividends on the common stock during the two most
recently completed fiscal years. The Company currently intends to retain any
earnings to finance operations and expansion and, therefore, does not
anticipate paying any dividends on the common stock in the foreseeable future.
Future dividends, if any, will be determined by the Board of Directors of the
Company and will depend upon the Companys earnings, capital requirements,
financial condition, level of indebtedness and other factors deemed relevant by
the Board of Directors. The Companys Credit Agreement prohibits the payment of
any dividends in respect of the common stock.

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ITEM 6. SELECTED FINANCIAL DATA

(In thousands, except per share data)









The selected consolidated financial data set forth below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations set forth below and the financial statements of the
Company included elsewhere in this Report and referred to in the Index to
Financial Statements (together with the notes and other reports relating to
such financial statements).

For fiscal year 2002, the Company began classifying commissions paid to
its agents in cost of revenues. The corresponding amounts of $967,000,
$1,006,000, $646,000 and $3,359,000, respectively, for the twelve months ended
March 31, 2001, 2000, 1999 and 1998 have been reclassified from selling,
general, and administrative expenses to cost of revenues.

|                               |  |                              |        |           |  |           |         |           |  |           |         |   |  |   |        |   |  |   |        |  
|------------------------------ |  | ---------------------------- | ------ | --------- |  | --------- | ------- | --------- |  | --------- | ------- | - |  | - | ------ | - |  | - | ------ | -
|                               |  | Fiscal Years Ended March 31,
|                               |  |                             
|                               |  | 2002                         |        | 2001      |  | 2000      |         | 1999      |  | 1998     
|                               |  |                              |        |           |  |           |         |           |  |          
|Statement of Operations Data:  |  | (unaudited)                  |        | (audited) |  | (audited) |         | (audited) |  | (audited)
|Total Revenue                  |  | $                            | 59,057 |           |  | $         | 41,501  |           |  | $         | 38,889  |   |  | $ | 55,514 |   |  | $ | 73,547 |  
|Gross Margin                   |  |                              | 17,450 |           |  |           | 6,475   |           |  |           | 7,194   |   |  |   | 19,331 |   |  |   | 36,321 |  
|Gross Margin %                 |  |                              | 29.5   | %         |  |           | 15.6    | %         |  |           | 18.5    | % |  |   | 34.8   | % |  |   | 49.4   | %
|Operating Expenses             |  | $                            | 17,895 |           |  | $         | 18,403  |           |  | $         | 18,269  |   |  | $ | 16,329 |   |  | $ | 23,194 |  
|Operating Income (Loss)        |  |                              | (445   | )         |  |           | (11,928 | )         |  |           | (11,075 | ) |  |   | 3,002  |   |  |   | 13,127 |  
|Interest (Income) Expense, Net |  |                              | (220   | )         |  |           | 4,444   |           |  |           | 8,056   |   |  |   | 7,316  |   |  |   | 5,905  |  
|Other Expense                  |  |                              | 61     |           |  |           | 257     |           |  |           | 325     |   |  |   | 400    |   |  |   | 97     |  
|Net Income (Loss)              |  |                              | 4,336  |           |  |           | (14,108 | )         |  |           | (18,902 | ) |  |   | (3,107 | ) |  |   | 3,233  |  
|Basic Earnings Per Share       |  |                              | 0.06   |           |  |           | (0.26   | )         |  |           | (0.91   | ) |  |   | (0.15  | ) |  |   | 0.16   |  
|Diluted Earnings Per Share     |  |                              | 0.06   |           |  |           | (0.26   | )         |  |           | (0.91   | ) |  |   | (0.15  | ) |  |   | 0.15   |  
|Balance Sheet Data:            |  |                              |        |           |  |           |         |           |  |           |         |   |  |   |        |   |  |   |        |  
|Working Capital                |  |                              | 20,957 |           |  |           | 15,893  |           |  |           | 21,020  |   |  |   | 27,010 |   |  |   | 18,907 |  
|Total Assets                   |  |                              | 36,350 |           |  |           | 32,173  |           |  |           | 41,575  |   |  |   | 60,150 |   |  |   | 56,380 |  
|Total Debt                     |  |                              | 42,977 |           |  |           | 43,990  |           |  |           | 73,772  |   |  |   | 72,200 |   |  |   | 63,000 |  
|Redeemable Preferred Stock     |  |                              | 27,319 |           |  |           | 27,049  |           |  |           | 0       |   |  |   | 0      |   |  |   | 0      |  
|Stockholders Deficit          |  |                              | 49,802 |           |  |           | 54,086  |           |  |           | 48,201  |   |  |   | 29,633 |   |  |   | 28,231 |  

|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This analysis of the Companys results of operations should be viewed in
conjunction with the accompanying financial statements, including notes
thereto, contained in Item 8 of the Annual Report on Form 10-K. This report may
contain certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Statements that are
predictive in nature, that depend upon or refer to future events or conditions,
are forward looking
statements. Although the Company believes that these statements are based
upon reasonable expectations, we can give no assurance that their goals will be
achieved.

Risks could arise due to Arthur Andersen LLP being our past
auditors

You may have no
effective remedy against Arthur Andersen LLP in connection with a
material misstatement or omission in these financial statements,
particularly in the event that Arthur Andersen LLP ceases to exist or
becomes insolvent as a result of the indictment or other proceedings
against Arthur Andersen LLP.

Arthur Andersen LLP,
which audited our financial statements included in this report for
the years ended March 31, 2000 and March 31, 2001, has
informed us that on March 14, 2002 an indictment was unsealed
charging it with federal obstruction of justice arising from the
governments investigation of Enron Corp. On June 15, 2002,
Arthur Andersen was convicted of obstructing justice in connection
with investigations of their former client Enron Corp.

Our inability to
include in future registration statements or reports financial
statements for one or more years audited by Arthur Andersen LLP or to
obtain Arthur Andersen LLPs consent to the inclusion of their report
on our 2000 and 2001 financial statements may impede our access to
the capital markets.

Should we seek to
access the public capital markets, Securities and Exchange Commission
(SEC) rules will require us to include or incorporate by reference in
any prospectus three years of audited financial statements. Until our
audited financial statements for the fiscal year ending
March 31, 2004 become available, the SECs current rules
would require us to present audited financial statements for one or
more fiscal years audited by Arthur Andersen LLP. Prior to that time
the SEC may cease accepting financial statements audited by Arthur
Andersen LLP, in which case we would be unable to access the public
capital markets unless PricewaterhouseCoopers LLP, our current
independent accounting firm, or another independent accounting firm,
is able to audit the financial statements originally audited by
Arthur Andersen LLP. In addition, as a result of the departure of our
former engagement team leaders, Arthur Andersen LLP is no longer in a
position to consent to the inclusion or incorporation by reference in
any prospectus of their report on our audited financial statements
for the years ended March 31, 2000 and March 31, 2001, and
investors in any subsequent offerings for which we use their audit
report will not be entitled to recovery against them under
Section 11 of the Securities Act of 1933 for any material
misstatements or omissions in those financial statements.
Consequently, our financing costs may increase or we may miss
attractive market opportunities if either our annual financial
statements for 2000 and 2001 audited by Arthur Andersen LLP should
cease to satisfy the SECs requirements or those statements are
used in a prospectus but investors are not entitled to recovery
against our auditors for material misstatements or omissions in them.

Page 14



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Actual results may differ from those expressed or implied in
forward-looking statements. With respect to any forward looking statements
contained in this report, the Company believes that it is subject to a number
of competition risk factors, including: the inherent unpredictability of
currency fluctuations; actions of its competitors, including pricing; the
ability to realize cost reductions and operating efficiencies, and in a manner
that does not unduly disrupt business operations and the ability to identify
and to realize other cost-reduction opportunities; and general economic and
business conditions. Any forward-looking statements in this report should be
evaluated in light of these important risk factors and those enumerated below
in Liquidity and Capital Resources.

Company Overview

The Company is a leading worldwide producer of interactive simulation
systems designed to provide training for multiple markets to include the
handling and use of small and supporting arms. It also competes in air defense
and armored vehicle weaponry; and commercial hunter and sports activities.

Although the Company sells its products and services to a large number of
military and law enforcement agencies both in the U.S. and abroad, the top five
customers accounted for approximately 40.0%, 34.9% and 58.2% of the Companys
revenues in fiscal 2002, 2001, and 2000, respectively. A significant increase
or decrease in demand by a major customer can have a substantial effect on the
Companys revenues and cash flow. Revenue from any one customer can vary
materially from period to period. In addition, a significant decrease in the
overall level or allocation of defense spending in the U.S. or other countries
could have a material adverse effect on the Companys future results of
operations and financial condition. The Company expects that sales to the U.S.
military will continue to be a significant portions due to renewed commitments
of the U.S. government to protect and safeguard its domestic and international
interests. Significant portions of the Companys revenue are derived from
customers located outside the U.S., primarily in Canada, Europe and Asia.
During fiscal 2002, 2001, and 2000, approximately 40.3%, 52.7%, and 70.5%,
respectively, of the Companys revenues were derived from sales to
international customers. The Company expects that sales to international
customers will continue to account for a significant percentage of future
revenues, as the worldwide acceptance of simulation-based training systems
continues to grow. Sales to international customers may be subject to political
and economic risks, including political instability, currency controls,
exchange rate fluctuations and changes in import/export regulations and tariff
rates. In addition, various forms of protectionist trade legislation have been
and in the future may be proposed in the U.S. and certain other countries. The
Company, from time to time, experiences significant delays in receipt of
payment for the delivery of products from certain international customers. Any
resulting changes in current tariff structures or other trade and monetary
policies could adversely affect the Companys sales to international customers.
Certain of the Companys international sales are denominated in foreign
currencies. The Company does not currently hedge these foreign currency
transactions, since it believes its exposure to foreign exchange rate
fluctuations has not been material.

Cost of revenues generally includes materials, direct labor, overhead, and
other direct costs. Operating expenses include selling, general and
administrative expenses, R&D costs, bid and proposal expenses, plus
depreciation and amortization. Selling, general and administrative expenses
consist primarily of salaries, wages, benefits, international agents
commissions, and marketing expenses. R&D expenses are largely comprised of
salaries, wages, benefits, prototype equipment and project supplies. The
Company expenses all R&D costs in the period in which they are incurred and has
funded all of its R&D efforts over the past 18 years primarily through
internally generated funds.

Restructure Transaction

On August 25, 2000, the Company, its lenders and the Centre Entities
completed a restructuring transaction which significantly reduced the Companys
outstanding indebtedness.

In connection with the restructuring, the Company and holders of its
outstanding debt and preferred stock exchanged all such debt and preferred
stock for the following:



| |  | A new senior secured revolving credit line in the amount of
approximately $882,000 to support existing letters of credit and
future working capital requirements.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | $12 million of senior secured debt with cash interest payable at prime
plus 1% and no principal payments due until maturity in 2003, with a
one year extension at the Companys option.                                                                                                               
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | $23 million of junior secured debt with 10% interest payable in
additional notes or cash, depending on the Companys profitability,
and no principal payments until maturity in 2003, with a one year
extension at the Companys option.                                                              
| 
| |  | Approximately $21 million of new preferred stock with a 10% cumulative
dividend rate payable in additional shares of preferred stock. This
new preferred stock must be redeemed by the Company when junior
secured debt is repaid.                                                                    
| 
| |  | 48,695,212 additional shares of Common Stock. As a result of this share
issuance, the Companys senior lenders have the power to vote a majority
of the Companys voting common stock. See Item 1 Change of Control.                                                                                  
| 
| |  | Warrants to purchase 2,000,000 shares of Common Stock with an exercise price of $0.25 issued to the Centre Entities.                                                                                                                                                                                  
| 
| |  | Amended warrants already held by the Centre Entities to purchase 3,246,164 shares of Common Stock at $1.00 per share by
providing for payment of the exercise price in cash rather than the Series A Preferred Stock and making a slight adjustment
in the original exercise price of $1.03 per share.

Certain of the securities described above were issued to the Centre Entities.
See Item 13, Certain Relationships and Related
Transactions.

On December 31,
2001 and March 29, 2001, the Company and its lenders amended the Credit
Agreement. See Liquidity and Capital Resources.

Page 16



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##### Table of Contents



Related Party Transactions

The Company has entered into a consulting agreement, dated October 4,
2000, with Sugarman & Company, LLP, a company in which Randy Sugarman is the
managing partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
are performed on an hourly basis, plus out-of-pocket expenses, and the Company
is billed accordingly. Since May 16, 2001, Mr. Sugarman has served as Interim
Chief Executive Officer and President of the Company. The Company incurred consulting fees of $390,000 and $221,000, plus
expenses of $72,000 and $51,000, for consulting services under the agreement
for the fiscal years 2002 and 2001, respectively.

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Results of Operations

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

|                               |                                   |                         |     |                             |    |           |     |           |    |   |     |    |    |  
|------------------------------ | --------------------------------- | ----------------------- | --- | --------------------------- | -- | --------- | --- | --------- | -- | - | --- | -- | -- | -
|                               |                                   |                         |     | Fiscal Year Ended March 31,
|                               |                                   |                         |     |                            
|                               |                                   |                         |     | 2002                        |    | 2001      |     | 2000     
|                               |                                   |                         |     |                             |    |           |     |          
|                               |                                   |                         |     | (Unaudited)                 |    | (Audited) |     | (Audited) |    |   |     |    |    |  
|Total Revenue                  |                                   |                         | 100 | %                           |    |           | 100 | %         |    |   | 100 | % 
|Gross Margin                   |                                   |                         | 30  | %                           |    |           | 16  | %         |    |   | 19  | % 
|Operating Expenses:            |                                   |                         |     |                             |    |           |     |           |    |   |     |   
|                               | Selling, General & Administrative |                         |     | 20                          | %  |           |     | 24        | %  |   |     | 28 | % 
|                               | Research & Development            |                         |     | 7                           | %  |           |     | 11        | %  |   |     | 10 | % 
|                               | Depreciation and Amortization     |                         |     | 3                           | %  |           |     | 6         | %  |   |     | 6  | % 
|                               | Impairment of Assets              |                         |     | 2                           | %  |           |     | 3         | %  |   |     | 5  | % 
|                               |                                   |                         |     |                             |    |           |     |           |    |   |     |   
|                               |                                   | Total Operating Expense |     |                             | 30 | %         |     |           | 44 | % |     |    | 50 | %
|                               |                                   |                         |     |                             |    |           |     |           |    |   |     |   
|Operating Income (Loss)        |                                   |                         | -1  | %                           |    |           | -29 | %         |    |   | -28 | % 
|Interest Income (Expense), net |                                   |                         | 0   | %                           |    |           | 11  | %         |    |   | 21  | % 
|Other Expense, net             |                                   |                         | 0   | %                           |    |           | 1   | %         |    |   | 1   | % 
|                               |                                   |                         |     |                             |    |           |     |           |    |   |     |   
|Net Loss Before Taxes          |                                   |                         | -1  | %                           |    |           | -40 | %         |    |   | -50 | % 
|Income Tax Benefit             |                                   |                         | 8   | %                           |    |           | 3   | %         |    |   | 2   | % 
|Accretion of Preferred Stock   |                                   |                         | 0   | %                           |    |           | 1   | %         |    |   | 1   | % 
|Net Income (Loss)              |                                   |                         | 7   | %                           |    |           | -34 | %         |    |   | -49 | % 
|Adjusted EBITDA (1)            |                                   |                         | 4   | %                           |    |           | -21 | %         |    |   | -18 | % 



---

|(1) |  | Adjusted EBITDA consists of net loss before tax excluding interest
expense, net and depreciation and amortization, as further adjusted to exclude
non-cash impairment of assets and nonrecurring restructuring charges. This
metric is used to evaluate the Companys overall operational performance and
should not be considered as an alternative to net loss as a measure of
operating results or to cash flow as a measure of liquidity.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal Year Ended March 31, 2002 Compared to the Fiscal Year Ended March 31, 2001

Net Revenues:Revenues increased $17.6 million, or 41.7%, to $59.1 million
for the twelve months ended March 31, 2002 as compared to $41.5 million for the
twelve months ended March 31, 2001. Sales to U.S. military customers for the
twelve months ended March 31, 2002, increased by $16.6 million, or 148.2%, from
$11.2 million to $27.8 million. The increase in military sales is due to
significant deliveries of items to customers that were in the Companys $55.4
million backlog of sales as of March 31, 2001. Sales to U.S. law enforcement
customers for the twelve months ended March 31, 2002 decreased $0.7 million or
(9.5%) to $6.7 million due to increased competition in this market. Sales to
international customers for the twelve months ended March 31, 2002 increased
$1.7 million, or 7.8%, to $23.9 million.

Gross Margin:Cost of revenues increased
$6.6 million, or 18.3% to $41.6
million or 70.4% of revenues for fiscal 2002 as compared to $35.0 million, or
84.4% of revenues, for fiscal 2001. The decrease in cost of revenues as a
percentage of revenues is attributed to a higher volume of revenues to cover
fixed costs. In addition, the Company recorded a $4.2 million contract loss
provision in fiscal 2001 associated with certain contracts and anticipated
losses on existing contracts and a $0.5 million inventory write-off due to
anticipated changes in future sales demand of a certain product. These
decreases in costs were partially off-set by a $2.5 million increase in the
Companys inventory reserve for excess inventory related to older, slow-moving
products and $0.5 million increase in the warranty provisions for certain
contracts as well as to accrue for anticipated losses on existing contracts
during fiscal 2002. For fiscal year 2002, the Company began classifying
commissions paid to its agents in cost of revenues. The corresponding amount of
$967,000 for the twelve months ended March 31, 2001 has been reclassified from
selling, general, and administrative expenses to cost of revenues. As a result
of the foregoing, gross margin increased $10.9 million, or 167.7% to $17.4
million, or 29.6% of revenues, for fiscal year 2002 as compared to $6.5
million, or 15.7% of revenues, for fiscal 2001.

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Total Operating Expenses:Total operating expenses decreased $0.5 million,
or (2.7%) to $17.9 million for fiscal 2002 as compared to $18.4 million for
fiscal 2001. As a percentage of revenues, total operating expenses decreased to
30.4% for the twelve months ended March 31, 2002 as compared to 44.6% for the
twelve months ended March 31, 2001. Selling, general and administrative
(SG&A) expenses increased $1.9 million, or 19.0%. This increase in SG&A is
due primarily to increases in employee compensation costs, including $0.3
million related to the separation agreement with the Companys former President
and CEO and a provision for severance costs for personnel reduction at the
Companys Simtran subsidiary and a reserve for legal fees regarding recent
claims made by certain customers of the Companys former subsidiary, Dart
International, concerning the DVD component of the electronic archery system.
In the opinion of management, these proceedings did not have a material adverse
effect on the Companys financial position, liquidity or results of operations.
Prior to the adoption of SFAS No. 142 in the first quarter of fiscal year 2003,
the Company assessed the carrying value of its goodwill and determined it to
have no value as of March 31, 2002. During the twelve months ended March 31,
2002, the Company recorded an impairment loss of $1.0 million relating to
goodwill that had been recorded relating to the acquisition of certain assets
from SBS Technologies during fiscal year 1998. The Company has no goodwill
remaining as of March 31, 2002. Also, an impairment loss of $1.2 million was
recorded during the twelve months ended March 31, 2001, that was associated
with the Companys Simtran operations and was equal to the difference between
the carrying value of the long-lived assets and associated goodwill of Simtran
and the expected discounted future cash flows. Research and development
expenses decreased $0.6 million, or (14.0%), 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 $0.5 million, or (22.6%), due to the impairment of long-lived
assets in fiscal year 2001, which lowered the basis of long-lived assets and
goodwill.

Operating Income:As a result of the
foregoing, operating income increased
$11.5 million to a loss of $0.4 million, or (0.9%) of revenues, for the twelve
months ended March 31, 2002 as compared to an operating loss of $11.9 million,
or (28.7%) of revenues, for the twelve months ended March 31, 2001.

Other Income (Expense), net:Net interest income totalled $0.2 million, or
0.3% of revenues for the twelve months ended March 31, 2002 as compared to
interest expense of $4.4 million, or 10.6% of revenues for the twelve months
ended March 31, 2001. The reduction in interest expense is attributable to the
debt restructuring completed by the Company in August 2000. In conjunction with
the debt restructuring, the Companys outstanding indebtedness was exchanged
for new borrowings, common stock, and mandatory redeemable preferred stock. The
sum of all future principal and interest payments due under the new agreements
exceeded the carrying value of the old debt, and thus no gain was recognized on
the transaction in accordance with SFAS No. 15. The excess of the carrying
amount of the old borrowings exceeded the fair value of the new borrowings,
common stock, and mandatory redeemable preferred stock and was allocated
proportionately to the new debt and preferred stock. During the twelve months
ended March 31, 2002 and 2001, approximately $3.5 million and $2.0 million
reduced the excess amount allocated to debt, respectively, resulting in a
corresponding reduction of interest expense. Interest expense for the twelve
months ended March 31, 2001 also included fees associated with the
restructuring of approximately $0.6 million. Interest expense will continue to
be recognized at a much lower effective interest cost until the debt matures in
September of 2003.

Provision (Benefit) for Income Taxes:The effective tax rate was
effectively (1,710.5%) of loss before taxes for the twelve months ended March
31, 2002 as compared to 6.3% of income before taxes for the twelve months ended
March 31, 2001. The Company has not recorded a tax benefit for the majority of
its operating losses due to uncertainty of future realization in both periods;
however, certain of the Companys foreign subsidiaries had higher operating
income in fiscal year 2001 and fiscal year 2002, resulting in additional tax
provisions. The Company has recorded a $4.9 million benefit for fiscal year
2002 that was related to an anticipated refund due to the Company for
carrybacks of certain net operating losses, which was a result of a change in
the tax law. The Company recorded a $1.0 million tax benefit for fiscal year
2001, which was related to an anticipated refund due to the Company for
carrybacks of net operating losses.

Accretion of Preferred Stock:The expense for the accretion of the
preferred stock was a total of $0.3 million for the twelve months ended March
31, 2002 as compared to $0.3 million for the twelve months ended March 31, 2001
related to the preferred stock issued in November, 1998 which was exchanged in
August 2000 for new preferred stock.

Net Income applicable to common shareholders:The net income applicable to
common shareholders increased $18.4 million to $4.3 million ($0.06 per share)
or 7.3% of revenue. This compares to a loss of $14.1 million ($0.26 per share)
or (34.0%) of revenue for the twelve months ended March 31, 2001, which
included a Gain on Extinguishment of Preferred Stock of $1.7 million and a
one-time charge of $1.2 million for impairment of long-lived assets related to
Simtran.

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##### Table of Contents



Fiscal Year Ended March 31, 2001 Compared to the Fiscal Year Ended March 31, 2000

Revenues:Revenues increased $2.6 million, or 6.7%, to $41.5 million for
fiscal 2001 as compared to $38.9 million for fiscal 2000. International
revenues decreased $5.5 million, or (20.2%) to $21.9 million. U.S. Military
increased $7.0 million, or 162.9% to $11.2 million. U.S. Law Enforcement
increased $1.9 million, or 33.4%, to $7.4 million. Hunter/Sports decreased $0.7
million, or (40.1%), to $1.0 million. Sales in the Hunter/Sports market
declined primarily due to an expected softened demand for the product line.
Reduced revenues in the International market are primarily due to completion of
contracts in Canada and Australia. By contrast, the U.S. Law Enforcement and
Military sales increased significantly due to contract awards delayed in fiscal
year 2000 being awarded and completed in fiscal 2001 as the Company
restructured its debt facilities in August 2000 and renewed confidence of its
customers.

Gross Margin:As a percentage of revenues, cost of revenues increased to
82.1% for fiscal 2001 as compared to 78.9% for fiscal 2000. An accrual of
approximately $4.0 million was charged to cost of revenues during the fiscal
year associated with costs to complete the warranty provisions of certain
contracts as well as to accrue for anticipated losses on existing contracts.
These accruals are primarily due to recent increases in costs associated with
delivery of products and warranty services not originally anticipated at the
time the warranty program or related contract were entered into. The Company
estimates that the related revenue from these programs is no longer expected to
offset the anticipated expenses. Therefore, an accrual for this loss
contingency was made when the loss was determined and when it was reasonably
estimable. As a result of the foregoing, gross margin decreased $0.8 million,
or (9.2%) to $7.4 million, or 17.8% of revenues, for fiscal 2001 as compared to
$8.2 million, or 21.1% of revenues, for fiscal 2000.

Total Operating Expenses:Total operating expenses remained constant at
$19.3 million for fiscal 2001. Total operating expenses as a percentage of
revenues decreased to 46.7% for fiscal 2001 from 49.6% for fiscal 2000.
Selling, general and administrative expenses decreased as a percentage of
revenue to 26.7% for fiscal 2001 from 28.2% for fiscal 2000. Selling, general
and administrative (SG&A) expenses increased $0.1 million or 1.0%. This
decrease in SG&A as a percentage of revenue is due primarily to improved
management of time and resource allocations in fiscal year 2001 and a one-time
charge for deferred compensation associated with severance pay to the former
President and CEO that was included in fiscal year 2000. R&D expenses increased
$0.8 million to $4.8 million in fiscal 2001 from $4.0 million in fiscal 2000
primarily attributable to the Companys expenditures for research and
development activities relating to new products and product lines.

During the third quarter of fiscal year 2001, management began an
evaluation of the operations of Simtran in response to Simtrans declining
customer order backlog. As a result of the strategic repositioning plan for
Simtran, management performed an evaluation of the recoverability of the assets
of Simtran by estimating the future undiscounted cash flows expected to result
from future Simtran operations and determined that an impairment of long-lived
assets had occurred. The Company then recorded an impairment loss of
$1,244,000, which was equal to the difference between the carrying value of the
long-lived assets and associated goodwill of Simtran and the expected
discounted future cash flows.

Operating Loss:As a result of the foregoing, operating loss increased
$0.8 million to a loss of $11.9 million, or (28.7%) of revenues, for fiscal
2001 as compared to a loss of $11.1 million, or (28.5%) of revenues, for fiscal
2000.

Other Expense, net:Net interest expense totaled $4.4 million, or 10.7% of
revenues for fiscal 2001 as compared to net interest expense of $8.1 million,
or 20.7% for fiscal 2000. Other income (expense), net for fiscal 2001 primarily
includes a charge of $0.2 million related to foreign currency exchange cost
associated with international revenues. In conjunction with the Restructure
Transaction (see Footnote 4 of the Notes to the Consolidated Financial
Statements) 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
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
year, the excess amount allocated to debt was reduced by approximately $2.0
million, resulting in a corresponding reduction of interest expense. Interest
expense will continue to be recognized at a much lower effective interest rate
until the debt matures in March of 2003.

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Benefit from Income Taxes:The effective tax rate increased to 6.3% of
income before income taxes for fiscal 2001 compared to 4.2% of income before
taxes for fiscal 2000. The Company is no longer recording a tax benefit for the
majority of its operating losses due to uncertainty of future realization.
However, the Company recorded a $1.0 million tax benefit for fiscal year 2001,
which was related to a refund due to the Company for carrybacks of
net operating losses.

Accretion of Preferred Stock:The expense for the accretion of the
preferred stock issued in November 2000 was a total of $260,000 for fiscal year
2001 compared to $254,000 for fiscal year 2001.

Gain on Extinguishment of Preferred Stock:This represents the excess of
the value of the Series A Mandatory Redeemable Preferred Stock over the fair
value of the common stock and warrants exchanged. A gain of $1,729,000 was
recorded during fiscal year 2001 as a result of the Restructure Transaction.

Net Loss:As a result of the foregoing, the net loss decreased $4.8
million, to a loss of $14.1 million or ($0.26) per diluted share, or (34.0%) of
revenues for fiscal 2001 as compared to a loss of $18.9 million or ($0.91) per
diluted share, or (48.6%) of revenues for fiscal 2000. Net loss prior to a
one-time charge of $1.2 million for impairment of long-lived assets related to
Simtran would have resulted in a net loss of $12.9 million, or (31.0%) of
revenues.

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##### Table of Contents



Unaudited Quarterly Results of Operations

The following table presents certain quarterly statements of operations
data for each of the eight quarters beginning April 1, 2000 and ending March
31, 2002. Such information, in the opinion of management, includes all
adjustments necessary for a
fair presentation of that information. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future quarter.

|                                                   |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|-------------------------------------------------- | ------- | - | ------------------------------------- | ---- | ---------------- | - | ---------- | ---- | ------ | - | ------- | ---- | ------- | - | ------ | ---- | ------ | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ---- | 
|                                                   |         |   | Quarter Ended                        
|                                                   |         |   | (In thousands, except per share data)
|                                                   |         |   | Fiscal Year 2002                      |      | Fiscal Year 2001
|                                                   |         |   |                                       |      |                 
|                                                   |         |   | (Restated)                            |      | (Restated)       |   | (Restated) |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |  
|                                                   |         |   | June 30                               |      | Sept 30          |   | Dec 31     |      | Mar 31 |   | June 30 |      | Sept 30 |   | Dec 31 |      | Mar 31
|                                                   |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |       
|Revenues                                           |         | $ | 11,639                                |      |                  | $ | 16,897     |      |        | $ | 15,396  |      |         | $ | 15,125 |      |        | $ | 10,271 |       |   | $ | 7,368  |       |   | $ | 9,109  |       |   | $ | 14,753 |     
|Gross Margin                                       |         |   | 4,480                                 |      |                  |   | 4,687      |      |        |   | 4,652   |      |         |   | 3,631  |      |        |   | 2,987  |       |   |   | (2,163 | )     |   |   | 758    |       |   |   | 5,225  |     
|Gross Margin %                                     |         |   | 38                                    | %    |                  |   | 28         | %    |        |   | 30      | %    |         |   | 24     | %    |        |   | 29     | %     |   |   | -29    | %     |   |   | 8      | %     |   |   | 35     | %   
|Operating Expense                                  |         | $ | 4,139                                 |      |                  | $ | 4,073      |      |        | $ | 4,267   |      |         | $ | 5,416  |      |        | $ | 3,944  |       |   | $ | 3,780  |       |   | $ | 5,805  |       |   | $ | 5,206  |     
|                                                   |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Operating (Loss) Income                            |         |   | 341                                   |      |                  |   | 614        |      |        |   | 385     |      |         |   | (1,785 | )    |        |   | (957   | )     |   |   | (5,943 | )     |   |   | (5,047 | )     |   |   | 19     |     
|Interest Expense (Income), Net                     |         |   | (158                                  | )    |                  |   | (11        | )    |        |   | 54      |      |         |   | (105   | )    |        |   | 2,346  |       |   |   | 2,225  |       |   |   | 64     |       |   |   | (191   | )   
|Other Expense (Income)                             |         |   | (20                                   | )    |                  |   | 76         |      |        |   | 44      |      |         |   | (39    | )    |        |   | 22     |       |   |   | 284    |       |   |   | (6     | )     |   |   | (43    | )   
|                                                   |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Pre-Tax (Loss) Income                              |         |   | 519                                   |      |                  |   | 549        |      |        |   | 287     |      |         |   | (1,641 | )    |        |   | (3,325 | )     |   |   | (8,452 | )     |   |   | (5,105 | )     |   |   | 253    |     
|Tax (Benefit) Provision                            |         |   | 296                                   |      |                  |   | 186        |      |        |   | 63      |      |         |   | (5,437 | )    |        |   | (116   | )     |   |   | 54     |       |   |   | 54     |       |   |   | (1,044 | )   
|                                                   |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Net (Loss) Income                                  |         |   | 223                                   |      |                  |   | 363        |      |        |   | 224     |      |         |   | 3,796  |      |        |   | (3,209 | )     |   |   | (8,506 | )     |   |   | (5,159 | )     |   |   | 1,297  |     
|Accretion of Preferred Stock                       |         |   | 65                                    |      |                  |   | 67         |      |        |   | 68      |      |         |   | 70     |      |        |   | 66     |       |   |   | 74     |       |   |   | 57     |       |   |   | 63     |     
|Gain on extinguish. of Pref. Stock                 |         |   | 0                                     |      |                  |   | 0          |      |        |   | 0       |      |         |   | 0      |      |        |   | 0      |       |   |   | (1,729 | )     |   |   | 0      |       |   |   | 0      |     
|                                                   |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Net
(Loss) Income applicable tocommon stockholders |         |   | 158                                   |      |                  |   | 296        |      |        |   | 156     |      |         |   | 3,726  |      |        |   | (3,275 | )     |   |   | (6,851 | )     |   |   | (5,216 | )     |   |   | 1,234  |     
|Earnings per common share                          |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|                                                   | Basic   |   |                                       | 0.00 |                  |   |            | 0.00 |        |   |         | 0.00 |         |   |        | 0.05 |        |   |        | (0.16 | ) |   |        | (0.13 | ) |   |        | (0.07 | ) |   |        | 0.02 | 
|                                                   | Diluted |   |                                       | 0.00 |                  |   |            | 0.00 |        |   |         | 0.00 |         |   |        | 0.05 |        |   |        | (0.16 | ) |   |        | (0.13 | ) |   |        | (0.07 | ) |   |        | 0.02 | 
|                                                  
|                                                  
|                                                  
|                                                  

RESTATEMENT

The Companys interim condensed
consolidated financial statements for the quarters ended
June 30, 2001, September 30, 2001 and December 31, 2001
have been restated from amounts previously reported to revise the
revenue recognition policy applied to certain of the Companys
sales contracts. Revenue under these contracts was previously
reported upon shipment and passage of title of the underlying systems
under multi-element arrangements, which also included various bill
and hold sales. Revenue on these contracts has been revised to
reflect the application of the percentage of completion method of
accounting as these contracts call for significant customization of
the Company's proprietary system. The following table shows the line
items that have been restated in the Company's Condensed Consolidated
Statements of Operations:

SUMMARY OF CHANGES

---

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited and in thousands)


---



|                                      |  |                    |        |                   |  |          |        |               |  |  |        |  |  |  |        | 
|------------------------------------- |  | ------------------ | ------ | ----------------- |  | -------- | ------ | ------------- |  |  | ------ |  |  |  | ------ | 
|                                      |  |                    |        |                  
|                                      |  | Three months ended |        | Nine months ended
|                                      |  | December 31, 2001  |        | December 31, 2001
|                                      |  |                    |        |                  
|                                      |  |                    |        | As previously     |  |          |        | As previously
|                                      |  | Restated           |        | reported          |  | Restated |        | reported     
|                                      |  |                    |        |                   |  |          |        |              
|Revenues                              |  |                    | 15,396 |                   |  |          | 15,999 |               |  |  | 43,932 |  |  |  | 42,910 | 
|Cost of Revenues                      |  |                    | 10,744 |                   |  |          | 11,255 |               |  |  | 30,113 |  |  |  | 29,501 | 
|Gross Margin                          |  |                    | 4,652  |                   |  |          | 4,744  |               |  |  | 13,819 |  |  |  | 13,409 | 
|Operating income                      |  |                    | 385    |                   |  |          | 477    |               |  |  | 1,340  |  |  |  | 930    | 
|Income before taxes                   |  |                    | 287    |                   |  |          | 379    |               |  |  | 1,355  |  |  |  | 945    | 
|Provision for income taxes            |  |                    | 63     |                   |  |          | 94     |               |  |  | 545    |  |  |  | 406    | 
|Net income                            |  |                    | 224    |                   |  |          | 285    |               |  |  | 810    |  |  |  | 539    | 
|Net income applicable to shareholders |  |                    | 156    |                   |  |          | 217    |               |  |  | 610    |  |  |  | 339    | 
|Earnings per share  basic            |  |                    | 0.00   |                   |  |          | 0.00   |               |  |  | 0.01   |  |  |  | 0.00   | 
|Earnings per share  diluted          |  |                    | 0.00   |                   |  |          | 0.00   |               |  |  | 0.01   |  |  |  | 0.00   | 

|                                      |  |                    |        |                    |  |          |        |               |  |  |        |  |  |  |        | 
|------------------------------------- |  | ------------------ | ------ | ------------------ |  | -------- | ------ | ------------- |  |  | ------ |  |  |  | ------ | 
|                                      |  |                    |        |                   
|                                      |  | Three months ended |        | Nine months ended 
|                                      |  | September 30, 2001 |        | September 30, 2001
|                                      |  |                    |        |                   
|                                      |  |                    |        | As previously      |  |          |        | As previously
|                                      |  | Restated           |        | reported           |  | Restated |        | reported     
|                                      |  |                    |        |                    |  |          |        |              
|Revenues                              |  |                    | 16,897 |                    |  |          | 15,863 |               |  |  | 28,536 |  |  |  | 26,911 | 
|Cost of Revenues                      |  |                    | 12,210 |                    |  |          | 11,457 |               |  |  | 19,369 |  |  |  | 18,246 | 
|Gross Margin                          |  |                    | 4,687  |                    |  |          | 4,406  |               |  |  | 9,167  |  |  |  | 8,665  | 
|Operating income                      |  |                    | 614    |                    |  |          | 333    |               |  |  | 955    |  |  |  | 453    | 
|Income before taxes                   |  |                    | 549    |                    |  |          | 268    |               |  |  | 1,068  |  |  |  | 566    | 
|Provision for income taxes            |  |                    | 186    |                    |  |          | 91     |               |  |  | 482    |  |  |  | 312    | 
|Net income                            |  |                    | 363    |                    |  |          | 177    |               |  |  | 586    |  |  |  | 254    | 
|Net income applicable to shareholders |  |                    | 296    |                    |  |          | 110    |               |  |  | 454    |  |  |  | 122    | 
|Earnings per share  basic            |  |                    | 0.00   |                    |  |          | 0.00   |               |  |  | 0.01   |  |  |  | 0.00   | 
|Earnings per share  diluted          |  |                    | 0.00   |                    |  |          | 0.00   |               |  |  | 0.01   |  |  |  | 0.00   | 

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

The Companys revenues and results of operations historically have varied
substantially from quarter to quarter, and the Company expects these variations
to continue. Among the factors causing these variations have been the number,
timing and scope of the Companys contracts and purchase orders, concentration
of shipments under large orders and the uneven timing of the receipt by the
Company of necessary authorizations from government customers. The Company
recognizes revenues primarily upon shipment of its products to its customers,
while a high percentage of the Companys operating expenses, including
personnel, rent and debt service, are relatively fixed. As a result the concentration of several order deliveries
in a particular quarter, unanticipated variations in the number and timing of
shipments or customer delays in proceeding to succeeding stages of a contract
could have a material adverse effect on the Companys quarterly results of
operations and financial condition.

Liquidity and Capital Resources

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 has entered into a restructured
Credit Agreement as discussed above under Restructure
Transaction. The initial and further amended
capital structure provided approximately $882,000 to support existing letters
of credit and future working capital requirements in connection therewith.
Therefore, the Companys primary source of liquidity and capital resources is
cash generated from its operating activities. On December 31,
2001 and March 29, 2002, the Company and its Lenders amended the Amended Agreement as follows:

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##### Table of Contents



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
Parent 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 Notes.                                                                                                                                                                                                                                                                      
| 
|  |  | On March 29, 2002, the
Company and its lenders 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
Notes. The amendment requires that 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 Parent 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 Borrower pay an unused commitment fee with respect to the unused portion
of the New Revolving Credit Commitment of 0.5% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

As of March 31, 2002, the Company had working capital of $20.9 million
compared to $15.9 million as of March 31, 2001. The Companys spending for its
fiscal 2002 capital expenditures was $0.8 million. Such expenditures include
leasehold improvements, computer equipment and software, marketing product
demonstration equipment, and manufacturing machinery.

The Companys cash and cash equivalents increased by $2.4 million in
fiscal 2002 compared to essentially no change and a net decrease of $0.9
million in fiscal 2001 and 2000, respectively. For fiscal 2002, the Companys
operating activities generated cash of approximately $4.5 million. The
Companys investing activities used $0.8 million in restricted cash, which was
used to secure contract performance guarantees, used $0.7 million for capital
expenditures and generated $0.1 million from the disposal of property and
equipment. The Company used $0.1 million for financing activities in fiscal
2002 for repayment of long-term debt. The overall effect of foreign exchange
for fiscal 2002 was a decrease in cash and cash equivalents of $0.5 million as
compared to essentially no change for fiscal 2001.

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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS

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

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

SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill
to be periodically reviewed for impairment rather than amortized, for fiscal
years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets. As of March 31, 2002, the Company had no goodwill
or material intangible assets and thus, does not believe that the adoption of
this standard in the first quarter of fiscal year 2003 will have a material
impact on the financial statements.

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

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

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 judgement and estimates on the
part of management in its application. Refer to footnote 3 in the disclosures
to the Companys financial statements included in Form 10K 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 revenues, costs, and
profits and in assigning the amounts to accounting periods. The
process is complicated by the need to evaluate continually the
uncertainties inherent in the performance of contracts and by the
need to rely on estimates of revenues, costs, and the extent of
progress toward completion. The company continually monitors each of
these estimates based on the most current information available from
the project managers and project engineers assigned to the programs.
Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined. These revisions could materially increase
or decrease profit margins on particular contracts in future periods.

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.

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.

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##### Table of Contents



COMMITMENTS AND OTHER CONTRACTURAL OBLIGATIONS

Disclosure of Commitments and Other Contractural Obligations
March 31, 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    |        |  | $           | 130   |             |  | $       | 0      |       |  | $ | 0     |  |  | $ | 0   | 
|Long-term debt  Senior       |  |       | 12,000 |        |  |             | 0     |             |  |         | 12,000 |       |  |   | 0     |  |  |   | 0   | 
|Long-term debt  Junior       |  |       | 27,334 |        |  |             | 0     |             |  |         | 27,334 |       |  |   | 0     |  |  |   | 0   | 
|Long-term accrued interest *  |  |       | 3,512  |        |  |             | 3,512 |             |  |         | 0      |       |  |   | 0     |  |  |   | 0   | 
|                              |  |       |        |        |  |             |       |             |  |         |        |       |  |   |       |  |  |   |     | 
|Other                         |  |       |        |        |  |             |       |             |  |         |        |       |  |   |       |  |  |   |     | 
|Operating lease obligations   |  |       | 4,334  |        |  |             | 948   |             |  |         | 1,624  |       |  |   | 1,442 |  |  |   | 320 | 
|Acquisition earn-out payment  |  |       | 708    |        |  |             | 708   |             |  |         | 0      |       |  |   | 0     |  |  |   | 0   | 



---

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

ITEM 7(A) 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. Assuming a 10% increase in interest rates, interest
expense, net related to the senior debt and working capital borrowings for
fiscal year 2002 would have increased by approximately $0.1 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of Independent Public Accountants, the Consolidated Financial
Statements, Financial Statement Schedule and Notes to Consolidated Financial
Statements that appear on pages F-1 through F-26 and S-1 of this Form 10-K are
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Previous Independent Accountants

After a competitive bid process that
began in March 2002, Firearms Training Systems, Inc. dismissed Arthur
Andersen LLP as its independent accountants effective April 17,
2002. Firearms Training Systems, Inc.s Audit Committee and Board of
Directors participated in and approved the decision to change
independent accountants. Arthur Andersen LLPs audit reports on the
Firearms Training Systems, Inc.s financial statements for the two
most recent fiscal years did not contain an adverse opinion or
disclaimer of opinion and no such report was qualified or modified as
to uncertainty, audit scope or accounting principles. In connection
with its audits for Firearms Training Systems, Inc.s two most
recent fiscal years and through April 17, 2002, there were no
disagreements between Firearms Training Systems, Inc. and Arthur
Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Arthur Andersen
LLP would have caused them to make reference thereto in their report
on the financial statements for such years. During the Company's two
most recent fiscal years and through April 8, 2002, there have
been no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K. Firearms Training Systems, Inc. requested Arthur
Andersen LLP to furnish it with a letter addressed to the Securities
and Exchange Commission stating whether it agrees with the above
statements made by the Company. A copy of such letter, dated
April 30, 2002, was filed as Exhibit 16.1 to Firearms
Training Systems, Inc.s Current Report on Form 8-K/A,
dated as of April 30, 2002.

New Independent Accountants

Firearms Training Systems, Inc.
engaged PricewaterhouseCoopers LLP as its new independent accountants
as of April 17, 2002. During the two most recent fiscal years
and the interim period between March 31, 2001 and through
April 17, 2002, Firearms Training Systems, Inc. did not consult
with PricewaterhouseCoopers LLP regarding any of the matters or
events set forth in Item 304(a)(2) of Regulation S-K.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Information in this Item should be read in conjunction with Item 1 Change
of Control concerning the agreement by certain directors affiliated with the
Centre Entities to resign at the request of the Lenders, the Lenders agreement
to vote their controlling interest in favor of the election of one director
affiliated with the Centre Entities, the joint agreement to recommend selection
of qualified candidates to serve until the next annual meeting of the Company
and their joint agreement to recommend appointment of an additional director or
active chairman.

The following table sets forth the name, age, and position of each
director and executive officer as of July 10, 2002. The Board currently
consists of six directors. The Company divides the Board of Directors into
three classes, each of which is elected for a three-year term. Executive
officers of the Company are elected by the Board of Directors annually and hold
office until the next annual meeting of stockholders or until they sooner
resign or are removed from office by the Board of Directors.

|                   |  |     |    |          |  |                                                                                                           
|------------------ |  | --- | -- | -------- |  | ----------------------------------------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Randy Sugarman     |  |     | 60 |          |  | Chairman of the Board of Directors, Interim
President, Chief Executive Officer and Chief
Operating Officer
|William J. Bratton |  |     | 54 |          |  | Director                                                                                                  
|Mary Ann Gilleece  |  |     | 61 |          |  | Director                                                                                                  
|Ronavan Mohling    |  |     | 60 |          |  | Director                                                                                                  
|Scott Perekslis    |  |     | 34 |          |  | Director                                                                                                  
|Ronald C. Whitaker |  |     | 54 |          |  | Director                                                                                                  
|John A. Morelli    |  |     | 53 |          |  | Vice President, Chief Financial Officer and Treasurer                                                     

Class I directors were elected in fiscal 2001 and their present terms expire
with the Annual Meeting of Stockholders in 2003:

SCOTT PEREKSLIS
MANAGING DIRECTOR
CENTRE PARTNERS MANAGEMENT LLC

Scott Perekslis, age 34, has served as a Director of the Company since July 31,
1996. Mr. Perekslis also served as a Vice President of the Company from July
31, 1996 through July 18, 1997. Since 1995, Mr. Perekslis has been a Principal
of Centre Partners Management LLC and a Principal of Corporate Advisors, L.P.
From 1991 to 1995, Mr. Perekslis was an Associate of Corporate Advisors, LP.
Mr. Perekslis also serves as a director of American Seafood, LP, Hyco
International, Inc. and KIK Corporation Holdings, Inc. Mr. Perekslis is a
member of the Compensation and Audit Committees of the Board of Directors.

R.     C. WHITAKER
PRESIDENT and CEO
STRATEGIC DISTRIBUTION

R.C. Whitaker, age 54, was named as a Director of the Company in October
2000 to fill a vacancy that was due to resignation of a director following the
Restructure Transaction in fiscal year 2001. Mr. Whitaker has been with
Strategic Distribution Inc. since September 2000. Prior to joining SDI, he was
an Operating Partner with Pegasus Investors (a private equity funds group) from
1999 to 2000. Previous operational positions were President and CEO of Johnson
Worldwide Associates (a sporting goods manufacturer) from 1996 to 1999,
President and CEO of EWI, Inc. (an automotive tier 1 supplier) from 1995 to
1996, Chairman, President and CEO of Colts Manufacturing Company (a designer
and producer of military

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firearms) from 1992 to 1995, and President & CEO of Wheelabrator
Corporation (an industrial equipment manufacturer). In addition to Strategic
Distribution Inc., he serves on the Board of Directors of Weirton Steel
Corporation and Precision Navigation, Inc., as well as a member of the Board of
Trustees for The College of Wooster. Mr. Whitaker is a member of the Audit
Committee of the Board of Directors.

Class II directors were elected in fiscal 2002 and their present terms expire
with the Annual Meeting of Stockholders in 2004:

WILLIAM J. BRATTON
PRESIDENT
THE BRATTON GROUP LLC

William J. Bratton, age 54, has served as a Director of the Company since
September 17, 1996. He has been the President of The Bratton Group LLC since
1999. From 1997 to 1999, he served as the President and Chief Operating
Officer of CARCO Group, Inc. From 1996 to 1997, Mr. Bratton served as Vice
Chairman of First Security Services Corporation and President of its new
subsidiary First Security Consulting, Inc. From 1994 to 1996, Mr. Bratton
served as Police Commissioner of the City of New York. In 1991, he served as
Superintendent in Chief of the Boston Police Department and was appointed
Police Commissioner of the Boston Police Department in 1993. From 1990 to
1991, Mr. Bratton served as Chief of the New York City Transit Police. Mr.
Bratton also serves as a director of Rite Aid Corporation, First Security
Services Corporation and Smart Cop Corporation. Mr. Bratton is a member of the
Compensation Committee and the Stock Options Sub-Committee of the Board of
Directors.

RONAVAN MOHLING
PARTNER and PRINCIPAL
CAPITOL PLACES, LLC

Ronavan Mohling,age 60, was named as a Director of the Company in October
2000. Mr. Mohling, a Partner and Principal of Capitol Places, LLC (a private
real estate group) since 1998, recently served for ten years with Bristol-Myers
Squibb Company in Europe, the Middle East, and Africa from 1988 to 1998. From
1995 to 1998, he was the Vice President of Business Development, responsible
for acquisitions and divestitures, for the companys Consumer Medicines
Division and, from 1992 to 1995 was President of the Consumer Products Division
with responsibility for the regions of Europe, the Middle East, and Africa.
From 1972 to 1988, Mr. Mohling served in the capacities of President and
Vice-President with Schering-Plough Corporation where he was responsible for
overseeing the companys Consumer Products Division. Mr. Mohling is a member of
the Audit Committee of the Board of Directors.

Class III directors were elected in fiscal 2000 and their present terms expire
with the Annual Meeting of Stockholders in 2002:

MARY ANN GILLEECE, J.D., L.L.M.
ATTORNEY, MANAGING DIRECTOR
VAN SCOYOC KELLY PLLC

Mary Ann Gilleece, age 61, was named as a Director of the Company in March of
2001. Ms. Gilleece is an Attorney, Managing Director with Van Scoyoc Kelly
PLLC, a newly formed law firm. Van Scoyoc Kelly PLLC was formed by Stu Van
Scoyoc and Kevin Kelly to provide a government contracts and procurement law
platform that Van Scoyoc Associates, one of Washingtons most distinctive
government relation firms, can retain to address complex acquisition,
procurement and regulatory issues. From 1972 to 1975 Ms. Gilleece was an
Assistant Attorney General for the Commonwealth of Massachusetts. She was
Counsel to the House of Representatives Committee on Armed Services from 1977
to 1983 and then in 1983 was appointed Deputy Undersecretary of Defense
Research and Engineering (Acquisition Management) and served in that capacity
until August, 1985 after which she returned to private practice.
Ms. Gilleece was a partner in the law firm of Manatt Phelps
& Phillips LLP from June 1997 to June 2002.

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RANDY SUGARMAN, CPA
MANAGING PARTNER
SUGARMAN & COMPANY, LLP

Randy Sugarman, age 60, was named a Director of the Company and Chairman
of the Board of Directors in October 2000. Randy Sugarman is the managing
partner of Sugarman & Company LLP (Financial Consultants), which he founded in
1977. Mr. Sugarman is a member of the Compensation Committee. Mr. Sugarman
assumed the additional offices of interim President and Chief Executive Officer
in May 2001 and interim Chief Operating Officer in May 2002 and will continue
as such until a successor is named.

JOHN A. MORELLI
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER

John A. Morelli, age 53, has served as Chief Financial Officer and
Treasurer since March 1999. Mr. Morelli previously served as Chief Operating
Officer from October 2000 to May 2002 and as Corporate Controller from
September 1996 to March 1999. Prior to joining the Company, Mr. Morelli served
as Financial Liaison from January 1996 to August 1996 with General Dynamics
during its acquisition of Teledyne Continental Motors, a major weapons defense
contractor. From April 1990 to December 1995, Mr. Morelli served as Division
Controller with Sparton Electronics, Inc., an electronics-manufacturing firm in
the defense industry. From 1979 to 1990, Mr. Morelli served as Controller for
Fairchild-ASD, an aircraft manufacturing and modification company. From 1974 to
1979, Mr. Morelli served as Finance Manager with Fairchild-Republic, an
aircraft manufacturing company.

Section 16(a) Beneficial Ownership Reporting Compliance:

Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during the fiscal year ended
March 31, 2002 and Form 5 and amendments thereto furnished to the Company with
respect to such fiscal year, to the best of managements knowledge, all Section
16(a) filing requirements applicable to its officers, directors and 10%
stockholders were complied with.

ITEM 11. EXECUTIVE COMPENSATION

Directors Compensation

Each director of the Company who is not an employee of the Company is
entitled to receive annual compensation of $20,000, payable quarterly. In
addition, directors of the Company are reimbursed for their reasonable expenses
incurred in attending meetings of the Board of Directors or committees thereof.
Directors who are also employees of the Company are not separately compensated
for their services as directors.

Pursuant to the Securities Purchase Agreement dated November 13, 1998 with
Centre Capital Investors II, L.P., Centre Partners Coinvestment, L.P., Centre
Capital Tax-Exempt Investors II, L.P., and Centre Capital Offshore Investors
II, L.P., three former directors of the Company who resigned in connection with
the Restructure, and Mr. Perekslis, who remains a director, all of whom are
affiliated with the Centre Partnerships, agreed to receive in lieu of annual
directors fees of $20,000 for each director, options to purchase at $1.03125
per share an aggregate of 106,700 shares of Common Stock, exercisable in equal
quarterly installments beginning December 31, 1998 which such directors
assigned to Centre Partners Management LLC. As of July 10, 2002, 106,700
shares of Common Stock are exercisable from this grant.

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Summary Compensation Table

The following summary compensation table sets forth information concerning
the annual and long-term compensation earned by the Chief Executive Officer
and each of the other highly compensated executive officers whose annual salary
and bonus during fiscal 2002 exceeded $100,000.

|                   |                                                                           |        |                     |        |                        |       |         |            |  |             |        |              |  |  |            |        |            |  |     |        |  |  |         |         |    
|------------------ | ------------------------------------------------------------------------- | ------ | ------------------- | ------ | ---------------------- | ----- | ------- | ---------- |  | ----------- | ------ | ------------ |  |  | ---------- | ------ | ---------- |  | --- | ------ |  |  | ------- | ------- | ---
|                   |                                                                           |        | ANNUAL COMPENSATION |        | Long Term Compensation |       |         |            | 
|                   |                                                                           |        |                     |        |                        |       |         |            | 
|                   |                                                                           |        |                     |        |                        |       |         |            |  |             |        |              |  |  | RESTRICTED |        | SECURITIES |  | All
|OFFICER NAME AND   |                                                                           | Fiscal |                     | SALARY |                        | BONUS |         | STOCK      |  | UNDERLYING  |        | Other       
|PRINCIPAL POSITION |                                                                           | Year   |                     | ($)    |                        | ($)   |         | AWARDS ($) |  | OPTIONS (#) |        | Compensation
|                   |                                                                           |        |                     |        |                        |       |         |            |  |             |        |             
|Randy Sugarman     |                                                                           |        | 2002                |        |                        |       | 0       |            |  |             | 0      |              |  |  | 0          |        |            |  | 0   |        |  |  | 390,000 | (1)    
|                   | Chairman of the Board, Interim                                            |        |                     | 2001   |                        |       |         | 0          |  |             |        | 0            |  |  |            | 0      |            |  |     | 0      |  |  |         | 221,000 | (1)
|                   | President and Chief Executive
Officer
and Interim Chief Operating Officer |        |                     |        |                        |       |         |            |  |             |        |              |  |  |            |        |            |  |     |        |  |  |         |         |    
|                   |                                                                          
|Robert F. Mecredy  |                                                                           |        | 2002                |        |                        |       | 76,274  |            |  |             | 0      |              |  |  | 0          |        |            |  | 0   |        |  |  | 239,786 | (3)(4) 
|                   | President and Chief                                                       |        |                     | 2001   |                        |       |         | 200,000    |  |             |        | 50,000       |  |  |            | 0      |            |  |     | 0      |  |  |         | 5,998   | (3)
|                   | Executive Officer  RESIGNED (2)                                          |        |                     | 2000   |                        |       |         | 160,000    |  |             |        | 0            |  |  |            | 0      |            |  |     | 0      |  |  |         | 5,049   | (3)
|                   |                                                                          
|John A. Morelli    |                                                                           |        | 2002                |        |                        |       | 125,000 |            |  |             | 50,000 |              |  |  | 0          |        |            |  | 0   |        |  |  | 2,423   | (3)    
|                   | Vice President,                                                           |        |                     | 2001   |                        |       |         | 125,000    |  |             |        | 35,000       |  |  |            | 0      |            |  |     | 0      |  |  |         | 3,089   | (3)
|                   | Chief
Financial Officer & Treasurer(5)                                    |        |                     | 2000   |                        |       |         | 105,000    |  |             |        | 0            |  |  |            | 18,750 | (6)        |  |     | 90,000 |  |  |         | 5,689   | (3)



|(1) |  | The
amounts set forth in the table consist of consulting fees for
Mr. Sugarmans services received by Sugarman & Company LLP, a company in which Mr. Sugarman is
managing general partner and has an 80% ownership interest. See Certain Relationships
and Related Transactions  Compensation Committee Interlocks and
Insider Participation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Mecredy became the Companys President and Chief Executive Officer
on October 1, 1999. He resigned effective May 16, 2001.                                                                                                                                                                                                                  
|   
|(3) |  | Matching contributions made by the Company to its 401(k) plan.                                                                                                                                                                                                                                                                                  
|   
|(4) |  | Mr. Mecredys All Other Compensation includes severance payments of
$237,500. See Employment and Related Matters.                                                                                                                                                                                                                             
|   
|(5) |  | Mr. Morelli also served as Chief Operating Officer from October 2000 to
May 2002.                                                                                                                                                                                                                                                               
|   
|(6) |  | Mr. Morelli was granted 30,000 restricted shares of common stock priced
at $0.625 per share during fiscal 2000. The restrictions on these
shares lapsed on September 30, 2000 and March 31, 2001, respectively.                                                                                                                                 

Fiscal Year-End Option Values

The following table contains certain information regarding options to
purchase common stock held as of March 31, 2002 by each of the named executive
officers. There were no exercises of stock options by the named executive
officers during the last fiscal year.

|                  |  |                                  |         |                        |  |             |         |               |  |   |        |  |  |   |         | 
|----------------- |  | -------------------------------- | ------- | ---------------------- |  | ----------- | ------- | ------------- |  | - | ------ |  |  | - | ------- | 
|                  |  | NUMBER OF SECURITIES

UNDERLYING |         | VALUE OF UNEXERCISED  
|                  |  | UNEXERCISED OPTIONS AT           |         | IN-THE-MONEY OPTIONS  
|                  |  | FISCAL YEAR-END                  |         | AT FISCAL YEAR-END (1)
|                  |  |                                  |         |                       
|OFFICER NAME      |  | EXERCISABLE                      |         | UNEXERCISABLE          |  | EXERCISABLE |         | UNEXERCISABLE
|                  |  |                                  |         |                        |  |             |         |              
|Randy Sugarman    |  |                                  | 0       |                        |  |             | 0       |               |  | $ | 0      |  |  | $ | 0       | 
|Robert F. Mecredy |  |                                  | 289,617 |                        |  |             | 402,983 |               |  | $ | 81,600 |  |  | $ | 163,200 | 
|John A. Morelli   |  |                                  | 209,420 |                        |  |             | 326,540 |               |  | $ | 65,273 |  |  | $ | 164,227 | 



|(1) |  | As required by the rules of the Securities and Exchange Commission, the
value of unexercised in-the-money options is based on the closing sales
price of the Companys Common Stock on the Over-The-Counter Bulletin
Board as of the last day of the fiscal year, March 31, 2002, which was
$0.52 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment and Related Matters

On May 18, 2001, Robert F. Mecredy tendered his resignation from his
positions of President, Chief Executive Officer, and Director of the Company.
Under the terms of his Separation Agreement, Mr. Mecredy continued in the
Companys employment until July 15, 2001 to assist in the transition of the new
management team for an aggregate compensation of

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$12,500. In addition, the Company agreed to pay him a performance bonus
of $50,000 for fiscal year 2001, $61,854.26 for accrued and unused vacation and
an aggregate amount of $200,000 in bi-weekly installments during the 24 month
period following termination of his employment and a further amount of $37,500.
The Company also amended Series F and Series H stock option agreements, each
in the amount of 240,000 shares of common stock so that (1) the Series F
Options (i) remain exercisable until the second anniversary of termination of
employment, and (ii) are terminable for breach of certain provisions of the
Separation Agreement rather than his existing agreements and (2) the Series H
Options (i) expire on the third rather than the seventh anniversary of the
Option date, (ii) continue to be exercisable after termination of his
employment and (iii) are terminable for breach of certain provisions of the
Separation Agreement rather than his existing agreements.

In March 1999, the Company entered into an employment agreement with John
A. Morelli, which was extended on February 18, 2000 for a period of one year
and further extended on November 1, 2000, for a period of three years
retroactive to October 1, 2000. Mr. Morellis base salary under this agreement
is $125,000 per annum, which shall be reviewed annually by the Compensation
Committee of the Board of Directors. Mr. Morelli has the opportunity to earn an
annual incentive bonus, based upon the Companys performance, his individual
performance and the Companys liquidity position of up to, but not exceeding,
60% of his base salary.

Mr. Morelli is entitled to receive a grant of nonqualified stock options
as follows: (i) an option to purchase from the Company 150,000 shares of its
Class A common stock at the price of $0.50 per share, under the terms and
conditions described in the Stock Option Agreement Series F, (ii) an option to
purchase from the Company 150,000 shares of Common Stock, at the price of $0.50
per share, under the terms and conditions described in the Stock Option
Agreement Series G (iii) an option to purchase from the Company 150,000 shares
of Common Stock, at the price of $0.01 per share, under the terms and
conditions described in the Stock Option Agreement Series H. During the
employment period, Mr. Morelli shall be entitled to participate in the
Companys employee benefit plans that are generally available from time to time
to executives of the Company, including group medical, dental, life, accidental
death and dismemberment, short-term disability, long-term disability, business
travel accident plans, sick leave, vacation, and the profit sharing retirement
plan. Under his agreement, Mr. Morelli agreed to certain non-disclosure and
non-compete agreements as long as he is receiving payments from the Company,
and for up to three years thereafter, in conjunction with his employment
agreement and agreed to not to directly or indirectly, induce or attempt to
induce any employee of the Company to terminate or abandon his or her
employment for any purpose whatsoever.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Ownership of Stock by Directors, Executive Officers and Principal Stockholders

The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of July 10, 2002 by: (i) each person
(or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock; (ii) each
of the Companys directors; (iii) the Companys chief executive officer and
each of the other executive officers included in the Summary Compensation
Table; and (iv) the Companys current directors and officers as a group. Except
as indicated in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
indicated as being beneficially owned by them.

|                                                             |  |              |            |   |  |  |      |  
|------------------------------------------------------------ |  | ------------ | ---------- | - |  |  | ---- | -
|                                                             |  | NUMBER OF    |            |   |  | 
|                                                             |  | SHARES OF    |            |   |  | 
|                                                             |  | COMMON STOCK |            |   |  | 
|                                                             |  | BENEFICIALLY |            |   |  | 
|NAME OF BENEFICIAL OWNER (1)                                 |  | OWNED (6)    |            | %
|                                                             |  |              |            |  
|Bank of America Corporation (1)                              |  |              | 12,757,426 |   |  |  | 18.2 | %
|Dominion Resources, Inc. c/o First Source Financial, LLP (2) |  |              | 9,467,188  |   |  |  | 13.5 | %
|U.S. Bank National Association (First Bank, N.A.) (3)        |  |              | 4,260,375  |   |  |  | 6.1  | %
|Centre Capital Investors II, LP (4)                          |  |              | 26,339,374 |   |  |  | 35.7 | %
|Centre Partners Coinvestment LP (4)                          |  |              | 3,822,535  |   |  |  | 5.4  | %
|Centre Capital Offshore Investors II, LP (4)                 |  |              | 5,219,372  |   |  |  | 7.4  | %
|Centre Capital Tax-Exempt (4)                                |  |              | 2,944,422  |   |  |  | 4.2  | %
|Centre Partners Management LLC (5)                           |  |              | 34,503,168 |   |  |  | 46.0 | %
|Centre Partners II LLC (6)                                   |  |              | 38,954,015 |   |  |  | 51.7 | %
|Randy Sugarman (8)                                           |  |              | 0          |   |  |  | *    |  
|Robert F. Mecredy  RESIGNED (8)                             |  |              | 207,785    |   |  |  | *    |  
|John A. Morelli (8)                                          |  |              | 248,177    |   |  |  | *    |  
|William J. Bratton (8)                                       |  |              | 21,100     |   |  |  | *    |  
|Scott Perekslis (9)                                          |  |              | 9,005      |   |  |  | *    |  
|All current directors and executive officers as a group      |  |              | 486,067    |   |  |  | 0.7  | %



|(1) |  | The address of Bank of America Corporation is 100 North Tryon
Street, Charlotte, North Carolina. Bank of America is the parent of
NB Holdings Corporation, which is the parent company of Bank of
America, N.A. Information regarding ownership of Common Stock
included herein is in reliance on information set forth in a Form 3
filed on September 6, 2000 with the Securities Exchange Commission
(the Commission), reflecting ownership as of August 25, 2000, as
well as information set forth in Schedule 13-D filed on September 6,
2000.            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The address of Dominion Resources, Inc. is 120 Tredegear Street,
Richmond, Virginia 23219. Dominion Resources is a holding company
and its subsidiaries include Dominion Capital, Inc., whose
subsidiaries include Virginia Financial Ventures, Inc. and N.H.
Capital, Inc., the general partners of First Source Financial, LLP.
Information regarding ownership of Common Stock included herein is
in reliance on information set forth in a Schedule 13-D filed on
September 6, 2000 with the Commission, reflecting ownership as of
August 25, 2000.        
|   
|(3) |  | The address of U.S. Bank National Association is U.S. Bank Place,
601 Second Avenue South, Minneapolis, Minnesota. Information
regarding ownership of Common Stock included herein in reliance on
information set forth in a Schedule 13-D filed on September 6, 2000
with the Commission, reflecting ownership as of August 25, 2000.                                                                                                                                                                                                                          
|   
|(4) |  | The address of Centre Capital Investors II, L.P., (together with
Centre Partners Coinvestment, L.P., Centre Capital Tax-exempt
Investors II, L.P. and Centre Capital Offshore Investors II, L.P.,
the Centre Partnerships), Centre Partners Management LLC (Centre
Management) and Centre Partners II, LLC (together with the Centre
Partnerships, the Centre Entities) is 30 Rockefeller Plaza, New
York, New York 10020, except that the address of Centre Capital
Offshore Investors II, L.P. is c/o Reid Management, Cedar House, 41
Cedar Avenue, Box

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##### Table of Contents





|    |  | HM 1179, Hamilton, Bermuda. Information regarding ownership of Common
Stock included herein is in reliance on information set forth in a
Schedule 13-D/A filed on May 16, 2002 with the Securities Exchange
Commission (the Commission), reflecting ownership as of May 13,
2002. On May 13, 2002, 7,100,391 shares of Common Stock were
acquired from PB
Capital Corporation, whose parent company is Deutsche Postbank AG
whose address is Friedrich-Ebert-Allee 114-126, 53113 Bonn, Germany,
by the following: Centre Capital Investors II, L.P.:
4,870,385 shares; Centre Capital Tax-Exempt: 544,472 shares; Centre
Capital Offshore Investors II, L.P.: 965,071 shares and Centre
Partners Coinvestment L.P.: 720,463 shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | Based on 70,153,139 shares of Common Stock outstanding on July 10,
2002. Calculation of percentage of beneficial ownership assumes the
exercise of all options exercisable within 60 days of July 10, 2002
only by the respective named shareholder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(6) |  | Information regarding ownership of Common Stock by the Centre
Entities is included herein in reliance on information provided by
Centre Management. Pursuant to a Management Agreement, Centre
Capital Investors II, L.P., Centre Partners Offshore Investors II,
L.P. and Centre Capital Tax-exempt Investors II, L.P. have delegated
voting and investment power with respect to the Common Stock
beneficially owned by them to Centre Management; accordingly, the
aggregate security ownership of those Centre Partnerships is
reflected for Centre Management as well.                                                                                                                                                           
|   
|(7) |  | Centre Partners II LLC (Centre Partners), as general partner of
the Centre Partnerships, is reflected as beneficially owning the
Common Stock owned by the Centre Partnerships. In addition, pursuant
to certain co-investment arrangements, Centre Partners has been
delegated voting and investment power with respect to an additional
571,181 shares of Common Stock and 57,131 warrants. Included within
the shares of Common Stock are 5,246,164 warrants currently
exercisable into shares of Common Stock.                                                                                                                                                                                                                  
|   
|(8) |  | Messrs. Sugarman, Mecredy and Morellis beneficial ownership
includes exercisable options for 0 shares, 0 shares and 209,420
shares, respectively. In addition, Messrs. Mecredy and Morellis
beneficial ownership includes 17,075 shares and 8,757 shares,
respectively held in a 401(k) plan for the benefit of each person as
of July 10, 2002, over which each such person has been delegated
voting and investment power.                                                                                                                                                                                                                                                                                                        
|   
|(9) |  | Includes 9,005 shares of Common Stock held in a 401(k) plan for the
benefit of Mr. Perekslis over which Mr. Perekslis has delegated
voting and investment authority to Centre Partners pursuant to
certain co-investment arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Equity Compensation Plan Information

The following table provides information about the Companys shares of
Common Stock that may be issued upon exercise of stock options under all the
Companys existing equity compensation plans as of March 31, 2002:

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |                         |                     |                         |                     |                      |                          |                             |      |                         |  |   |           | 
|---------------------------------------------------------- | ----------------------- | ------------------- | ----------------------- | ------------------- | -------------------- | ------------------------ | --------------------------- | ---- | ----------------------- |  | - | --------- | 
|                                                           |                         |                     | (a)                     |                     | (b)                  |                          | (c)                        
|                                                           |                         |                     |                         |                     |                      |                          |                            
|                                                           |                         |                     | Number of securities    |                     |                      |                          |                             |      | Number of Securities   
|                                                           |                         |                     | to be Issued upon       |                     |                      |                          |                             |      | Remaining Available for
|                                                           |                         |                     | exercise of outstanding |                     | Weighted-Average     |                          | Future Issuance Under      
|                                                           |                         |                     | Exercise of             |                     | Exercise Price Of    |                          | Equity Compensation        
|                                                           |                         |                     | Outstanding Options,    |                     | Outstanding Options, |                          | Plans (Excluding Securities
|Plan Category                                              |                         | Warrants and Rights |                         | Warrants and Rights |                      | Reflected In Column (a))
|                                                           |                         |                     |                         |                     |                      |                         
|Equity compensation plans approved
by security holders:    |                         |                     |                         |                     |                      |                          |                             |      |                         |  |   |          
|                                                           | Stock option plan       |                     |                         | 2,519,577           |                      |                          | $                           | 1.68 |                         |  |   | 4,977,744 | 
|                                                           | Stock compensation plan |                     |                         |                    |                      |                          |                             |     |                         |  |   | 189,733   | 
|Equity compensation plans not approved
by security holders |                         |                     | 0                       |                     |                      | $                        | 0.00                        |      |                         |  | 0 |          
|                                                           |                         |                     |                         |                     |                      |                          |                             |      |                         |  |   |          
|                                                           | Total                   |                     |                         | 2,519,577           |                      |                          | $                           | 1.68 |                         |  |   | 5,167,477 | 
|                                                           |                         |                     |                         |                     |                      |                          |                             |      |                         |  |   |          

Item 13. Certain Relationships and Related Transactions

Certain Transactions

On December 31, 2001, the Company and its lenders entered into 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 Parent remains at
an amount equal to 20% of Parents EBITDA for such fiscal year.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 32



---



##### Table of Contents





| |  | 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 Notes.                                                                                                                                                                                                                                                                      
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | On March 29, 2002, the Company and its lenders entered into 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 Notes. The amendment requires
that 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 Parent 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 Borrower pay an
unused commitment fee with respect to the unused portion of the New
Revolving Credit Commitment of 0.5% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Compensation Committee Interlocks and Insider Participation

Messrs. Bratton, Perekslis, and Sugarman served as members of the
Companys Compensation Committee during the 2002 fiscal year. Mr. Sugarman has
been serving as interim Chief Executive Officer and President since May 16,
2001 and interim Chief Operating Officer since May 20, 2002. Mr. Perekslis was
a Vice President of the Company through July 18, 1997.

The Company has entered into a consulting agreement, dated October 4,
2000, with Sugarman & Company, LLP, a company in which Randy Sugarman is the
managing partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
are performed on an hourly basis, plus out-of-pocket expenses, and the Company
is billed accordingly. Mr. Sugarman has served as Interim Chief Executive
Officer and President of the Company since May 16, 2001 and as Interim Chief
Operating Officer since May 20, 2002. The
Company incurred consulting fees of $390,000 and $221,000, plus expenses of
$72,000 and $51,000, for consulting services under the agreement for the fiscal
years 2002 and 2001, respectively.

Page 33



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##### Table of Contents



Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

THIS ANNUAL REPORT ON FORM 10-K INCLUDES UNAUDITED FINANCIAL STATEMENTS IN
LIEU OF AUDITED FINANCIAL STATEMENTS BECAUSE THE COMPANY DISMISSED ITS PRIOR PUBLIC ACCOUNTANTS, ARTHUR ANDERSEN LLP
IN APRIL 2002.

IN APRIL 2002, THE
COMPANY APPOINTED PRICEWATERHOUSECOOPERS LLP AS ITS NEW
PUBLIC ACCOUNTANTS. THE COMPANY WILL AMEND THIS ANNUAL REPORT ON FORM 10-K TO
INCLUDE AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 2002
AS SOON AS THE AUDIT OF THESE FINANCIAL STATEMENTS IS COMPLETED. THE COMPANY
CURRENTLY ANTICIPATES THAT THIS AUDIT WILL BE COMPLETED ON OR BEFORE AUGUST 15,
2002.

NO AUDITOR HAS OPINED THAT THE UNAUDITED
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED MARCH 31, 2002 PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION, THE RESULTS OF
OPERATIONS, CASH FLOWS AND THE CHANGES IN SHAREHOLDERS EQUITY OF THE
COMPANY IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.



| | (a) |  | 1. Financial Statements
| | --- |  | -----------------------

The following financial statements and notes thereto of the Company are
incorporated by reference in Item 8 of this report:




INDEX TO FINANCIAL STATEMENTS

|                                                                                                                               |  |  |     | 
|------------------------------------------------------------------------------------------------------------------------------ |  |  | --- | 
|Report
of previous Independent Public Accountants                                                                              |  |  | F-1 | 
|Unaudited
Consolidated Balance Sheets as of March 31, 2002 and 2001                                                            |  |  | F-2 | 
|Unaudited Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 2002, 2001, and 2000                      |  |  | F-3 | 
|Unaudited Consolidated Statements of Changes in Stockholders Deficit
for the Fiscal Years Ended March 31, 2002, 2001 and 2000 |  |  | F-4 | 
|Unaudited Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2002, 2001 and 2000                       |  |  | F-5 | 
|Unaudited Notes to Consolidated Financial Statements                                                                           |  |  | F-6 | 



| | 2. |  | Financial Statement Schedule.
| | -- |  | -----------------------------

The following financial statement schedule is included on page S-1 of this
annual report on Form 10-K:

34



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##### Table of Contents



Schedule II  Valuation and Qualifying Accounts



| | 3. |  | Exhibits.
| | -- |  | ---------

The following exhibits are required to be filed with this Annual Report on
Form 10-K by Item 601 of Regulation S-K:

|               |  |   |  |                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|-------------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  |   |  | Description of Exhibits                                                                                                                                                                                                                                                                                                       |  |  |  | 
|               |  |   |  |                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|3.01           |  |  |  | By-laws of the
Company. (filed as Exhibit 3.06 to the Companys Registration Statement No. 333-13105)                                                                                                                                                                                                                        
|3.02           |  |  |  | Restated Certificate of Incorporation of the Company, dated December 23, 1996. (filed
as Exhibit 3.03 to the Companys Quarterly Report on Form 10-Q for the Fiscal Quarter
ended December 31, 1996)                                                                                                                         
|3.03           |  |  |  | Certificate of Designation of Series A Preferred Stock of the Company setting forth
the powers, preferences, rights, Qualification, limitations and restrictions of the
series dated November 13, 1998. (filed as exhibit 3.03 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended December 31, 1998)
|3.04           |  |  |  | Certificate of Amendment to the Certificate of Incorporation of the Company dated
(and filed with the Office of the Secretary of State of Delaware on) August 25, 2000.                                                                                                                                                      
|3.05           |  |  |  | Certificate of Designations of Series B Preferred Stock of the Company setting forth
the powers, preferences, rights, qualifications, limitations and restrictions of the
series dated August 24, 2000 (filed with the office of the Secretary of State of
Delaware on August 25, 2000)                                      
|9.01           |  |  |  | Voting and Stock Restriction Agreement dated as of April 1, 2000 among the financial
institutions listed on the signature pages thereof and Bank of America, N.A.,
successor in interest to NationsBank N.A.                                                                                                                 
|9.02           |  |  |  | Letter from Bank of America dated August 25, 2000 and signed by the Centre entities
named therein and the non- Centre lenders named therein with respect to the Board of
Directors of the Company.                                                                                                                           
|10.01-01       |  |  |  | Second Amended and Restated Credit Agreement and Partial Exchange Agreement dated as
of April 1, 2000, among the Company, FATS, Inc. and Bank of America, N.A., successor
in interest to NationsBank, N.A., as Agent and as Issuing Bank, and the Financial
institutions parties thereto.                                    
|10.01-02       |  |  |  | Loan Agreement and Exchange Agreement dated as of April 1, 2000 among the Company,
FATS, Inc., the lenders named therein and Centre Capital Investors II, L.P. as Agent.                                                                                                                                                     
|10.03          |  |  |  | Pledge and Security Agreement, dated as of July 31, 1996, between the Company and
NationsBank, N.A. (South). (filed as Exhibit 10.06 to the Companys Registration
Statement No. 333-13105)                                                                                                                                  
|10.04          |  |  |  | Assignment and Assumption Agreement dated as of January 1, 1997 among the Company,
FATS, Inc. and NationsBank N.A. (South). (Filed as Exhibit 10.03 to the Companys
Annual Report on Form 10-K for the Fiscal Year ended March 31, 1997)                                                                                    
|10.05          |  |  |  | Borrowers Consent and Agreement dated as of October 15, 1997 between FATS, Inc. and
NationsBank N.A. (South). (Filed as Exhibit 10.01 to the Companys Quarterly Report
on Form 10-Q for the Fiscal Quarter ended September 30, 1997)                                                                                       
|10.06          |  |  |  | Pledge Agreement dated as of January 1, 1997 between the Company and NationsBank N.A.
(South). (Filed as Exhibit 10.03 to the Companys Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1997)                                                                                                                 
|10.07          |  |  |  | Parents Consent dated as of October 15, 1997 between the Company and NationsBank
N.A. (South). (Filed as Exhibit 10.01 to the Companys Quarterly Report on Form 10-Q
for the Fiscal Quarter ended September 30, 1997)                                                                                                      
|10.09-01       |  |  |  | Lease, dated May 4, 1993, between the Company and Technology Park/Atlanta, Inc.
(filed as Exhibit 10.09 to the Companys Registration Statement No. 333-13105)                                                                                                                                                               
|10.09-02       |  |  |  | First Amendment to Lease Agreement, dated December 21,1993, between the Company and
Technology Park/Atlanta, Inc. (filed as Exhibit 10.09 to the Companys Registration
Statement No. 333-13105)                                                                                                                             
|10.09-03       |  |  |  | Second Amendment to Lease Agreement, dated December 21,1995, between the Company and
Schneider Atlanta, L.P. (filed as Exhibit 10.10 to the Companys Registration
Statement No. 333-13105)                                                                                                                                  

35



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##### Table of Contents



|               |  |   |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|-------------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  |   |  | Description of Exhibits                                                                                                                                                                                                                                                                                    |  |  |  | 
|               |  |   |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|10.10          |  |  |  | Management Shares Agreement, dated as of September 18, 1996, between the Company and
Peter A. Marino, Robert F. Mecredy, Juan de Ledebur and certain other individuals.
(filed as Exhibit 10.12 to the Companys Registration Statement No. 333-13105)                                                    
|10.11          |  |  |  | Firearms Training Systems, Inc. Stock Option Plan. (filed as Exhibit 10.13 to the
Companys Registration Statement No. 333-13105)                                                                                                                                                                         
|10.12          |  |  |  | Stock Option Agreement Series A, dated as of September 18, 1996 between the Company
and Peter A. Marino. (filed as Exhibit 10.14 to the Companys Registration Statement
No. 333-13105)                                                                                                                   
|10.12-01       |  |  |  | Schedule identifying Stock Option Agreements Series A substantially identical in all
material respects to Exhibit 10.12.                                                                                                                                                                                  
|10.13          |  |  |  | Stock Option Agreement Series B, dated as of September 18, 1996 between the Company
and Peter A. Marino. (filed as Exhibit 10.15 to the Companys Registration Statement
No. 333-13105)                                                                                                                   
|10.13-01       |  |  |  | Schedule identifying Stock Option Agreements Series B substantially identical in all
material respects to Exhibit 10.13.                                                                                                                                                                                  
|10.14          |  |  |  | Stock Option Agreement Series C, dated as of September 18, 1996 between the Company
and William J. Bratton. (filed as Exhibit 10.16 to the Companys Registration
Statement No. 333-13105)                                                                                                                
|10.14-01       |  |  |  | Schedule identifying Stock Option Agreements Series C substantially identical in all
material respects to Exhibit 10.14. (filed as Exhibit 10.16.01 to the Companys
Registration Statement No. 333-13105)                                                                                                
|10.14-02       |  |  |  | Form of Restricted Stock Award Agreement issued to Mr. Morelli under Item 11,
Executive Compensation, herein                                                                                                                                                                                            
|10.15          |  |  |  | Registration Rights Agreement, dated as of July 31, 1996, between the Company and the
Institutional Holders set forth on Schedule I thereto. (filed as Exhibit 10.17 to the
Companys Registration Statement No. 333-13105) (filed as Exhibit 10.18 to the
Companys Registration Statement No. 333-13105)
|10.16          |  |  |  | Registration Rights Agreement, dated as of April 1, 2000 among the Company and the
Institutional Holders set forth on Schedule I thereto.                                                                                                                                                                 
|10.17          |  |  |  | Firearms Training Systems, Inc. Executive Severance Benefit Plan. (filed as Exhibit
10.19 to the Company Registration Statement No. 333-13105)                                                                                                                                                            
|10.18          |  |  |  | Employment Agreement, dated as of September 18, 1996, between the Company and Peter
A. Marino. (filed as Exhibit 10.20 to the Companys Registration Statement No.
333-13105)                                                                                                                             
|10.18-01       |  |  |  | Resignation Agreement, dated as of September 15, 1999, between the Company and Peter
A. Marino. (filed as Exhibit 10.29 to the Companys Quarterly Report on Form 10-Q for
the Fiscal Quarter ended September 30, 1999)                                                                                   
|10.19          |  |  |  | Form of Agreement to Limit Future Competition entered into with each member of senior
management of the Company. (filed as Exhibit 10.21 to the Companys Registration
Statement No. 333-13105)                                                                                                           
|10.19-01       |  |  |  | Schedule listing Agreements to Limit Future Competition Substantially identical in
all material respects to Exhibit 10.19. (filed as Exhibit 10.21-01 to the Companys
Registration Statement No. 333-13105)                                                                                              
|10.20          |  |  |  | License Agreement, dated October 31, 1991 by and between Microware Systems
Corporation and the Company. (filed as Exhibit 10.23 to the Companys Registration
Statement No. 333-13105)                                                                                                                    
|10.21          |  |  |  | Warrant to purchase Class B Non Voting Common Stock of the Company dated November 13,
1998. (filed as Exhibit 10.21 to the Companys Quarterly Report on Form 10-Q for the
Fiscal Quarter ended Quarter ended December 31, 1998)                                                                          
|10.22          |  |  |  | Form of Amended Warrant to Purchase Common Stock of the Company dated August 25, 2000.                                                                                                                                                                                                                    
|10.23          |  |  |  | Form of Warrant to Purchase Common Stock of the Company dated August 25, 2000.                                                                                                                                                                                                                            
|10.24          |  |  |  | Stock Option Agreement dated as of November 13, 1998 between the Company and Centre
Partners Management LLC. (filed as Exhibit 10.22 to the Companys Quarterly Report on
Form 10-Q for the Fiscal Quarter ended December 31, 1998)                                                                       
|10.25          |  |  |  | Securities Purchase Agreement dated as of November 13, 1998 between the Company and
Centre Entities. (filed as Exhibit 10.23 to the Companys Quarterly Report on Form
10-Q for the Fiscal Quarter ended December 31, 1998)                                                                               
|10.26          |  |  |  | Agreement among Borrowers and other Borrower Guarantors of the Company, Firearms
Training Systems Limited and Firearms Training Systems, B.V. and the Centre Entities
dated June 1, 1999. (Filed as Exhibit 10.24 to the Companys Annual Report on Form
10-K for the Fiscal Year ended March 31, 1999)   
|10.27          |  |  |  | Securities Exchange and Release Agreement dated as of April 1, 2000 among the
investors named therein and the Company.                                                                                                                                                                                    

36



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##### Table of Contents



|               |  |   |  |                                                                                                                                                                                                                                                                                                             |  |  |  | 
|-------------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  |   |  | Description of Exhibits                                                                                                                                                                                                                                                                                     |  |  |  | 
|               |  |   |  |                                                                                                                                                                                                                                                                                                             |  |  |  | 
|10.28          |  |  |  | First Amendment
and Waiver to the Second Amended and Restated Credit Agreement and Partial Exchange Agreement dated December 31, 2001.                                                                                                                                                                     
|10.28-01       |  |  |  | Second Amendment to the Second Amended and Restated Credit Agreement and Partial
Exchange Agreement dated March 29, 2002.                                                                                                                                                                                  
|10.29          |  |  |  | Employment Agreement dated as of April 1, 1999, between the Company and John A.
Morelli. (Filed as Exhibit 10.26 to the Companys Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1999)                                                                                                     
|10.29-01       |  |  |  | Amended Employment Agreement dated as of February 18, 2000, between the Company and
John A. Morelli. (Filed as Exhibit 10.29-01 to the Companys Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 2000)                                                                            
|10.29-02       |  |  |  | Form of Series F stock option agreement dated as of April 1, 2000 between the Company
and John A. Morelli. (Filed as Exhibit 10.29-02 to the Companys Quarterly Report on
Form 10-Q for the Fiscal Quarter ended September 30, 2000)                                                                      
|10.29-03       |  |  |  | Form of Series G stock option agreement dated as of April 1, 2000 between the Company
and John A. Morelli. (Filed as Exhibit 10.29-03 to the Companys Quarterly Report on
Form 10-Q for the Fiscal Quarter ended September 30, 2000)                                                                      
|10.29-04       |  |  |  | Form of Series H stock option agreement dated as of April 1, 2000 between the Company
and John A. Morelli. (Filed as Exhibit 10.29-04 to the Companys Quarterly Report on
Form 10-Q for the Fiscal Quarter ended September 30, 2000)                                                                      
|10.31          |  |  |  | Employment agreement dated as of November 1, 2000
between the Company and Robert F. Mecredy. (Filed as
Exhibit 10.31 to the Companys Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 2000)                                                                                       
|10.31-01       |  |  |  | Form of Series F stock option agreement dated as of
April 1, 2000 between the Company and Robert F. Mecredy.
(Filed as Exhibit 10.31-01 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended
September 30, 2000)                                                                    
|10.31-02       |  |  |  | Form of Series G stock option agreement dated as of
April 1, 2000 between the Company and Robert F. Mecredy.
(Filed as Exhibit 10.31-02 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended
September 30, 2000)                                                                    
|10.31-03       |  |  |  | Form of Series H stock option agreement dated as of
April 1, 2000 between the Company and Robert F. Mecredy.
(Filed as Exhibit 10.31-03 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended
September 30, 2000)                                                                    
|10.31-04       |  |  |  | Separation and General Release Agreement, dated as of
May 16, 2001, between the Company and Robert F. Mecredy
including form of amendments to Series F and Series H
options agreements. (Filed as Exhibit 10.31-04 to the
Companys Quarterly Report on Form 10-K for the Fiscal
Year ended March 31, 2001)
|21.01          |  |  |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                               
|23.01          |  |  |  | Consent of Arthur Andersen LLP, dated June 29, 2001.
This consent is a copy of a previously issued opinion
and the report has not been reissued by Arthur Andersen
LLP.                                                                                                                                    
|24.01          |  |  |  | Power of Attorney (set forth on page V-1)                                                                                                                                                                                                                                                                  



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------
|
| |     |  | None                



| |  |  | (c)                |  | Exhibits.
| |  |  | ------------------ |  | ---------
|
| |  |  | See (a) (3) above.
|
| |  |  | See (a) (2) above.

37



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##### Table of Contents






The following report is a copy of a report
previously issued by Arthur Andersen LLP and has not been reissued by
Arthur Andersen LLP.

REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS

To Firearms Training Systems, Inc.:

We have audited the accompanying consolidated balance sheets of FIREARMS
TRAINING SYSTEMS, INC.(a Delaware corporation) AND SUBSIDIARIESas of March
31, 2001 and 2000 and the related consolidated statements of operations,
changes in stockholders deficit, and cash flows for each of the three years in
the period ended March 31, 2001. These financial statements and the schedule
referred to below are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Firearms Training Systems,
Inc. and subsidiaries as of March 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2001 in conformity with accounting principles generally accepted in
the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule I is presented for the purpose
of complying with the Securities and Exchange Commissions rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 18, 2001

Page F-1



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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)




|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |           |         |   |  | 
|----------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------- | - | ------- | ----------- | -------- | --------- | ------- | - |  | 
|                                                                                          |                                                                                                                                                      |                                             |          |   |         | MARCH 31   
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |            
|                                                                                          |                                                                                                                                                      |                                             |          |   |         | 2002        |          | 2001     
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      |                                             |          |   |         | (Unaudited) |          | (Audited) |        
|ASSETS                                                                                    |                                                                                                                                                      |                                             |          |   |         |             |          |          
|CURRENT ASSETS:                                                                           |                                                                                                                                                      |                                             |          |   |         |             |          |          
|Cash and cash equivalents                                                                 |                                                                                                                                                      | $                                           | 4,252    |   |         | $           | 1,864    |          
|Restricted cash                                                                           |                                                                                                                                                      |                                             | 1,434    |   |         |             | 628      |          
|Accounts receivable, net of allowance of $352 and
$359 in 2002 and 2001, respectively     |                                                                                                                                                      |                                             | 10,500   |   |         |             | 8,591    |          
|Income taxes receivable                                                                   |                                                                                                                                                      |                                             | 2,950    |   |         |             | 809      |          
|Costs and estimated earnings in excess of billings
on uncompleted contracts               |                                                                                                                                                      |                                             | 3,120    |   |         |             | 1,480    |          
|Unbilled receivables                                                                      |                                                                                                                                                      |                                             | 1,612    |   |         |             | 1,355    |          
|Inventories, net                                                                          |                                                                                                                                                      |                                             | 9,434    |   |         |             | 12,526   |          
|Prepaid expenses and other current assets                                                 |                                                                                                                                                      |                                             | 1,444    |   |         |             | 1,117    |          
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      | Total current assets                        |          |   | 34,746  |             |          |           | 28,370  |  
|Property and equipment, net                                                               |                                                                                                                                                      |                                             | 1,579    |   |         |             | 2,647    |          
|Other noncurrent assets                                                                   |                                                                                                                                                      |                                             | 25       |   |         |             | 0        |          
|Goodwill, net of accumulated amortization of $0 and
$3,958 in 2002 and 2001, respectively |                                                                                                                                                      |                                             | 0        |   |         |             | 1,156    |          
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      | Total assets                                |          | $ | 36,350  |             |          | $         | 32,173  |  
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                     |                                                                                                                                                      |                                             |          |   |         |             |          |          
|CURRENT LIABILITIES:                                                                      |                                                                                                                                                      |                                             |          |   |         |             |          |          
|Accounts payable                                                                          |                                                                                                                                                      | $                                           | 4,430    |   |         | $           | 2,902    |          
|Accrued liabilities                                                                       |                                                                                                                                                      |                                             | 5,053    |   |         |             | 3,895    |          
|Accrued interest                                                                          |                                                                                                                                                      |                                             | 861      |   |         |             | 954      |          
|Billings in excess of costs and estimated
earnings on uncompleted contracts               |                                                                                                                                                      |                                             | 285      |   |         |             | 0        |          
|Deferred revenue                                                                          |                                                                                                                                                      |                                             | 902      |   |         |             | 1,910    |          
|Warranty and contracts cost provision  Current                                           |                                                                                                                                                      |                                             | 2,258    |   |         |             | 2,816    |          
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      | Total current liabilities                   |          |   | 13,789  |             |          |           | 12,477  |  
|Long-term debt                                                                            |                                                                                                                                                      |                                             | 42,977   |   |         |             | 43,990   |          
|Noncurrent deferred tax                                                                   |                                                                                                                                                      |                                             | 22       |   |         |             | 223      |          
|Warranty and contracts cost provision  Noncurrent                                        |                                                                                                                                                      |                                             | 1,467    |   |         |             | 1,724    |          
|Other noncurrent liabilities                                                              |                                                                                                                                                      |                                             | 579      |   |         |             | 796      |          
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      | Total liabilities                           |          |   | 58,834  |             |          |           | 59,210  |  
|COMMITMENTS AND CONTINGENCIES (Note 11)                                                   |                                                                                                                                                      |                                             |          |   |         |             |          |          
|Mandatory redeemable preferred stock (Note 5)                                             |                                                                                                                                                      |                                             | 27,319   |   |         |             | 27,049   |          
|Stockholders Deficit:                                                                    |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          | Class A common stock, $0.000006 par value; 100,000 shares
authorized, 70,153 and 70,084 shares issued and
outstanding in 2002 and 2001, respectively |                                             |          | 0 |         |             |          | 0         |        
|Additional paid-in capital                                                                |                                                                                                                                                      |                                             | 122,314  |   |         |             | 122,273  |          
|Stock warrants                                                                            |                                                                                                                                                      |                                             | 613      |   |         |             | 613      |          
|Unearned compensation                                                                     |                                                                                                                                                      |                                             | 0        |   |         |             | 0        |          
|Accumulated deficit                                                                       |                                                                                                                                                      |                                             | (172,350 | ) |         |             | (176,686 | )        
|Cumulative foreign currency translation adjustment                                        |                                                                                                                                                      |                                             | (380     | ) |         |             | (286     | )        
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      | Total stockholders deficit                 |          |   | (49,802 | )           |          |           | (54,086 | )
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          
|                                                                                          |                                                                                                                                                      | Total liabilities and stockholders deficit |          | $ | 36,350  |             |          | $         | 32,173  |  
|                                                                                          |                                                                                                                                                      |                                             |          |   |         |             |          |          




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

Page F-2



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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 2002, 2001, AND 2000
(in thousands, except per share data)

|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |        |        |  
|---------------------------------------------------- | --------------------------------------------- | --------------------------------- | ------ | ----------- | ------ | --------- | ------- | --------- | ------ | - | ------- | ------ | ------ | -
|                                                     |                                               |                                   |        | 2002        |        | 2001      |         | 2000     
|                                                     |                                               |                                   |        |             |        |           |         |          
|                                                     |                                               |                                   |        | (Unaudited) |        | (Audited) |         | (Audited) |        |   |        
|Revenues                                             |                                               | $                                 | 59,057 |             |        | $         | 41,501  |           |        | $ | 38,889  |       
|Cost of revenues                                     |                                               |                                   | 41,607 |             |        |           | 35,026  |           |        |   | 30,689  |       
|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|Gross margin                                         |                                               |                                   | 17,450 |             |        |           | 6,475   |           |        |   | 8,200   |       
|Operating expenses:                                  |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|                                                     | Selling, general, and administrative expenses |                                   |        | 12,036      |        |           |         | 10,119    |        |   |         | 10,974 |       
|                                                     | Research and development expenses             |                                   |        | 4,083       |        |           |         | 4,747     |        |   |         | 3,992  |       
|                                                     | Depreciation and amortization                 |                                   |        | 1,776       |        |           |         | 2,293     |        |   |         | 2,508  |       
|                                                     | Nonrecurring restructuring charge (Note 3)    |                                   |        | 0           |        |           |         | 0         |        |   |         | (143   | )     
|                                                     | Impairment of assets                          |                                   |        | 0           |        |           |         | 1,244     |        |   |         | 1,944  |       
|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|                                                     |                                               | Total operating expenses          |        |             | 17,895 |           |         |           | 18,403 |   |         |        | 19,275 |  
|Operating income (loss)                              |                                               |                                   | (445   | )           |        |           | (11,928 | )         |        |   | (11,075 | )     
|Other income (expense), net                          |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|                                                     | Interest income                               |                                   |        | 206         |        |           |         | 247       |        |   |         | 0      |       
|                                                     | Interest expense                              |                                   |        | 14          |        |           |         | (4,691    | )      |   |         | (8,056 | )     
|                                                     | Other expense, net                            |                                   |        | (61         | )      |           |         | (257      | )      |   |         | (325   | )     
|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|                                                     |                                               | Total other income (expense), net |        |             | 159    |           |         |           | (4,701 | ) |         |        | (8,381 | )
|Income (Loss) before benefit for income taxes        |                                               |                                   | (286   | )           |        |           | (16,629 | )         |        |   | (19,456 | )     
|Benefit for income taxes                             |                                               |                                   | (4,892 | )           |        |           | (1,052  | )         |        |   | (808    | )     
|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|Income (Loss) before accretion of preferred stock    |                                               |                                   | 4,606  |             |        |           | (15,577 | )         |        |   | (18,648 | )     
|Accretion of preferred stock                         |                                               |                                   | (270   | )           |        |           | (260    | )         |        |   | (254    | )     
|Gain on extinguishment of preferred stock            |                                               |                                   | 0      |             |        |           | 1,729   |           |        |   | 0       |       
|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|Net income (loss) applicable to common shareholders  |                                               | $                                 | 4,336  |             |        | $         | (14,108 | )         |        | $ | (18,902 | )     
|                                                     |                                               |                                   |        |             |        |           |         |           |        |   |         |       
|Basic Loss per share                                 |                                               | $                                 | 0.06   |             |        | $         | (0.26   | )         |        | $ | (0.91   | )     
|Diluted Loss per share                               |                                               | $                                 | 0.06   |             |        | $         | (0.26   | )         |        | $ | (0.91   | )     
|Weighted average common shares outstanding  basic   |                                               |                                   | 70,152 |             |        |           | 53,643  |           |        |   | 20,760  |       
|Weighted average common shares outstanding  diluted |                                               |                                   | 70,829 |             |        |           | 53,643  |           |        |   | 20,760  |       

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

Page F-3



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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CHANGES IN STOCKHOLDERS DEFICIT
FOR THE YEARS ENDED MARCH 31, 2002, 2001, and 2000
(in thousands, except share amounts)
(Fiscal Year ended March 31, 2002 are unaudited)

|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------- | ------- | ------ |  | ------- | ---------- | ----------------- |  | ------ | - | ----- |  | -------- | ---------- | ------------ |  | ----------- | - | ---------- |  | ----- | ------- |  |  | ---------- | --- |  |  | - | ---- | - |  | - | -------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                 |  |               |         |        |  | Class A |            | Class B Nonvoting |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |  
|                                                                                 |  |               |         |        |  | Common  |            | Common            |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  | Cumulative |     |  |  |  
|                                                                                 |  | Comprehensive |         |        |  |         |            |                   |  |        |   | Stock |  | Unearned |            | Retained     |  | Translation |   |            |  |      
|                                                                                 |  | Income (Loss) |         | Shares |  | Amount  |            | Shares            |  | Amount |   | APIC  |  | Warrants |            | Compensation |  | Earnings    |   | Adjustment |  | TOTAL
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |      
|Balance, March 31, 1999                                                          |  | $             | (3,336  | )      |  |         | 19,020,213 |                   |  |        | 0 |       |  |          | 1,694,569  |              |  |             | 0 |            |  |       | 114,324 |  |  |            | 0   |  |  |   | 0    |   |  |   | (143,676 | ) |  |   | (281 | ) |  |   | (29,633 | )
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  
|Net loss                                                                         |  |               | (18,902 | )      |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | (18,902  | ) |  |   | 0    |   |  |   | (18,902 | )
|Common stock issued to Company
Employee Stock 401(k) Plan                        |  |               | 0       |        |  |         | 101,734    |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 84      |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 84      |  
|Issuance of restricted stock                                                     |  |               | 0       |        |  |         | 272,500    |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 184     |  |  |            | 0   |  |  |   | (184 | ) |  |   | 0        |   |  |   | 0    |   |  |   | 0       |  
|Amortization of deferred stock-based
compensation                                |  |               | 0       |        |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 7    |   |  |   | 0        |   |  |   | 0    |   |  |   | 7       |  
|Foreign currency translation adjustment                                          |  |               | 243     |        |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 243  |   |  |   | 243     |  
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  
|Balance, March 31, 2000                                                          |  | $             | (18,659 | )      |  |         | 19,394,447 |                   |  |        | 0 |       |  |          | 1,694,569  |              |  |             | 0 |            |  |       | 114,592 |  |  |            | 0   |  |  |   | (177 | ) |  |   | (162,578 | ) |  |   | (38  | ) |  |   | (48,201 | )
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |        
|Net loss                                                                         |  |               | (14,108 | )      |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | (14,108  | ) |  |   | 0    |   |  |   | (14,108 | )
|Common stock issued to Company
Employee Stock 401(k) Plan                        |  |               | 0       |        |  |         | 332,875    |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 72      |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 72      |  
|Forfeiture of restricted stock                                                   |  |               | 0       |        |  |         | (32,500    | )                 |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 0       |  
|Common stock issued in conjunction
with debt restructuring                       |  |               | 0       |        |  |         | 48,695,212 |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 7,609   |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 7,609   |  
|Exchange of Class B Nonvoting Shares
for Class A Voting shares  Centre
Entities |  |               | 0       |        |  |         | 1,694,569  |                   |  |        | 0 |       |  |          | (1,694,569 | )            |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 0       |  
|Stock warrants issued in exchange for
Series A preferred stock                   |  |               | 0       |        |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 613 |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 613     |  
|Amortization of deferred stock-based
compensation                                |  |               | 0       |        |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 177  |   |  |   | 0        |   |  |   | 0    |   |  |   | 177     |  
|Foreign currency translation adjustment                                          |  |               | (248    | )      |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | (248 | ) |  |   | (248    | )
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  
|Balance, March 31, 2001                                                          |  | $             | (14,356 | )      |  |         | 70,084,603 |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 122,273 |  |  |            | 613 |  |  |   | 0    |   |  |   | (176,686 | ) |  |   | (286 | ) |  |   | (54,086 | )
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  
|Net
income                                                                       |  |               | 0       |        |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 4,336    |   |  |   | 0    |   |  |   | 4,336   |  
|Common stock issued to Company
Employee Stock 401(k) Plan                        |  |               | 0       |        |  |         | 68,536     |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 41      |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 41      |  
|Amortization of deferred stock-based
compensation                                |  |               | 0       |        |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | 0    |   |  |   | 0       |  
|Foreign currency translation adjustment                                          |  |               | (93     | )      |  |         | 0          |                   |  |        | 0 |       |  |          | 0          |              |  |             | 0 |            |  |       | 0       |  |  |            | 0   |  |  |   | 0    |   |  |   | 0        |   |  |   | (93  | ) |  |   | (93     | )
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  
|Balance, March 31, 2002                                                          |  | $             | (14,449 | )      |  |         | 70,153,139 |                   |  | $      | 0 |       |  |          | 0          |              |  | $           | 0 |            |  | $     | 122,314 |  |  | $          | 613 |  |  | $ | 0    |   |  | $ | (172,350 | ) |  | $ | (379 | ) |  | $ | (49,802 | )
|                                                                                 |  |               |         |        |  |         |            |                   |  |        |   |       |  |          |            |              |  |             |   |            |  |       |         |  |  |            |     |  |  |   |      |   |  |   |          |   |  |   |      |   |  |   |         |  

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

Page F-4



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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
MARCH 31, 2002, 2001, AND 2000
(in thousands)




|                                           |                                                                                           |                                           |      |             |        |           |     |         |        |  
|------------------------------------------ | ----------------------------------------------------------------------------------------- | ----------------------------------------- | ---- | ----------- | ------ | --------- | --- | ------- | ------ | -
|                                           |                                                                                           |                                           |      | 2002        |        | 2001     
|                                           |                                                                                           |                                           |      |             |        |          
|                                           |                                                                                           |                                           |      | (Unaudited) |        | (Audited) |     |        
|OPERATING ACTIVITIES:                      |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Net
income (loss)                                                                         |                                           | $    | 4,336       |        |           | $   | (14,108 | )     
|                                           | Adjustments to reconcile net loss to net cash (used in)
provided by operating activities: |                                           |      |             |        |           |     |         |       
|                                           | Employee stock compensation plan -401(k)                                                  |                                           |      | 7           |        |           |     | 72      |       
|                                           | Employee compensation -other                                                              |                                           |      | 10          |        |           |     | 0       |       
|                                           | Gain on extinguishment of preferred stock                                                 |                                           |      | 0           |        |           |     | (1,729  | )     
|                                           | Noncash reduction of debt restructuring liability                                         |                                           |      | (3,512      | )      |           |     | (2,049  | )     
|                                           | Noncash refinancing cost                                                                  |                                           |      | 0           |        |           |     | 250     |       
|                                           | Amortization of deferred stock-based compensation                                         |                                           |      | 0           |        |           |     | 177     |       
|                                           | Accretion of mandatory redeemable preferred stock                                         |                                           |      | 270         |        |           |     | 260     |       
|                                           | Depreciation                                                                              |                                           |      | 1,591       |        |           |     | 2,042   |       
|                                           | Loss on impairment of long-lived assets                                                   |                                           |      | 971         |        |           |     | 1,244   |       
|                                           | Amortization of goodwill                                                                  |                                           |      | 185         |        |           |     | 251     |       
|                                           | Amortization of loan costs                                                                |                                           |      | 0           |        |           |     | 332     |       
|                                           | (Gain) Loss on sale of assets                                                             |                                           |      | (56         | )      |           |     | 178     |       
|                                           | Compensatory stock options issued                                                         |                                           |      | 0           |        |           |     | 0       |       
|                                           | Deferred income taxes                                                                     |                                           |      | (201        | )      |           |     | (96     | )     
|                                           | Changes in assets and liabilities:                                                        |                                           |      |             |        |           |     |         |       
|                                           |                                                                                           | Accounts receivable, net                  |      |             | (1,909 | )         |     |         | (1,937 | )
|                                           |                                                                                           | Unbilled receivables                      |      |             | (349   | )         |     |         | 1,427  |  
|                                           |                                                                                           | Inventories                               |      |             | 3,375  |           |     |         | 3,820  |  
|                                           |                                                                                           | Prepaid expenses and other current assets |      |             | (327   | )         |     |         | (493   | )
|                                           |                                                                                           | Accounts payable                          |      |             | 1,525  |           |     |         | 504    |  
|                                           |                                                                                           | Accrued liabilities                       |      |             | 3,885  |           |     |         | 4,605  |  
|                                           |                                                                                           | Income taxes payable /(receivable)        |      |             | (3,733 | )         |     |         | 364    |  
|                                           |                                                                                           | Deferred revenue                          |      |             | (717   | )         |     |         | 1,180  |  
|                                           |                                                                                           | Warranty and contracts costs provision    |      |             | (642   | )         |     |         | 3,885  |  
|                                           |                                                                                           | Noncurrent liabilities                    |      |             | (217   | )         |     |         | (390   | )
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Total adjustments                                                                         |                                           |      | 156         |        |           |     | 13,897  |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Net cash (used in) provided by operating activities                                       |                                           |      | 4,492       |        |           |     | (211    | )     
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|INVESTING ACTIVITIES:                      |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Liquidation (purchase) of performance guarantees                                          |                                           |      | (806        | )      |           |     | 714     |       
|                                           | Purchase of property and equipment                                                        |                                           |      | (758        | )      |           |     | (736    | )     
|                                           | Proceeds from disposal of property and equipment                                          |                                           |      | 59          |        |           |     | 52      |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Net cash provided by (used in) investing activities                                       |                                           |      | (1,505      | )      |           |     | 30      |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|FINANCING ACTIVITIES:                      |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Proceeds from borrowings of long-term debt                                                |                                           |      | 0           |        |           |     | 200     |       
|                                           | Repayments of long-term debt                                                              |                                           |      | (70         | )      |           |     | 0       |       
|                                           | Deferred financing costs                                                                  |                                           |      | 0           |        |           |     | 0       |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Net cash provided by (used in) financing activities                                       |                                           |      | (70         | )      |           |     | 200     |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|EFFECT OF CHANGE IN FOREIGN EXCHANGE RATES |                                                                                           |                                           | (529 | )           |        |           | (41 | )      
|                                           | Net (increase) decrease in cash and cash equivalents                                      |                                           |      | 2,388       |        |           |     | (22     | )     
|                                           | Cash and cash equivalents, beginning of year                                              |                                           |      | 1,864       |        |           |     | 1,886   |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Cash and cash equivalents, end of year                                                    |                                           | $    | 4,252       |        |           | $   | 1,864   |       
|                                           |                                                                                           |                                           |      |             |        |           |     |        
|Supplemental disclosure of cash paid for:  |                                                                                           |                                           |      |             |        |           |     |        
|                                           | Interest                                                                                  |                                           | $    | 965         |        |           | $   | 1,010   |       
|                                           | Income taxes                                                                              |                                           | $    | (1,030      | )      |           | $   | (1,327  | )     




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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2002 (UNAUDITED),
MARCH 31 2001, AND MARCH 31, 2000


1. Organization and Nature of Business

Firearms Training Systems, Inc. (FATS or the Company), a Delaware
corporation, was incorporated in 1984.

FATS is engaged in the development, manufacture, sale, and servicing of
small and supporting arms training simulators and simulated firearms. The
Companys products include simulators for the military, law enforcement, sport
shooting, and hunter education. The Companys customers include military and
law enforcement agencies primarily throughout the United States (U.S.),
Canada, Europe and Asia.

The Company has one wholly owned subsidiary, FATS, Inc., which is the
operating subsidiary (the Operating Subsidiary). As of March 31, 2002, FATS,
Inc. had six wholly owned subsidiaries (collectively, the Subsidiaries):
Firearms Training Systems Limited (the Operating Subsidiarys U.K. subsidiary),
F.A.T.S. Singapore Pte, Ltd., Firearms Training Systems Netherlands, B.V.,
Simtran Technologies, Inc., which is based in Montreal, Canada (Simtran),
FATS Canada Holdings, and Firearms Training Systems Australia Pty Ltd..

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

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

The Company believes that this business strategy may achieve positive
operating results 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company,
the Operating Subsidiary, and the Subsidiaries. All significant intercompany
transactions and balances have been eliminated.

Foreign Currency Translation

The assets and liabilities of the Operating Subsidiarys foreign
subsidiaries are translated into U.S. dollars using current exchange rates in
effect at the balance sheet date, and revenues and expenses are translated at
average monthly exchange rates.

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The resulting translation adjustments are recorded as a separate component
of stockholders deficit. Gains and losses, which result from foreign currency
transactions, are included in the accompanying consolidated statements of
operations.

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 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 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.
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. 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.

Restricted Cash

Restricted cash represents an escrow account, which has been established
to ensure contract performance by the Company under certain contracts. The cash
is invested in certificates of deposit yielding 1.25% and maturity dates
ranging from June 30, 2002 to September 18, 2002, unless otherwise extended.

Inventories

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. During the fiscal
year ended March 31, 2002, the Company increased its reserve for excess
inventory based on its analysis of existing inventory in conjunction with
future estimated sales demand, by $2.5 million which was recorded in cost of
sales that was based on an analysis of its readily saleable inventory.

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Inventories consist of the following (in thousands):

|                |                    |   |           |        |      |   |        |        | 
|--------------- | ------------------ | - | --------- | ------ | ---- | - | ------ | ------ | 
|                |                    |   | March 31,
|                |                    |   |          
|                |                    |   | 2002      |        | 2001
|                |                    |   |           |        |     
|Raw materials   |                    | $ | 8,874     |        |      | $ | 7,997  |       
|Work in process |                    |   | 2,800     |        |      |   | 3,998  |       
|Finished goods  |                    |   | 1,280     |        |      |   | 1,559  |       
|                |                    |   |           |        |      |   |        |       
|                | Inventories, gross |   |           | 12,954 |      |   |        | 13,554 | 
|Less reserves   |                    |   | (3,520    | )      |      |   | (1,028 | )     
|                |                    |   |           |        |      |   |        |       
|                | Inventories, net   |   | $         | 9,434  |      |   | $      | 12,526 | 
|                |                    |   |           |        |      |   |        |       

Long-Term Contracts

Costs and estimated earnings on uncompleted contracts and related amounts billed as of March 31, 2002
and March 31, 2001, respectively, are as follows:

|                                        |  |           |             |           |  |   |            |  
|--------------------------------------- |  | --------- | ----------- | --------- |  | - | ---------- | -
|                                        |  | March 31, |             | March 31,
|                                        |  | 2002      |             | 2001     
|                                        |  |           |             |          
|Costs incurred on uncompleted contracts |  | $         | 14,305,027  |           |  | $ | 2,418,877  |  
|Estimated earnings                      |  |           | 6,536,314   |           |  |   | 1,556,450  |  
|                                        |  |           |             |           |  |   |            |  
|                                        |  | $         | 20,841,341  |           |  | $ | 3,975,327  |  
|Less: billings to date                  |  |           | (18,006,715 | )         |  |   | (2,495,303 | )
|                                        |  |           |             |           |  |   |            |  
|                                        |  | $         | 2,834,626   |           |  | $ | 1,480,024  |  
|                                        |  |           |             |           |  |   |            |  

Such amounts are included in the following accounts:

|                                                                            |  |           |           |           |  |   |           | 
|--------------------------------------------------------------------------- |  | --------- | --------- | --------- |  | - | --------- | 
|                                                                            |  | March 31, |           | March 31,
|                                                                            |  | 2002      |           | 2001     
|                                                                            |  |           |           |          
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $         | 3,119,691 |           |  | $ | 1,480,024 | 
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |           | (285,065  | )         |  |   | 0         | 
|                                                                            |  |           |           |           |  |   |           | 
|                                                                            |  | $         | 2,834,626 |           |  | $ | 1,480,024 | 
|                                                                            |  |           |           |           |  |   |           | 

Property and Equipment

Property and equipment are stated at cost. Major property additions,
replacements, and improvements are capitalized, while maintenance and repairs
that do not extend the useful lives of these assets are expensed currently.
Depreciation is provided using the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. Estimated service
lives of the principal items of property and equipment range from three to five
years. Total depreciation expense for the years ended March 31, 2002, 2001, and
2000 was $1,591,000, $2,042,000, and $1,991,000, respectively.

The detail of property and equipment is as follows (in thousands):

|                                               |          |   |           |        |      |   |        |        | 
|---------------------------------------------- | -------- | - | --------- | ------ | ---- | - | ------ | ------ | 
|                                               |          |   | March 31,
|                                               |          |   |          
|                                               |          |   | 2002      |        | 2001
|                                               |          |   |           |        |     
|Machinery and equipment                        |          | $ | 6,099     |        |      | $ | 5,726  |       
|Demonstration equipment                        |          |   | 2,988     |        |      |   | 3,458  |       
|Furniture and fixtures                         |          |   | 455       |        |      |   | 422    |       
|Vehicles                                       |          |   | 291       |        |      |   | 303    |       
|Leasehold Improvements                         |          |   | 185       |        |      |   | 179    |       
|                                               |          |   |           |        |      |   |        |       
|                                               | Subtotal |   | $         | 10,018 |      |   | $      | 10,088 | 
|Less accumulated depreciation and amortization |          |   | (8,439    | )      |      |   | (7,441 | )     
|                                               |          |   |           |        |      |   |        |       
|                                               | Net      |   | $         | 1,579  |      |   | $      | 2,647  | 
|                                               |          |   |           |        |      |   |        |       

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Long-Lived Assets

SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When events or changes in
circumstances occur related to long-lived assets, the Company estimates the
future undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. During fiscal years 2002, 2001 and 2000, the Company
performed these analyses due to changes in circumstances for its relating to
its acquisition of certain operating assets from SBS Technologies (ICAT) and
changes in circumstances at its Simtran and Dart subsidiaries and recorded
impairment losses of $971,000, $1,244,000 and $1,944,000, respectively. Having
found no other instances whereby the sum of expected future cash flows
(undiscounted and without interest charges) was less than the carrying value of
the asset, thus requiring the recognition of an impairment loss, management
believes that the other long-lived assets in the accompanying balance sheets
are appropriately valued.

Prior to the adoption of SFAS No. 142 in the first quarter of fiscal year
2003, the Company assessed the carrying value of its goodwill related to the
ICAT acquisition and determined it to have no value as of March 31, 2002.
During the twelve months ended March 31, 2002, the Company recorded an
impairment loss of $971,000 million relating to goodwill that had been recorded
upon acquisition of certain assets from SBS Technologies during fiscal year
1998 and is included in operating expenses in the accompanying statements of
operations.

During the third quarter of fiscal year 2001, management began an
evaluation of the operations of Simtran, in response to Simtrans declining
customer order backlog. As a result of the strategic repositioning plan for
Simtran, management performed an evaluation of the recoverability of the assets
of Simtran by estimating the future undiscounted cash flows expected to result
from future Simtran operations and determined that an impairment of long-lived
assets had occurred. Management then recorded an impairment loss equal to the
difference between the carrying value of the long-lived assets and associated
goodwill of Simtran and the expected discounted future cash flows. An
impairment charge of $1,244,000, comprised of $608,000 of certain fixed assets
and $636,000 of unamortized goodwill was recorded under SFAS No.121 and is
included in operating expenses in the accompanying statements of operations.

During the fiscal year ended March 31, 2000, the Company reviewed the
historical and projected results for its Dart subsidiary, noting that the
division was performing well below the expectations of management and had
experienced recurring operating losses and negative cash flows. As a result of
the changes in operations at the subsidiary, the Company reviewed the goodwill
created as a result of the purchase of Dart for impairment as an event occurred
that may indicate that the carrying amount of the goodwill may not be
recoverable. The Company estimated the future cash flows expected to result
from future Dart operations and determined that the entire amount of the
unamortized goodwill at March 31, 2000, which was associated with this
subsidiary had no value. An impairment charge of $1,944,000 equal to the
unamortized goodwill was recorded under Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and is included in operating
expenses in the accompanying statement of operations for the fiscal year ended
March 31, 2000.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

|                                                    |                           |   |           |       |      |   |       |       | 
|--------------------------------------------------- | ------------------------- | - | --------- | ----- | ---- | - | ----- | ----- | 
|                                                    |                           |   | March 31,
|                                                    |                           |   |          
|                                                    |                           |   | 2002      |       | 2001
|                                                    |                           |   |           |       |     
|Sales commissions, bonuses, and agents commissions |                           | $ | 555       |       |      | $ | 843   |      
|Accrued salaries and related expenses               |                           |   | 1,105     |       |      |   | 894   |      
|Professional fees                                   |                           |   | 2,955     |       |      |   | 414   |      
|Accrued severance costs                             |                           |   | 216       |       |      |   | 23    |      
|Other                                               |                           |   | 222       |       |      |   | 1,721 |      
|                                                    |                           |   |           |       |      |   |       |      
|                                                    | Total accrued liabilities |   | $         | 5,053 |      |   | $     | 3,895 | 
|                                                    |                           |   |           |       |      |   |       |      

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Warranty and Contracts Cost Provision

During the fiscal year ended March 31, 2001, the Company recorded accruals
of approximately $4.2 million associated with the costs to complete the
warranty provisions of certain contracts as well as to accrue for anticipated
losses on existing contracts. These accruals are primarily due to recent
increases in costs associated with the delivery of products. The additional
costs were not originally anticipated at the time the warranty program or
related contracts were entered into. Based on the Companys revised estimates,
the related revenue from these programs is no longer expected to offset the
anticipated expenses. Therefore, an accrual for this loss contingency was made
when the loss was determined and when it was reasonably estimable. During the
fiscal year ended March 31, 2002, $1.5 million of this accrual was consumed
leaving a balance of $2.7 million as of March 31, 2002. During fiscal 2002, the
Company recorded $0.5 million for warranty provisions of certain contracts and
to accrue for losses on existing contracts.

Stock-Based Compensation Plans

The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for
Stock Issued to Employees. The Company has adopted the disclosure option of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires
that companies that do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted.

Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of
SFAS No. 123 (see Note 6).

Research and Development Activities

The Company expenses research and development costs as incurred. Research
and development costs included in the accompanying statements of operations
include salaries, wages, benefits, general and administrative, prototype
equipment, project supplies and other related costs directly associated with
research and development activities.

Advertising Costs

The Company expenses all advertising costs as incurred.

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Financial Instruments

SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the following information about the fair value of
certain financial instruments for which it is practicable to estimate that
value. For purposes of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties other than in a forced sale or
liquidation. The financial instruments of the Company consist primarily of cash
and cash equivalents, accounts receivable, accounts payable and long-term debt
at March 31, 2001 and 2000. The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. In
managements opinion, the carrying amounts of these financial instruments, with
the exception of the long-term debt, approximate their fair values due to the
immediate or short-term maturity of these financial instruments at March 31,
2001 and 2000. A portion of long-term debt bears interest at a fluctuating
rate based on the prime rate. The other portion bears interest at a fixed rate
that is close to this fluctuating rate. The Company therefore believes that
the carrying amount of its long-term debt approximates fair value.

Net Income (Loss) Per Common Share

Net income (loss) per share for the three and twelve months ended March 31, 2002 and 2001 were as follows:
(in thousands, except per share amounts)




|                                                                                               |  |                    |        |                    |  |                     |        |                     |  |   |        |  |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------------ |  | ------------------- | ------ | ------------------- |  | - | ------ |  |  | - | ------- | -
|                                                                                               |  | Three months ended |        | Three months ended |  | Twelve months ended |        | Twelve months ended
|                                                                                               |  | March 31,          |        | March 31,          |  | March 31,           |        | March 31,          
|                                                                                               |  | 2002               |        | 2001               |  | 2002                |        | 2001               
|                                                                                               |  |                    |        |                    |  |                     |        |                    
|                                                                                               |  | (Unaudited)        |        |                    |  | (Unaudited)         |        |                    
|Basic:                                                                                         |  |                    |        |                    |  |                     |        |                     |  |   |        |  |  |   |         |  
|Net income (loss) attributable to common shareholders                                          |  | $                  | 4,336  |                    |  | $                   | 1,234  |                     |  | $ | 4,280  |  |  | $ | (14,108 | )
|Weighted average common shares outstanding                                                     |  |                    | 70,153 |                    |  |                     | 70,061 |                     |  |   | 70,152 |  |  |   | 53,643  |  
|                                                                                               |  |                    |        |                    |  |                     |        |                     |  |   |        |  |  |   |         |  
|Per share amount                                                                               |  | $                  | 0.06   |                    |  | $                   | 0.02   |                     |  | $ | 0.06   |  |  | $ | (0.26   | )
|Diluted:                                                                                       |  |                    |        |                    |  |                     |        |                     |  |   |        |  |  |   |         |  
|Net income (loss) attributable to common shareholders                                          |  | $                  | 4,336  |                    |  | $                   | 1,234  |                     |  | $ | 4,280  |  |  | $ | (14,108 | )
|Weighted average common shares outstanding                                                     |  |                    | 70,153 |                    |  |                     | 70,061 |                     |  |   | 70,152 |  |  |   | 53,643  |  
|Shares assumed issued upon exercise of dilutive
stock options using the treasury stock method  |  |                    | 236    |                    |  |                     | 231    |                     |  |   | 81     |  |  |   | 0       |  
|Shares assumed issued upon exercise of dilutive
stock warrants using the treasury stock method |  |                    | 613    |                    |  |                     | 0      |                     |  |   | 596    |  |  |   | 0       |  
|                                                                                               |  |                    |        |                    |  |                     |        |                     |  |   |        |  |  |   |         |  
|Total                                                                                          |  |                    | 71,002 |                    |  |                     | 70,292 |                     |  |   | 70,829 |  |  |   | 53,643  |  
|                                                                                               |  |                    |        |                    |  |                     |        |                     |  |   |        |  |  |   |         |  
|Per share amount                                                                               |  | $                  | 0.06   |                    |  | $                   | 0.02   |                     |  | $ | 0.06   |  |  | $ | (0.26   | )




Basic and diluted earnings per common share were computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the year. Stock options to purchase 2,519,577 shares of common stock as
well as warrants to purchase 3,246,164 shares of common stock were excluded for
the three months ended March 31, 2002 as they were all anti-dilutive. The
effect of all of the stock options and warrants was excluded for the three and
twelve months ended March 31, 2001 as a loss was recorded and amounts were
anti-dilutive.

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Class B to Class A Common Shares Exchange

On April 24, 1998, 1,694,569 shares of the Companys voting Common Stock
were exchanged by a group of major shareholders managed by Centre Partners
Management, LLC (the Centre Entities) for an equal amount of nonvoting Class
B common stock. In connection with the exchange, the Centre Entities agreed not
to convert the shares of Class B common stock to shares of Common Stock if, as
a result of such conversion, the Centre Entities would hold, of record or
beneficially with power to vote, more than 50% of the shares of Common Stock
outstanding immediately following such conversion, unless concurrently with
such conversion the shares of Common Stock are transferred to an unaffiliated
person. As discussed in Note 5, the Company entered into a Securities Exchange
and Release Agreement with the Centre Entities, which resulted in the release
of the restrictions on the conversion of the Class B to Common Stock. The
Centre Entities then converted all of its shares of Class B common stock to
Common Stock during fiscal year 2001.

Income Taxes

The Company is a C corporation for U.S. federal income tax reporting
purposes and accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes, which requires the use of an asset and liability
method of accounting for deferred income taxes. Under SFAS No. 109, deferred
tax assets or liabilities at the end of each period are determined using the
tax rate expected to apply to taxable income in the period in which the
deferred tax asset or liability is expected to be settled or realized.

New Accounting Pronouncements

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

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

SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill
to be periodically reviewed for impairment rather than amortized, for fiscal
years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets. During fiscal year 2002, the Company analyzed its
remaining balance of goodwill and determined it was fully-impaired. the Company
recorded an impairment loss of $971,000 million relating to goodwill that had
been recorded upon acquisition of certain assets from SBS Technologies during
fiscal year 1998 and is included in operating expenses in the accompanying
statements of operations. The Company will adopt this standard in the first
quarter of fiscal year 2003.

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

In August 2001 the Financial Accounting Standards Board approved Statement
of Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and establishes a
single accounting model for the impairment or disposal of long-lived assets.
The statement supersedes FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
supercedes accounting and reporting under APB Opinion No.

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30 for the disposal of a segment of a business. The statement is
effective for the Companys 2003 fiscal year and is not expected to have a
material effect on its financial position or results of operations.

Use of Estimates and Accruals

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and contingent amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Restructuring Charge

The Company recognized a restructuring charge of $870,000 related to a
workforce reduction and certain other measures implemented to enhance future
profitability in fiscal year 1999. The Company recorded a $143,000 decrease in
operating expenses in fiscal year 2000 as a result of the unused portion of
this accrual.

Employee Benefit Plan

The Company has a defined contribution profit sharing plan (the Plan)
for substantially all company employees. The Plan provides for annual
contributions by the Company at the discretion of the board of directors. The
Plan also contains a 401(k) feature, which allows participants to contribute up
to 15% of their eligible compensation, as defined, and provides for
discretionary employer matching contributions of cash and company stock.
Matching of contributions with Company stock ended in May 2001. Total
contributions by the Company to the Plan were approximately $168,000, $182,000,
and $200,000 for the years ended March 31, 2002, 2001, and 2000, respectively.

Shipping and Handling Expenses

All shipping and handling fees charged to customers are included as a
component of revenues. Shipping and handling costs are included as a part of
the cost of revenues.

Reclassifications

Certain prior period amounts have been reclassified to conform to the
current year presentation.

3. Long-Term Debt

At March 31, 2002 and 2001, long-term debt consisted of the following (in
thousands):

|                             |       |  |        |         |      |  |        |        | 
|---------------------------- | ----- |  | ------ | ------- | ---- |  | ------ | ------ | 
|                             |       |  | 2002   |         | 2001
|                             |       |  |        |         |     
|Working capital  borrowings |       |  | 130    |         |      |  | 200    |       
|Long-term debt  senior      |       |  | 12,000 |         |      |  | 12,000 |       
|Long-term debt  junior      |       |  | 24,765 |         |      |  | 24,765 |       
|Long-term accrued interest   |       |  | 7,025  |         |      |  | 7,025  |       
|                             |       |  |        |         |      |  |       
|                             | Total |  | $      | $43,990 |      |  | $      | 43,990 | 
|                             |       |  |        |         |      |  |       

In August 2000, the Company entered 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

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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 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.

Centre Entities had guaranteed the Revolving promissory note outstanding
at March 31, 2000. Subsequent to March 31, 2000, Centre Entities repaid the
$3,000,000 Revolving promissory note on behalf of the Company in exchange for a
$250,000 funding fee. In August 2000, the Company entered into a Loan Agreement
and Exchange Agreement with Centre Entities (the Centre Loan Agreement).
Under the Centre Loan Agreement, the $3,000,000 balance paid by Centre Entities
on the Revolving Promissory Note, as well as the $250,000 funding fee, was
converted to 1,764,452 shares of Common Stock, 897.397 shares of Series B
mandatory redeemable preferred stock, approximately $504,000 in senior secured
loans, and approximately $966,000 in junior secured loans.

The exchange of the old credit facility and note for the new loans,
preferred stock, and common stock 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). 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. As of March 31, 2002,
approximately $3,512,000 and $2,299,000 of the liability remained and is
included in long-term debt and mandatory redeemable preferred stock,
respectively, on the accompanying balance sheet. The reduction in the liability
allocated to long-term debt and corresponding reduction in interest expense is
shown as noncash reduction of debt restructuring liability on the accompanying
statements of cash flows. Expenses relating to the restructuring, including the
$250,000 funding fee related to the Revolving promissory note, totaled
approximately $656,000 and are included in interest expense in the accompanying
statement of operations for the year ended March 31, 2001.

The New Credit Agreement, which was amended on December 31, 2001 and on
March 29, 2002, includes a senior secured credit line in the amount of
approximately $2,200,000 to support letters of credit and working capital
requirements. As of March 31, 2002, borrowings of $130,000 and irrevocable
standby letters of credit in the principal amount of approximately $548,000 in
connection with the performance of certain sales contracts were outstanding.

On December 31, 2001,
the Company and its lenders amended the New Credit Agreement as
follows:



| |  | The quarterly limitations on Capital Expenditures were removed, but
the full year limitation on Capital Expenditures for Parent 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 Notes.




On March 29, 2002, the Company and its lenders
further amended the New Credit Agreement as follows:






| |  | 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 Notes. The amendment requires
that the Support Letters of Credit Facility be cash-collateralized.
The amendment

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|  |  | 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 Parent 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 Borrower pay an unused
commitment fee with respect to the unused portion of the New Revolving Credit
Commitment of 0.5% per annum.

All borrowings under the amended agreements mature on September 30, 2003.
The senior loans bear interest at prime plus 2%, (6.75% at March 31, 2002),
payable quarterly in cash or by delivery of additional Junior Secured Notes.
The junior loans bear interest at 10%, payable quarterly in cash or in notes
with the same terms, depending on interest coverage ratios, as defined. During
the year ended March 31, 2002, issuing additional notes, which have been
included in the total junior debt amount above, paid approximately $2,634,335
of junior loan interest. As of March 31, 2002, the effective future interest
rate on all borrowings under the new credit agreement was approximately 0.2%.

The borrowings under the old agreement and the New Credit Agreement are
secured by substantially all of the Companys assets, a pledge of all of the
common shares of the operating subsidiary, and a pledge of 65% of the capital
stock of the Companys foreign subsidiaries. The New Credit Agreement also
contains restrictive covenants, which, among other things, limit borrowings and
capital expenditures and require certain interest coverage ratios, as defined,
to be maintained. As of March 31, 2002, the Company was not in compliance with
these covenants. The Company has obtained a waiver from the banks.

4. Mandatory Redeemable Preferred Stock

Series A Preferred Stock

In November 1998, the board of directors created a new class of Series A
preferred stock with 38,000 authorized shares. The Company then entered into a
Securities Purchase Agreement with Centre Entities whereby Centre Entities
purchased, for $3,000,030, securities comprised of Series A preferred stock and
nondetachable warrants to purchase Class B Nonvoting Common Stock with an
exercise price of $1.03. The securities bore dividends at 8% per year and were
subject to mandatory redemption on November 13, 2003. The Company recorded
accretion of the dividends of approximately $110,000, and $254,000 for the
years ended March 31, 2001, and 2000, respectively.

In August 2000, the Company entered into a Securities Exchange and Release
Agreement with Centre Entities. In accordance with the agreement, all shares of
Series A mandatory redeemable preferred stock and related non-detachable
warrants were redeemed for 6,695,212 shares of Common Stock, an amended warrant
to purchase 3,246,164 shares of Common Stock at $1.00 per share, and a new
warrant to purchase 2,000,000 shares of Common Stock at an exercise price of
$0.25 per share. The common stock issued was recorded at the market value at
the time of issuance. The warrants were recorded at fair value of approximately
$613,000 calculated using the Black Scholes method. A gain of approximately
$1,729,000 was recorded on the transaction.

Series B Preferred Stock

In August 2000, the board of directors approved an amendment to the
articles of incorporation to change the number of authorized shares of
preferred stock to 100,000. The board of directors then created a new class of
Series B preferred stock

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with 50,000 authorized shares. Holders of the Series B preferred stock are
entitled to receive cumulative dividends equal to 10% of the liquidation
preference payable quarterly in additional shares of Series B preferred stock.
The preferred stock is subject to mandatory redemption on the later of March
31, 2003 or the latest maturity date of the senior secured debt (see Note 4) at
the liquidation value thereof. The Company issued 21,361.113 shares of Series B
preferred stock with a liquidation value of $1,000 per share (approximately
$21.4 million) in August 2000 in conjunction with its debt restructuring (Note
4). Accretion related to dividends earned during the year ended March 31, 2002
totalled approximately $2,353,000. As discussed in Note 4, this amount was
offset by the reduction in the debt restructuring liability allocated to the
preferred stock, resulting in net accretion of approximately $270,000 for the
year ended March 31, 2002.

5. Stock-Based Compensation Plans

Stock Option Plan

The Company adopted the Firearms Training Systems, Inc. Stock Option Plan
(the Option Plan) in fiscal year 1997. The Company has reserved a total of
7,500,000 shares of Common Stock for issuance under the Option Plan under eight
different nonqualified option series. The Option Plan provides for antidilution
in the event of certain defined circumstances. The Option Plan is administered
by a committee designated by the board of directors of the Company. The price
of options granted is determined at the date of grant.

Series A Options

Options under this series are available for grant to officers and other
employees. During the year ended March 31, 2002, no Series A options were
issued. The options are generally exercisable as follows: (i) 50% on the third
anniversary of the option issue date (the option date), (ii) 25% on the
fourth anniversary of the option date, and (iii) 25% on the fifth anniversary
of the option date. The options expire on the seventh anniversary of the option
date. In the event of termination of the optionees employment for any reason
other than cause (as defined in the Plan) prior to the third anniversary of the
option date, 16.7% of the options shall be exercisable for each anniversary of
the option date prior to the optionees termination date. In the event of
termination of the optionees employment for cause, all of the optionees
outstanding options shall be forfeited.

Series B Options

Options under this series are available for grant to officers and other
employees. During the year ended March 31, 2002, no Series B options were
issued. The options are generally exercisable on the ninth anniversary but are
subject to acceleration based on defined earnings targets. The options expire
after the ninth anniversary of the option date. In the event of termination of
the optionees employment for any reason other than cause (as defined in the
Plan), options shall be exercisable to the extent they are exercisable on the
effective date of the optionees termination. In the event of termination of
the optionees employment for cause, all of the optionees outstanding options
shall be forfeited.

Series C Options

Options under this series are available for grant to nonemployee
directors. During the year ended March 31, 2002, no Series C options were
issued. The options are generally exercisable one-third per year on a
cumulative basis beginning on the first anniversary of the option date. The
options expire on the seventh anniversary of the option date. In the event the
optionee ceases to be a director, options shall be exercisable to the extent
they are exercisable on the effective date the optionee ceases to be a
director.

Series D Options

Options under this series are available for grant to officers and other
employees. During the year ended March 31, 2002, no Series D options were
issued. The options are generally exercisable one-third per year on a
cumulative basis beginning on the

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first anniversary of the option date. The options expire on the seventh
anniversary of the option date. In the event of termination of the optionees
employment for any reason other than cause (as defined in the Plan), options
shall be exercisable to the extent they are exercisable on the effective date
of the optionees termination. In the event of termination of the optionees
employment for cause, all of the optionees outstanding options shall be
forfeited.

Series E Options

Options under this series are available for grant to officers and other
employees. During the year ended March 31, 2002, no Series E options were
issued. The options are generally exercisable one-third on September 30, 2000,
one-third on March 31, 2001 and one-third on September 30, 2001. The options
expire on the seventh anniversary of the option date. In the event of
termination of the optionees employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent they are
exercisable on the effective date of the optionees termination. In the event
of termination of the optionees employment for cause, all of the optionees
outstanding options shall be forfeited.

Series F Options

Options under this series are available for grant to executive officers.
During the year ended March 31, 2002, no Series F options were issued. The
options are generally exercisable one-third per year on a cumulative basis
beginning on the first anniversary of the option date. The options expire on
the seventh anniversary of the option date. In the event of termination of the
optionees employment for any reason other than cause (as defined in the Plan),
options shall be exercisable to the extent they are exercisable on the
effective date of the optionees termination. In the event of termination of
the optionees employment for cause, all of the optionees outstanding options
shall be forfeited.

Series G Options

Options under this series are available for grant to executive officers.
The options are exercisable on a pro-rata basis at the end of the fiscal year
and annually thereafter, beginning March 31, 2001, based on the Company meeting
specific financial performance goals at the end of its fiscal year. The
options expire on the seventh anniversary of the option date. In the event of
termination of the optionees employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent they are
exercisable on the effective date of the optionees termination. In the event
of termination of the optionees employment for cause, all of the optionees
outstanding options shall be forfeited.

During the year ended March 31, 2002, no Series G options were issued and
150,000 Series G options were outstanding. During the year ended March 31,
2001, 390,000 Series G options were issued to executive officers of the Company
with an exercise price of $0.50. Under APB No. 25, the Company is required to
make estimates of the number of shares expected to be earned at the end of each
reporting period. The estimated shares to be earned are multiplied by the
excess, if any, of the fair market value of the common stock at period-end over
the $0.50 exercise price. This amount will be recognized as stock compensation
expense over the performance period. Estimated compensation expense totalled
$652 and $0 during the fiscal years ending March 31, 2002 and March 31, 2001,
respectively.

Series H Options

Options under this series are available for grant to executive officers.
The options are exercisable upon the sale of the Company, with certain
limitations and multipliers based on the fair market value per share sale price
of the Company. The options expire on the seventh anniversary of the option
date. In the event of termination of the optionees employment for any reason
other than cause (as defined in the Plan), options shall be exercisable to the
extent they are exercisable on the effective date of the optionees
termination. In the event of termination of the optionees employment for
cause, all of the optionees outstanding options shall be forfeited.

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During the year ended March 31, 2002, no Series H options were issued
and 390,000 Series H options were outstanding. During the year ended March 31,
2001, 390,000 Series H options were issued to executive officers of the Company
with an exercise price of $0.01. The value of these options computed as the
excess of the fair market value of the common stock over the exercise price
will be recorded at the time the contingency is resolved upon the sale of the
Company.

A summary of changes in outstanding options during the years ended March
31, 2000, 2001, and 2002 is as follows:

|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|---------------------------------- |  | ------- | --------- | -------------- |  | -------------- | ---- |  |  |  | - |  |  | - | ----- |  |  | ---------------- | ---- | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  | Weighted Average
|                                   |  | OPTIONS |           | EXERCISE PRICE |  | Exercise Price
|                                   |  |         |           |                |  |               
|Outstanding, March 31, 1999        |  |         | 2,221,152 |                |  | $              | 0.69 |  |  |  |  |  |  | $ | 14.00 |  |  | $                | 3.65 | 
|Granted                            |  |         | 673,400   |                |  |                | 0.50 |  |  |  |  |  |  |   | 1.00  |  |  |                  | 0.69 | 
|Cancelled                          |  |         | (679,698  | )              |  |                | 0.56 |  |  |  |  |  |  |   | 14.00 |  |  |                  | 3.86 | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|Outstanding, March 31, 2000        |  |         | 2,214,854 |                |  | $              | 0.50 |  |  |  |  |  |  | $ | 12.00 |  |  | $                | 2.82 | 
|Granted                            |  |         | 1,206,900 |                |  |                | 0.01 |  |  |  |  |  |  |   | 0.69  |  |  |                  | 0.35 | 
|Cancelled                          |  |         | (425,069  | )              |  |                | 0.56 |  |  |  |  |  |  |   | 12.00 |  |  |                  | 3.21 | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|Outstanding, March 31, 2001        |  |         | 2,996,685 |                |  | $              | 0.01 |  |  |  |  |  |  | $ | 12.00 |  |  | $                | 1.77 | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|Granted                            |  |         | 0         |                |  |                | 0.00 |  |  |  |  |  |  |   | 0.00  |  |  |                  | 0.00 | 
|Cancelled                          |  |         | (477,108  | )              |  |                | 0.19 |  |  |  |  |  |  |   | 12.00 |  |  |                  | 2.21 | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|Outstanding, March 31, 2002        |  |         | 2,519,577 |                |  | $              | 0.01 |  |  |  |  |  |  | $ | 12.00 |  |  | $                | 1.68 | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|Shares available for future grants |  |         | 4,977,744 |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 
|                                   |  |         |           |                |  |                |      |  |  |  |   |  |  |   |       |  |  |                  |      | 

As of March 31, 2002, 2001, and 2000, options to purchase 2,519,577,
1,057,416, and 810,288 shares, respectively, were exercisable with weighted
averages prices of $1.68, $3.15, and $3.59, respectively.

Grants and cancellations for fiscal year 1999 include 189,950 shares
reissued at a price of $3.253 on December 11, 1998. The options were cancelled
and reissued to certain employees. The Company has elected to account for its
stock-based compensation plans under APB No. 25; however, the Company has
computed for pro forma disclosure purposes the value of all options granted at
March 31, 2002 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following ranges of weighted average assumptions used
for grants:

|                          |  |                      |      |      |  |      |        |   |  |  |        |  
|------------------------- |  | -------------------- | ---- | ---- |  | ---- | ------ | - |  |  | ------ | -
|                          |  | Year ended March 31,
|                          |  | 2002                 |      | 2001 |  | 2000
|                          |  |                      |      |      |  |     
|Risk-free interest rate   |  |                      | 0.00 | %    |  |      | 5.00   | % |  |  | 5.00   | %
|Expected dividend yield   |  |                      | 0    |      |  |      | 0      |   |  |  | 0      |  
|Expected lives (in years) |  |                      | 0.0  |      |  |      | 4.0    |   |  |  | 4.0    |  
|Expected volatility       |  |                      | 0.00 | %    |  |      | 150.00 | % |  |  | 153.20 | %

The total value of options granted during the years ended March 31, 2002,
2001 and 2000 was computed as approximately $0, $194,000, and $340,000,
respectively, which would be amortized on a pro forma basis over the vesting
period of the options. If the Company had accounted for the plan in accordance
with SFAS No. 123, the Companys net income (loss) and net income (loss) per
diluted share for the years ended March 31, 2002, 2001, and 2000 would have
been as follows:




|                                      |  |                      |       |      |  |      |         |   |  |   |         |  
|------------------------------------- |  | -------------------- | ----- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                      |  | Year ended March 31,
|                                      |  | 2002                 |       | 2001 |  | 2000
|                                      |  |                      |       |      |  |     
|Net income (loss)                     |  | $                    | 3,551 |      |  | $    | (16,184 | ) |  | $ | (20,254 | )
|Net income (loss) per share  diluted |  | $                    | 0.05  |      |  | $    | (0.30   | ) |  | $ | (0.98   | )




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The following table sets forth the Companys outstanding options and
options exercisable, including the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date as of March 31, 2002:

|                         |       |            |  |                  |  |                |   |            |  |                |             |           |           |                     |          |     |             |   |          |       |  |  |           |           |  |   |      |       | 
|------------------------ | ----- | ---------- |  | ---------------- |  | -------------- | - | ---------- |  | -------------- | ----------- | --------- | --------- | ------------------- | -------- | --- | ----------- | - | -------- | ----- |  |  | --------- | --------- |  | - | ---- | ----- | 
|OPTIONS OUTSTANDING      |       |            |  |                  |  |                |   |            |  |                |             |           |           | OPTIONS EXERCISABLE
|                         |       |            |  |                  |  | Weighted       |   |            |  |                |             |          
|                         |       |            |  |                  |  |                |   |            |  |                | Outstanding |           | Average   |                     | Weighted |     | Exercisable |   | Weighted
|                         |       |            |  |                  |  |                |   |            |  |                | as of       |           | Remaining |                     | Average  |     | as of       |   | Average 
|Range of Exercise Prices |       | 03/31/2002 |  | Contractual Life |  | Exercise Price |   | 03/31/2002 |  | Exercise Price
|                         |       |            |  |                  |  |                |   |            |  |               
|$                        | 0.01  |            |  |                 |  |                | $ | 1.43       |  |                |             | 1,654,300 |           |                     |          | 7.6 |             |   | $        | 0.49  |  |  |           | 1,007,172 |  |   | $    | 0.67  | 
|                         | 1.44  |            |  |                 |  |                |   | 2.85       |  |                |             | 46,583    |           |                     |          | 6.1 |             |   |          | 1.79  |  |  |           | 46,583    |  |   |      | 1.79  | 
|                         | 2.86  |            |  |                 |  |                |   | 4.28       |  |                |             | 693,427   |           |                     |          | 3.0 |             |   |          | 3.25  |  |  |           | 635,391   |  |   |      | 3.25  | 
|                         | 4.29  |            |  |                 |  |                |   | 5.70       |  |                |             | 16,600    |           |                     |          | 2.8 |             |   |          | 5.19  |  |  |           | 16,600    |  |   |      | 5.19  | 
|                         | 5.71  |            |  |                 |  |                |   | 7.13       |  |                |             | 3,000     |           |                     |          | 2.4 |             |   |          | 7.13  |  |  |           | 3,000     |  |   |      | 7.13  | 
|                         | 7.14  |            |  |                 |  |                |   | 8.55       |  |                |             | 59,733    |           |                     |          | 4.4 |             |   |          | 7.54  |  |  |           | 59,733    |  |   |      | 7.54  | 
|                         | 8.56  |            |  |                 |  |                |   | 9.98       |  |                |             | 100       |           |                     |          | 3.0 |             |   |          | 9.00  |  |  |           | 100       |  |   |      | 9.00  | 
|                         | 11.40 |            |  |                 |  |                |   | 12.83      |  |                |             | 45,834    |           |                     |          | 4.3 |             |   |          | 11.78 |  |  |           | 45,834    |  |   |      | 11.78 | 
|                         |       |            |  |                  |  |                |   |            |  |                |             |           |           |                     |          |     |             |   |          |       |  |  |           |           |  |   |      |      
|                         |       |            |  |                  |  |                |   |            |  |                | 2,519,577   |           |           |                     | 6.1      |     |             | $ | 1.68     |       |  |  | 1,814,413 |           |  | $ | 2.16 |      

Stock Compensation Plan

The Company adopted the Firearms Training Systems, Inc. Employee Stock
Compensation Plan (the Stock Plan) on July 1, 1997. The Company has reserved
a total of 1,000,000 shares of Common Stock for issuance under the Plan. As of
March 31, 2002, 189,733 shares were available for future grant under the Stock
Plan. The Stock Plan provides for antidilution in the event of certain defined
circumstances. Under the Plan, the Company may issue shares of Common Stock for
compensation, including issuances to make Company matching contributions under
the Companys 401(k) Profit Sharing Plan. During the years ended March 31,
2002, 2001, and 2000, the Company issued 68,536, 332,875, and 101,734 shares,
respectively, of Common Stock to the 401(k) Profit Sharing Plan as matching
contributions (Note 3).

During the year ended March 31, 2000, the Company also granted 272,500
shares of restricted stock with a fair value at the date of grant of $0.69 per
share to various employees under the Stock Plan. The shares vest and became
unrestricted 50% on September 30, 2000 and 50% on March 31, 2001. The Company
recorded deferred compensation equal to the fair value of these shares on the
date of grant, which was amortized to expense over the vesting period of the
stock.

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Management Shares Agreement

In September 1996, the Company entered into a management shares agreement
(Management Shares Agreement) with Centre Partners Management LLC, the Centre
Entities and those executive officers who either: (i) have been awarded options
pursuant to the Plan; (ii) have been awarded shares of common stock; or (iii)
have purchased shares of common stock from the Company (the Management
Holders). Pursuant to the Management Shares Agreement, Centre Partners
Management LLC, on behalf of the Centre Entities, has bring along rights,
pursuant to which it has the right to require the Management Holders to sell a
pro rata portion of their shares in connection with a sale to an unaffiliated
third party of 5% or more of the common stock held by the Centre Entities. The
Management Holders have similar tag along rights pursuant to which they can
participate in a sale by the Centre Entities of 5% or more of the outstanding
shares of common stock to an unaffiliated third party. The Centre Entities also
have agreed to assist the Management Holders in registering proportionate
amounts of the common stock held by such Management Holders if the Centre
Entities exercise any rights to register common stock under a registration
rights agreement, which granted Centre Entities certain demand registration
rights exercisable on no more than ten occasions as well as certain piggyback
registration rights. The Management Shares Agreement terminates: (i) with
respect to the Centre Entities, at such time as they hold less than 10% of the
outstanding shares of common stock and (ii) ten years from the date of the
agreement, if not sooner terminated.



|6. |  | Income Taxes
|-- |  | ------------

The significant components of income tax expense are as follows (in thousands):




|         |                                       |   |                      |        |      |   |        |      |   |   |      |        |  
|-------- | ------------------------------------- | - | -------------------- | ------ | ---- | - | ------ | ---- | - | - | ---- | ------ | -
|         |                                       |   | Year ended March 31,
|         |                                       |   | 2002                 |        | 2001 |   | 2000  
|         |                                       |   |                      |        |      |   |       
|         |                                       |   | (unaudited)          |        |      |   |        |      |   |  
|Current: |                                       |   |                      |        |      |   |        |      |   |   |      |       
|         | Federal income tax (benefit)/expense  |   | $                    | (4,851 | )    |   | $      | (999 | ) |   | $    | (3,751 | )
|         | Foreign income tax (benefit)/expense  |   |                      | 130    |      |   |        | 43   |   |   |      | 292    |  
|         | State income tax (benefit)/expense    |   |                      | 0      |      |   |        | 0    |   |   |      | 0      |  
|         | Deferred income tax expense/(benefit) |   |                      | (171   | )    |   |        | (96  | ) |   |      | 2,651  |  
|         |                                       |   |                      |        |      |   |        |      |   |   |      |        |  
|         |                                       | $ | (4,892               | )      |      | $ | (1,052 | )    |   | $ | (808 | )     
|         |                                       |   |                      |        |      |   |        |      |   |   |      |        |  




A reconciliation of recorded income taxes with the amount computed at the
statutory rate is as follows (in thousands):




|                                           |       |   |                      |        |      |   |        |        |   |   |        |      |  
|------------------------------------------ | ----- | - | -------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ---- | -
|                                           |       |   | Year ended March 31,
|                                           |       |   | 2002                 |        | 2001 |   | 2000  
|                                           |       |   |                      |        |      |   |       
|                                           |       |   | (unaudited)          |        |      |   |        |        |   |  
|Tax at statutory rate                      |       | $ | 283                  |        |      | $ | (5,654 | )      |   | $ | (6,631 | )   
|Nondeductible goodwill                     |       |   | 0                    |        |      |   | 22     |        |   |   | 83     |     
|Research and development tax credit        |       |   | 0                    |        |      |   | 0      |        |   |   | (679   | )   
|Foreign sales corporation benefit          |       |   | 0                    |        |      |   | 0      |        |   |   | (188   | )   
|Impairment of nondeductible goodwill       |       |   | 0                    |        |      |   | 216    |        |   |   | 661    |     
|Taxable discount of accretion              |       |   | 108                  |        |      |   | 393    |        |   |   | 0      |     
|Increase (decrease) in valuation allowance |       |   | (5,308               | )      |      |   | 3,904  |        |   |   | 6,207  |     
|Other                                      |       |   | 25                   |        |      |   | 67     |        |   |   | (261   | )   
|                                           |       |   |                      |        |      |   |        |        |   |   |        |     
|                                           | Total |   | $                    | (4,892 | )    |   | $      | (1,052 | ) |   | $      | (808 | )
|                                           |       |   |                      |        |      |   |        |        |   |   |        |     




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The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows (in thousands):

|                                             |                                   |                                          |       |           |       |      |         |   |       |  
|-------------------------------------------- | --------------------------------- | ---------------------------------------- | ----- | --------- | ----- | ---- | ------- | - | ----- | -
|                                             |                                   |                                          |       | March 31,
|                                             |                                   |                                          |       |          
|                                             |                                   |                                          |       | 2002      |       | 2001
|                                             |                                   |                                          |       |           |       |     
|Deferred Tax Assets:                         |                                   |                                          |       |           |       |      |         |  
|Inventory reserves                           |                                   | $                                        | 0     |           |       | $    | 350     |  
|Accrued Liabilities                          |                                   |                                          | 0     |           |       |      | 193     |  
|Warranty and contract costs reserve          |                                   |                                          | 11    |           |       |      | 1,640   |  
|Deferred revenue                             |                                   |                                          | 0     |           |       |      | 412     |  
|Deferred gain on restructuring               |                                   |                                          | 1,366 |           |       |      | 3,992   |  
|Loss on impairment of property and equipment |                                   |                                          | 0     |           |       |      | 319     |  
|Net Domestic operating loss carryforwards    |                                   |                                          | 2,617 |           |       |      | 4,873   |  
|Other                                        |                                   |                                          | 843   |           |       |      | 227     |  
|Valuation allowance                          |                                   |                                          | 0     |           |       |      | (10,621 | )
|                                             |                                   |                                          |       |           |       |      |         |  
|                                             |                                   | Total Gross Deferred Tax Assets          |       | $         | 4,837 |      |         | $ | 1,385 |  
|                                             |                                   |                                          |       |           |       |      |         |  
|Deferred Tax Liabilities:                    |                                   |                                          |       |           |       |      |         |  
|Accelerated Depreciation                     |                                   |                                          | 0     |           |       |      | 36      |  
|Inventory basis differences                  |                                   |                                          | 0     |           |       |      | 1,155   |  
|Other                                        |                                   |                                          | 0     |           |       |      | 417     |  
|                                             |                                   |                                          |       |           |       |      |         |  
|                                             |                                   | Total Gross Deferred Tax Liabilities     |       |           | 0     |      |         |   | 1,608 |  
|                                             |                                   |                                          |       |           |       |      |         |  
|Net Deferred Tax liabilities                 |                                   |                                          | 4,837 |           |       |      | (223    | )
|                                             | Less: Current Deferred Tax Assets |                                          |       | (2,528    | )     |      |         | 0 |      
|                                             |                                   |                                          |       |           |       |      |         |  
|                                             |                                   | Non-current Net Deferred Tax Liabilities |       | $         | 2,309 |      |         | $ | (223  | )
|                                             |                                   |                                          |       |           |       |      |         |  

The debt restructuring completed by the Company in August 2000 resulted in
a gain for tax purposes. However, due to the fact that the sum of all future
principal and interest payments due under the new agreements exceeded the
carrying value of the old debt, no gain was recognized on the transaction for
book purposes in accordance with SFAS 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 by approximately $14.6 million and was
allocated proportionately to the new debt and preferred stock based on their
relative carrying values. During the year ended March 31, 2001, the excess
amount allocated to debt was reduced by approximately $2,049,000, resulting in
a corresponding reduction of interest expense. The excess amount allocated to
preferred stock was reduced by approximately $1,156,000, resulting in a
corresponding reduction of accretion of preferred stock. The deferred tax
asset for the gain related to the cancellation of indebtedness above represents
the difference between the gain recognized for tax purposes and the gain
recognized for book purposes through the reductions in interest expense and
accretion. The taxable discount of accretion included in the rate
reconciliation represents the tax effect of the accretion discount recorded of
$1,156,000.

The Company recorded a federal income tax benefit of $4,879,000 for the
fiscal year ended March 31, 2002 related to the anticipated refund due the
Company for carrybacks of certain net operating losses.

As of March 31, 2002, the Company has available domestic operating loss
carryforwards of approximately $689,000. A valuation allowance is provided when
it is determined that some portion or all of the deferred tax assets may not be
realized. Due to uncertainty of future income, the Company has recorded a
valuation allowance for the entire amount of deferred tax assets attributable
to the operating loss carryforwards as well as for the amount of deferred tax
assets created as a result of temporary differences between book and tax. The
domestic operating losses expire in 2021 and 2022.

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|7. |  | Concentration of Revenues
|-- |  | -------------------------

For the years ended March 31, 2002, 2001, and 2000, the Companys five
largest customers accounted for approximately 40.0%, 34.9% and 58.2% of the
Companys total revenues, respectively. For any period, a major customer is
defined as a customer from whom the Company generated more than 10% of its
revenues for that period. For the fiscal year ended March 31, 2002, two
customers accounted for more than 10% of the Companys revenues. The following
table summarizes information about the Companys major customers for the year
ended March 31, 2002, 2001 and 2000:

|     |  |                                                       |  |           |        |          |  |  |      |  
|---- |  | ----------------------------------------------------- |  | --------- | ------ | -------- |  |  | ---- | -
|     |  |                                                       |  | Aggregate |        | Percent 
|     |  |                                                       |  | Revenues  |        | of Total
|Year |  | Major Customers                                       |  | (000s)    |        | Revenues
|     |  |                                                       |  |           |        |         
|2002 |  | Public Works and Government Services Center of Canada |  | $         | 7,768  |          |  |  | 13.2 | %
|     |  | Defense Threat Reduction Agency                       |  |           | 5,990  |          |  |  | 10.1 | %
|     |  |                                                       |  |           |        |          |  |  |      |  
|2001 |  | None                                                  |  |           | 0      |          |  |  | 0.0  | %
|     |  |                                                       |  |           |        |          |  |  |      |  
|2000 |  | Canadian Department of National Defence               |  | $         | 10,791 |          |  |  | 27.7 | %
|     |  | The Australian Army                                   |  |           | 5,295  |          |  |  | 13.6 | %

As of March 31, 2002, the Company had three customers that comprised
approximately 22.8%, 20.5% and 10.0% of total accounts receivable. As of March
31, 2001, the Company had two customers that comprised approximately 20.0% and
13.9% of total accounts receivable.

Given the nature of the Companys contracts, revenues attributable to
specific customers are likely to vary from year to year, and a significant
customer in one year may not be a significant customer in a subsequent year. In
order to reach its growth objectives, the Company will be required to seek
contracts from new domestic and international customers as well as orders from
existing customers for additional types of simulated firearms or increased
quantities of previously ordered systems and simulated weapons. A significant
decrease in demand by or the loss of one or more significant customers could
have a material adverse effect on the Companys results of operations or
financial condition.

The type of government contracts awarded to the Company in the future may
affect its financial performance. A number of the Companys contracts have been
obtained on a sole-source basis, while others were obtained through a
competitive bidding process. The extent to which the Companys contracts and
orders are obtained through a competitive bidding process rather than as
sole-source contracts may affect the Companys profit margins. The contracts
obtained by the Company in the future may also be cost reimbursement-type
contracts rather than fixed-price contracts, which may not take into account
certain costs of the Company such as interest on indebtedness. There can be no
assurance that changes in the type of government contracts and other contracts
entered into by the Company in the future will not have a material adverse
effect on future results of operations or financial condition of the Company.

A significant portion of the Companys sales is made to customers located
outside the U.S., primarily in Canada, Europe and Asia. In fiscal 2002, 2001,
and 2000, 40.1%, 52.7%, and 70.5%, respectively, of the Companys revenues were
derived from sales to customers located outside the United States. The Company
expects that its international customers will continue to account for a
substantial portion of its revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations and changes in
import/export regulations and tariff rates. In addition, various forms of
protectionist trade legislation have been, and in the future may be, proposed
in the U.S. and certain other countries. Any resulting changes in current
tariff structures or other trade and monetary policies could adversely affect
the Companys sales to international customers. The Company with respect to
certain of the markets in which it competes has identified political and
economic factors. There can be no assurance that these factors will not result
in defaults by customers in making payments due to the Company, in reductions
in the purchases of the Companys products by international customers or in
foreign currency exchange losses. In certain cases, the Company has reduced
certain of the risks associated with international contracts by obtaining bank
letters of credit to support the payment obligations of its customers and/or by
providing in its contracts for payment in U.S. dollars.

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|8. |  | Net Loss Per Common Share
|-- |  | -------------------------

Net loss per share at March 31, 2002, 2001, and 2000 were as follows (in
thousands except per share amounts):




|                                                      |  |             |        |      |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | 2002        |        | 2001 |  | 2000
|                                                      |  |             |        |      |  |     
|                                                      |  | (unaudited) |        |      |  |      |         |   |  |  
|Basic:                                                |  |             |        |      |  |      |         |   |  |   |         |  
|Net income (loss) attributable to common shareholders |  | $           | 4,336  |      |  | $    | (14,108 | ) |  | $ | (18,902 | )
|Weighted average common shares outstanding            |  |             | 70,152 |      |  |      | 53,643  |   |  |   | 20,760  |  
|                                                      |  |             |        |      |  |      |         |   |  |   |         |  
|Per share amount                                      |  | $           | 0.06   |      |  | $    | (0.26   | ) |  | $ | (0.91   | )
|Diluted:                                              |  |             |        |      |  |      |         |   |  |   |         |  
|Net income (loss) attributable to common shareholders |  | $           | 4,336  |      |  | $    | (14,108 | ) |  | $ | (18,902 | )
|Weighted average common shares outstanding            |  |             | 70,829 |      |  |      | 53,643  |   |  |   | 20,760  |  
|                                                      |  |             |        |      |  |      |         |   |  |   |         |  
|Per share amount                                      |  | $           | 0.06   |      |  | $    | (0.26   | ) |  | $ | (0.91   | )




Basic and diluted earnings per common share were computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the year. The effect of stock options and warrants was excluded in all
of the years presented above as a loss was recorded and amounts were
antidilutive.



|9. |  | 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
are performed on an hourly basis, plus out-of-pocket expenses, and the Company
is billed accordingly. Since May 16, 2001, Mr. Sugarman has served as Interim
Chief Executive Officer and President of the Company and on May 20, 2002, Mr.
Sugarman assumed additional duties as interim Chief Operating Officer of the
Company. The Company incurred consulting fees of
$390,000 and $221,000, plus expenses of $72,000 and $51,000, for consulting
services under the agreement for the fiscal years 2002 and 2001, respectively.
As of March 31, 2002, approximately $49,000 is due to the consulting company
and is included in accrued liabilities of the accompanying balance sheet.



|10. |  | Commitments and Contingencies
|--- |  | -----------------------------

Operating Leases

The Company leases its manufacturing and operating facilities and office
equipment under operating leases with terms in excess of one year. Rental
expense under noncancellable operating leases was approximately $967,000,
$1,001,000, and $942,000 for the years ended March 31, 2002, 2001, and 2000,
respectively.

At March 31, 2002, future minimum payments under noncancellable operating
leases were as follows (in thousands):

|           |  |   |       | 
|---------- |  | - | ----- | 
|2003       |  |   | 948   | 
|2004       |  |   | 839   | 
|2005       |  |   | 785   | 
|2006       |  |   | 728   | 
|2007       |  |   | 714   | 
|Thereafter |  |   | 420   | 
|           |  |   |       | 
|           |  | $ | 4,434 | 
|           |  |   |       | 

Page F-23



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##### Table of Contents



Government Agency Review

The Company is subject to review and regulation by various government
agencies as a result of the nature of its business involving the import and
export of firearms.

Employment Agreements

In September 1996, the Company entered into an employment agreement with
Mr. Peter A. Marino, its President, Chief Executive Officer (CEO) and Director.
As noted in the Companys Form 8-K dated September 15, 1999, in agreement with
the Board of Directors, Mr. Marino retired from his position as President and
CEO effective September 30, 1999. Mr. Marino received severance payments
totalling approximately $460,000 during the fiscal year ended March 31, 2001,
which included a lump-sum payment for the remainder of the agreement, all of
which had been accrued for as of March 31, 2000; there is no severance payment
liability remaining regarding Mr. Marinos employment agreement on the
accompanying balance sheet as of March 31, 2001. Also, the terms of all vested
options held by the officer as of his termination date were amended to extend
the exercise period until December 29, 2001. This amendment to the option terms
created a new measurement date under APB No. 25. However, due to the fact that
the market value of the Companys stock was below the exercise prices of the
options as of the amendment date, no compensation expense has been recognized.

Mr. Robert F. Mecredy, the Companys Executive Vice President, assumed
responsibilities as President and CEO as of October 1, 1999. On November 1,
2000, the Company entered into an employment agreement with Mr. Mecredy for a
period of three years retroactive to April 1, 2000. On May 18, 2001, Robert F.
Mecredy tendered his resignation from his positions of President, Chief
Executive Officer, and Director of the Company (Note 13). Mr. Mecredy received
severance payments totalling approximately $73,000 during the fiscal year ended
March 31, 2002

In March 1999, the Company entered into an employment agreement with its
Chief Financial Officer; this contract was amended on February 18, 2000 to
extend the agreement by a period of one year. On November 1, 2000, this
contract was extended for a period of three years retroactive to October 1,
2000. All other terms and conditions of the agreement remain in effect. The
amount of this contract is not material to the Companys financial position.

Legal

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.

See 12.
Subsequent Events.



|11. |  | Industry Segment and Geographic Information
|--- |  | -------------------------------------------

The Company operates in one industry segment  the manufacture, sale and
service of small and supporting arms training simulators. The Company sells its
products throughout the world. Export sales are handled through the operating
subsidiary and, to a lesser extent, through certain of the Subsidiaries.
Geographic financial information on international sales is as follows (in
thousands):
Page F-24Table of Contents

|                     |       |      |                      |        |  |      |       |        |  |   |        |        | 
|-------------------- | ----- | ---- | -------------------- | ------ |  | ---- | ----- | ------ |  | - | ------ | ------ | 
|                     |       |      | Year ended March 31,
|                     |       |      |                     
|International sales: |       | 2002 |                      | 2001   |  | 2000
|                     |       |      |                      |        |  |     
|Europe               |       | $    | 5,498                |        |  | $    | 9,149 |        |  | $ | 8,044  |       
|Asia                 |       |      | 2,630                |        |  |      | 2,629 |        |  |   | 3,007  |       
|Canada               |       |      | 11,486               |        |  |      | 5,705 |        |  |   | 10,790 |       
|Australia            |       |      | 1,156                |        |  |      | 1,773 |        |  |   | 5,296  |       
|Other                |       |      | 3,039                |        |  |      | 2,619 |        |  |   | 282    |       
|                     |       |      |                      |        |  |      |       |        |  |   |        |       
|                     | Total |      | $                    | 23,809 |  |      | $     | 21,875 |  |   | $      | 27,419 | 
|                     |       |      |                      |        |  |      |       |        |  |   |        |       

As of March 31, 2002, the Company had property and equipment, net of
approximately $1,346,000 in the United States and $233,000 at its subsidiaries
in foreign countries.



|12. |  | Subsequent Events
|--- |  | -----------------

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 is in the process of conducting an investigation into
this matter and intends to file the formal report with the ATF and local law
enforcement authorities as soon as the investigation is completed. 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.

Page F-25



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VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 2002 (UNAUDITED), 2001, AND 2000

|                                  |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |       | 
|--------------------------------- | ------------------------------- |  | ---------- | ----- | ---------- |  | ---------- | ----- | ------ |  | ---------- | ----- | --- |  | - | ----- | 
|                                  |                                 |  |            |       |            |  | Additions  |       |        |  |            |       |     |  |  
|                                  |                                 |  | Balance at |       | Charged to |  |            |       |        |  | Balance at
|                                  |                                 |  | Beginning  |       | Costs and  |  |            |       |        |  | End of    
|                                  |                                 |  | of Period  |       | Expenses   |  | Deductions |       | Period
|                                  |                                 |  |            |       |            |  |            |       |       
|Fiscal year ended March 31, 2002: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Allowance for doubtful accounts |  | $          | 359   |            |  | $          | 22    |        |  | $          | 29    |     |  | $ | 352   | 
|Fiscal year ended March 31, 2001: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Allowance for doubtful accounts |  |            | 215   |            |  |            | 150   |        |  |            | 6     |     |  |   | 359   | 
|Fiscal year ended March 31, 2000: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Allowance for doubtful accounts |  |            | 228   |            |  |            | 15    |        |  |            | 28    |     |  |   | 215   | 
|Fiscal year ended March 31, 2000: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Restructuring reserve           |  | $          | 318   |            |  | $          | (143  | )(2)   |  | $          | 175   | (1) |  | $ | 0     | 
|Fiscal
year ended March 31, 1999: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Restructuring reserve           |  | $          | 0     |            |  | $          | 870   | (2)    |  | $          | 552   | (1) |  | $ | 318   | 
|Fiscal year ended March 31, 2002: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Inventory Reserve               |  | $          | 1,028 |            |  | $          | 3,476 |        |  | $          | 984   |     |  | $ | 3,520 | 
|Fiscal year ended March 31, 2001: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Inventory Reserve               |  |            | 1,024 |            |  |            | 28    |        |  |            | 24    |     |  |   | 1,028 | 
|Fiscal year ended March 31, 2000: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Inventory Reserve               |  |            | 1,024 |            |  |            | 0     |        |  |            | 0     |     |  |   | 1,024 | 
|Fiscal year ended March 31, 2002: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Contract Cost Provision Reserve |  | $          | 4,013 |            |  | $          | 514   |        |  | $          | 1,352 |     |  | $ | 3,175 | 
|Fiscal year ended March 31, 2001: |                                 |  |            |       |            |  |            |       |        |  |            |       |     |  |   |      
|                                  | Contract Cost Provision Reserve |  |            | 0     |            |  |            | 4,013 |        |  |            | 0     |     |  |   | 4,013 | 



|(1) |  | Represents amounts charged against the restructuring reserve.                        
|--- |  | -------------------------------------------------------------------------------------
|   
|(2) |  | Represents removal of remaining reserve not considered necessary as of March 31, 2000

Page F-26



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##### Table of Contents






SIGNATURES




Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunder duly authorized, in the City of
Suwanee, State of Georgia on July 16, 2002.

| |  |                                                                                                                               |  |                    | 
| |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | 
| |  | FIREARMS TRAINING SYSTEMS, INC.                                                                                              
|
| |  | By:                                                                                                                           |  | /S/ Randy Sugarman
| |  |                                                                                                                               |  |                   
| |  |                                                                                                                               |  | Randy Sugarman    
| |  | Interim President and Chief Executive Officer andChairman of the Board of Directors and Director(Principal Executive Officer)




POWER OF ATTORNEY AND SIGNATURES

Each person whose signature appears below constitutes and appoints Randy
Sugarman and John A. Morelli each of them singly, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them, for him and his name, place and stead, and in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K of Firearms Training Systems, Inc., and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or any of their substitutes may lawfully do or cause to
be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.




|                    |  |                                                                                                           |  |              
|------------------- |  | --------------------------------------------------------------------------------------------------------- |  | -------------
|Signatures          |  | Title                                                                                                     |  | Date         
|                    |  |                                                                                                           |  |              
|                   
|*Randy Sugarman     |  | Chairman of the Board and Director
Interim President, Chief Executive Officer and
Chief Operating Officer |  | July 16, 2002
|                   
|*John A. Morelli    |  | Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)                        |  | July 16, 2002
|                   
|*William J. Bratton |  | Director                                                                                                  |  | July 16, 2002
|                   
|*Mary Ann Gilleece  |  | Director                                                                                                  |  | July 16, 2002
|                   
|*Ronavan Mohling    |  | Director                                                                                                  |  | July 16, 2002
|                   
|*Scott Perekslis    |  | Director                                                                                                  |  | July 16, 2002
|                   
|*Ron Whitaker       |  | Director                                                                                                  |  | July 16, 2002