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                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549

                            ------------------------
                                   FORM 10-K
                            ------------------------

<TABLE>
<C>               <S>
   (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, 1999
                                               OR
      [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                         COMMISSION FILE NUMBER 0-21773

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

<TABLE>
<S>                                                    <C>
                      DELAWARE                                              57-0777018
           (State or other jurisdiction of                     (I.R.S. Employer Identification No.)
           incorporation or organization)
</TABLE>

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

     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 ____________.

     Aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 12, 1999: $8,149,722 (based on 9,313,968 shares of
non-affiliates Class A Common Stock outstanding at $.875 per share; the last
sale price on The Nasdaq Small Cap on July 12, 1999)

     At July 12, 1999, there were issued and outstanding 19,043,576 shares of
Class A Common Stock, par value $0.000006 per share and there were issued and
outstanding 1,694,569 shares of Class B nonvoting Common Stock, par value
$0.000006 per share

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders, to be filed with the Commission, are incorporated by
reference into Part III hereof.
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<PAGE>   2

                                     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

GENERAL

     The Company is the leading worldwide producer of interactive simulation
systems designed to provide training in the handling and use of small and
supporting arms. The Company offers a broad array of cost-effective training
systems ranging from small arms trainers for rifles, pistols and handguns to
highly sophisticated, large caliber weapons training systems for tanks, armored
personnel carriers and artillery. Unlike traditional live firing ranges, the
Company's simulation systems enable users to train in highly realistic
situations through the integration of video and digitized projected imagery and
modified, laser-emitting gunnery systems that retain the fit, function and feel
of the original weapon. Utilizing internally developed proprietary software and
sensors incorporated into the simulated weapons, the Company's systems offer
real-time feedback and evaluation with respect to a number of performance
measures such as accuracy, reaction time, situational judgment and other
important elements of weapons handling. In addition, the Company's simulation
systems offer significant improvements in safety as well as many other benefits
to customers that cannot be attained in live weapons practice, including
reductions in ammunition consumption, weaponry wear, trainee transport and range
maintenance costs and environmental remediation expenses.

     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, located in Montreal, Canada. Simtran has
contracts to develop and deliver three unique products: an air defense missile
trainer; an appended armored vehicle crew trainer; and a stand-alone armored
vehicle crew trainer. Another subsidiary of the Company is Dart International,
Inc. ("Dart"), a Colorado-based hunter/sports simulation company, that focuses
on firearms and archery simulation systems to support commercial firearms and
archery dealers, hunters, and sports enthusiast. Other smaller subsidiaries
located in the U.K., the Netherlands and Australia provide sales, service and
limited manufacturing support.

     To date the Company has sold more than 3,300 simulation systems in the U.S.
and over 32 other countries. Although the Company is unaware of any independent
third party industry statistics, the Company believes, based on its monitoring
of the market, that its systems sold to date represent a substantial majority of
the worldwide installed base of interactive small and supporting arms simulation
systems purchased by military and law enforcement agencies. Management believes
that the Company's success to date has been due primarily to the proven quality
and cost-effectiveness of the Company's products, its premier FATS(R) brand
name, its strong long-term relationships with its customers, its ability to
provide innovative customized training solutions on a timely basis, its
extensive inventory of proven weapons and scenarios, its ability to integrate
advanced technologies and its team of recognized subject matter experts. As of
March 31, 1999, the Company had a backlog of approximately $28.0 million from
all customers.

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HISTORY

     The Company was incorporated in 1984 and was a wholly owned subsidiary of
THIN International N.V., a Netherlands Antilles corporation ("THIN
International"), until July 31, 1996. At that time, the Company consummated a
set of transactions (the "Recapitalization") pursuant to a Recapitalization and
Stock Purchase and Sale Agreement among the Company, THIN International, Centre
Partners Management LLC ("Centre Management"), and a group of entities managed
by Centre Management (the "Centre Entities"). As part of the Recapitalization,
the Company (i) effected a 100,000-for-one stock split with respect to its
common stock, (ii) issued common stock to the Centre Entities for cash, (iii)
issued certain senior subordinated bridge notes (the "Bridge Notes") and agreed
to deliver under certain circumstances warrants to purchase common stock of the
Company (the "Warrants"), (iv) entered into a new credit agreement (the
"NationsBank Credit Agreement") with NationsBank, N.A. (South) ("NationsBank")
and certain other lenders providing for certain credit facilities (the "Senior
Bank Debt"), pursuant to which it borrowed $76 million, and (v) repurchased
certain shares of common stock owned by THIN International and agreed to make an
additional contingent payment (the "Contingent Payment") upon the occurrence of
certain events. Also in connection with the Recapitalization, the Company sold
certain shares of common stock and granted certain options to members of the
Company's management. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General -- Recapitalization."

     In November 1996, the Company completed an initial public offering,
pursuant to which it offered and sold 6,000,000 shares of its common stock (the
"Offering"). The Company used approximately $75.3 million in net proceeds from
the Offering (i) to repay the Bridge Notes, (ii) to make the Contingent Payment,
(iii) to reacquire the Warrants, and (iv) to reduce the amount then outstanding
under the Senior Bank Debt. Following consummation of the Offering, the Centre
Entities owned or had control over approximately 54.7% and THIN International
owned approximately 14.5% of the outstanding shares of Class A Common Stock (the
"Common Stock").

     In fiscal 1997, the Company completed a reorganization into a holding
company structure (the "Drop Down Transaction"), with the Company owning 100% of
the outstanding capital stock of a newly-formed subsidiary, FATS, Inc., a
Delaware corporation (the "Drop Down Subsidiary" or "FATS") which is now the
primary operating company. The Company has pledged all of the shares of capital
stock of the Drop Down Subsidiary as security for the repayment of the
obligations under the NationsBank Credit Agreement. The financial statements of
the Company are prepared and presented on a consolidated basis and the
discussions in this report reflect the operations of the Company and it
subsidiaries.

     On April 24, 1998, 1,694,569 shares of the Company's voting Class A Common
Stock were exchanged by the Centre Entities for an equal amount of non-voting
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 Class A
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
Class A Common Stock outstanding immediately following such conversion, unless
concurrently with such conversion the shares of Class A Common Stock are
transferred to an unaffiliated person.

     On November 13, 1998, the Company and the Lenders amended the NationsBank
Credit Agreement (the "Agreement") to provide among other things for an
immediate capital investment of $3,000,030 by affiliates of Center Partners
Management, LLC on the following terms: The Company entered into a Securities
Purchase Agreement 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. (the "Centre Investors") whereby the Centre
Investors, for $3,000,030, purchased 18,182 units of a security comprised of
18,182 shares of Series A Preferred Stock (the "Preferred Stock") and an
aggregated 2,909,120 non-detachable warrants to purchase Class B Non-Voting
Common Stock ("Class B Stock") with an exercise price of $1.03125. Each unit of
the security includes one share of Preferred Stock and 160 warrants, and the
security bears a dividend of 8% per annum payable quarterly in additional units
of the security. The warrants in a unit can be exercised by tendering one share
of Preferred Stock, and the Preferred Stock is subject to

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mandatory redemption on November 13, 2003 at the liquidation value thereof. It
is also subject to redemption at the option of the holder in the event of change
of control of the Company as defined.

INDUSTRY OVERVIEW

     The Company has helped to revolutionize small and supporting arms training
through the introduction of cost-effective and realistic interactive simulation.
For decades, military and law enforcement organizations have trained personnel
on firing ranges with targets that are static or have limited motion
capabilities. This approach neither accurately replicates the hostile situations
armed personnel are likely to face nor fully develops tactical skills and
individual judgment. Despite efforts by law enforcement agencies to add
"aggressor" and "friendly" targets to evaluate the judgment of their trainees,
live fire training remains limited in its ability to replicate real-life
situations. Simulation systems not only provide solutions to these issues but
also offer significant improvements in safety and many other benefits that
cannot be attained in live weapons practice, including reductions in ammunition
consumption, weaponry wear, trainee transport and range maintenance costs.
Furthermore, many law enforcement agencies have begun to adopt simulation
systems based in part on their concern over the increasing number of liability
lawsuits relating to alleged uses of excessive force. As a result, military and
law enforcement organizations are allocating greater portions of their training
budgets to small and supporting arms simulation training. Concern for the safe
use of firearms by sports advocates has provided opportunity for expanded
application in the commercial sector.

     In addition to the increased demand for more realistic training, management
believes the development of the small arms simulation industry has benefited
from two trends: (i) increasing pressure on budgets, and (ii) rapidly advancing
computer and imaging technology. Faced with declining budgets, many military and
law enforcement agencies are adopting interactive small and supporting arms
simulation as a means of reducing costs while maintaining training
effectiveness. In addition, firearms simulators help customers reduce costs
associated with environmental compliance requirements such as the removal from
target ranges of lead deposits caused by the use of live ammunition. At the same
time, advances in computing power and speed coupled with advances in high
resolution graphics and video technology have made it possible to create highly
realistic and cost-effective simulators. The improved fidelity and diagnostic
capability of current simulators permit military and law enforcement agencies to
improve the quality of firearms training at a substantially lower cost than live
fire training.

     The interactive small and supporting arms simulation industry is supporting
a traditional and consistent practical need in military and law enforcement
organizations, and the Company believes that the global business opportunities
remain due to the benefits of and demand for simulation products. Moreover,
management believes the trends favoring increased reliance upon simulation in
the U.S. can also be identified abroad in military and law enforcement agencies
in other countries, generally centralized to a greater extent than in the U.S.,
and facing increasingly restrictive budgets.

     Sales to U.S. and international governmental agencies are subject to
numerous and changing regulations and budgetary processes that could have a
material adverse effect on the Company's future results of operations and
financial condition. See "-- Customers" and "-- Government Contracts and
Regulation."

PRODUCTS

     The Company offers a variety of innovative products to meet the specific
firearms training needs of its customers. Customers typically purchase a system
comprised of a simulator, simulated firearms, scenarios and software. The
Company's systems sell for prices from approximately $30,000 for low-end systems
with a basic complement of simulated firearms and scenarios to over $500,000 for
high-end systems with an extensive set of simulated firearms and scenarios and
auxiliary equipment. The Company also sells additional simulated firearms and
accessories to customers as add-ons to basic systems at prices ranging from
approximately $1,000 to $60,000.

     Simulators.  The Company continues to enhance its major simulator product
lines, which encompass Military Small Arms Trainers, Indirect Fire Trainers, Law
Enforcement Firearms Trainers, Sportsman Firearms Trainers, Ground/Air Missile
Defense Trainers, Naval Shipboard Small Arms Trainers, Live Fire
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Trainers, and Urban Team Engagement Trainers. Essential to the long-term success
of these varied product lines has been the Company's focus on standardizing
hardware, software, manufacturing processes, and logistics components and
processes across multiple simulator products lines. For example, the Company's
training simulators typically combine a standard set of system elements
including the primary simulation computer, instructor control computer or
control device, image generator, laser hit location detection system, video
projector(s), large display screen(s) (ranging from 10-30 feet wide) and a
variety of visual image storage and delivery media.

     In FATS direct fire trainers, the user of the simulator trains using FATS
high-fidelity simulated firearms, which fire a laser beam at targets within a
highly realistic training scenario appearing on a large projection screen. The
simulator processes data provided by the laser hit location detection system and
sensors integrated into the simulated weapon to provide the instructor and
trainee real-time performance feedback. In addition, the instructor can replay
various parts of the training exercise with the trainee for detailed analysis of
the trainee's performance, including the trainee's accuracy, reaction time,
judgment and other aspects of weapon handling. Certain of the Company's
simulators support training of up to 15 individuals simultaneously on the same
system. Multiple simulators can be networked and train together using High Level
Architecture (HLA). In addition, the simulators can be programmed to replicate a
wide variety of real-life situations, including situations in which outcomes
depend upon the user's reactions as well as situations in which the user faces
unexpected events such as the malfunction of the firearm.

     Simulated Firearms.  The Company offers a wide variety of weapon types for
use on the simulators including revolvers, semi-automatic pistols, shotguns,
semi-automatic and burst/automatic rifles, submachine guns, machine guns,
anti-armor rocket launchers, grenade launchers, cannons, mortars and archery
bows. The Company also continues to enhance the weapon interface configurations
including: (i) system controlled weapons, which include a wide range of sensors
and system interfaces to provide maximum control and diagnostics by the system,
(ii) wireless backpack weapons, which provide the functionality of the system
controlled weapons while communicating with the system via an untethered radio
frequency (RF) link to provide trainees with maximum degree of movement
flexibility, (iii) standalone wireless weapons, which consist of a laser insert
that the user can add to his live weapon to train on the system (without
enhanced diagnostics of the system controlled weapons), and (iv) live fire
weapons. The Company works closely with its customers to offer a diverse range
of specially modified or custom fabricated simulated firearms which accurately
replicate the fit, function and feel of the original firearm in all material
respects. The Company believes it is critical that its simulated weapons have
the same physical functions and operational characteristics as the actual
firearm such as weight, timing of fire, recoil, potential for weapon malfunction
and loading and reloading procedures. A typical simulated firearm will include
infra-red laser, air/gas piston actuator valves, several types of electronic
sensors, a localized computer controller, specialized recoil buffers, air/gas
lines, ports and wiring. Based on customer requirements, the Company can modify
actual weapons into simulated firearms or can manufacture simulated firearms
from raw materials. The majority of simulated firearms sold to U.S military and
law enforcement customers are modified from actual firearms or assembled from
weapon kits purchased from third party suppliers, which many international
military customers provide their own firearms for the Company to convert into
training devices. The Company's simulated firearms are designed for an extended
life-cycle with maximum reliability and realism.

     Scenarios and Software.  The Company offers a wide range of training modes
including Marksmanship Training Mode, Judgmental Video Training Mode, CGI
Collective Training Mode, Indirect Fire Training Mode, Live Fire Training Mode
and Urban Team Engagement Training Mode. The Company's simulators are designed
to use different combinations of these training modes as dictated by customer
training needs. As such, the scenarios and software associated with these
training modes are self-contained and modular to provide maximum training
flexibility to the customer. The Company offers a library of more that 1,000
scenarios and marksmanship courses, as well as an extensive library of digital
scenes and targets designed for various markets. The Company's software programs
combine video, graphics and computer-generated imagery into a versatile
simulation package. The instructor can use the program to employ existing, new
or modified training materials to monitor performance of the user in a broad
range of training situations. The existing library of materials provides a wide
array of situations to be presented for training or mission rehearsal. The

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Company has collected and offers training materials which can exercise the total
spectrum of infantry and indirect fire weapons. Additionally, training materials
are available to support the entire range of the law enforcement force continuum
including physical presence, verbal commands, chemical suppressants, impact
weapons and deadly force. The Company often works with customers to develop
custom materials that meet unique requirements and to provide them with the
ability to develop their own materials. The software program and built in
authoring tools provide the customer with the ability to capture real world
environments in video or computer generated imagery, convert that material into
a training or testing medium, present the material with the simulator, and
evaluate the performance of trainees during the conduct of selected exercises.

     Auxiliary Equipment.  The Company manufactures a wide range of optional
auxiliary equipment which enhances the realism of the training scenarios.
Options include: (i) enemy shootback, which simulates return fire from the
target and has the ability to disable a trainee's training weapon; (ii) night
vision adapter, which can simulate night training using the standard library of
daytime scenarios in conjunction with standard night vision goggles; (iii)
less-than-lethal law enforcement options such as baton simulation, pepper spray
training devices and blank firing weapons; (iv) classroom trainers, in which a
personal computer and software are added to the system so that as many as 32
students, each with a personal keypad, can participate in interactive training,
(v) indirect fire training options such as laser rangefinders, laser
designators, and binoculars, (vi) urban team engagement training options such as
synchronized video across multiple rooms, trainee position tracking, and
advanced shootback capability, and (vii) video training mode options such as
flashlights.

     Simtran.  Simtran has developed and delivered three unique products: a hand
held/shoulder launched anti-armor missile trainers (EVIGS/TVIGS); a stand-alone
classroom armored vehicle crew trainer (CCGT); and an air defense crew missile
trainer (JDT). A fourth product under development, an appended armored vehicle
crew trainer is scheduled for delivery in 1999. Additionally, Simtran is under
contract to upgrade the EVIGS system to include thermal imagery. Simtran
utilizes COTS components and state of the art technology to develop, manufacture
and sustain high fidelity training simulation solutions for its customers. Each
system is tailored to the customer's needs and training requirements. Like it's
parent company, Simtran utilizes the partnering/team approach with the customer
to assure training realism and fidelity of the system.

     Simtran's primary focus is on heavy weapons/systems for the military.
Simtran provides complete solutions to training requirements from the system to
scenarios. Scenarios are developed and tailored to the customer and are provided
in the medium (interactive video, CGI, Dynamic CGI) requested. Simtran's
advanced engineering group, seeks to control obsolescence and sustain all
systems throughout their life-cycle procedures. Simtran believes that its robust
logistics capability helps insure life cycle support of every system, including
installation and training. Coupled with FATS' international subsidiary network,
Simtran can sustain systems throughout the world.

     Dart.  The Company believes that Dart continues to be the market leader of
video simulation technology in the shooting sports industry with an installed
base of more than 300 systems nationwide. The product line at Dart has been
expanded to include portable and mobile systems in addition to its fixed
location systems for both firearms and archery applications.

     Dart products create revenue generating opportunities for the sporting
goods retailer and specialty pro shop dealer in a variety of ways. These
include: league and competition formats; traditional game play by the hour or
fraction thereof; marketing and advertising capabilities; point of purchase,
point of sale capability; hunter education and bowhunter education programs and
an internet-based communications network capable of linking all systems to a
central server at Dart's headquarters for service, support and database
management.

     The U.S. hunter and sports training component of the market includes all
state and federal wildlife agencies as well as conservation organizations such
as The National Wild Turkey Federation, Ducks Unlimited, The Rocky Mountain Elk
Foundation and The Foundation for North America Wild Sheep. These agencies and
organizations have endorsed the use of firearms simulation as a means of
promoting hunter safety and conservation.

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     The Company has been active and innovative in fostering new ideas and
training concepts in hunter education. The interactive training provided by the
Dart products has enhanced the teaching of shooters in proper hunting ethics,
shot placement and shot selection. The Company has integrated the Dart system
into 13 states and one federal aid region representing a total of 23 systems.
The International Hunter Education Association (IHEA) and the National Bowhunter
Education Foundation (NBEF) has endorsed the Dart Hunter and Bowhunter Core
Curriculum as a supplement to their instructor program. The Company believes
that most states require a formal firearms training course as a prerequisite to
purchasing a hunting license and/or a gun. In the future, training on simulators
may become an important part of all such courses in many states.

TARGET MARKETS

     The Company currently targets four principal market components: (i) U.S.
military; (ii) U.S. law enforcement; (iii) international (including military and
law enforcement authorities); and (iv) hunter and sports training.

     International.  The Company believes that many international military and
law enforcement agencies have begun to recognize the benefits of cost-effective
and realistic small arms simulation training. The Company has sold FATS(R)
systems to customers in more than 30 countries, including Canada, Great Britain,
the Netherlands, Italy and Singapore. Interest in the Company's products may be
greatest in countries in which limited land is available for live fire training
or in which budgetary constraints or interest in technological upgrades may
support a decision to purchase the Company's systems. 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 1999, 64.2% 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 desire to provide realistic training while
significantly reducing costs has been the primary reason for the adoption of
simulated 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 1998 and 1999 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 use of simulation, each
major branch of the U.S. military is at a different stage of implementing
simulation in training regimens. The U.S. Marine Corps has adopted simulation as
a fundamental part of its training activities. In fiscal 1995, through
competitive bidding, the Company was awarded a contract (Contract 2014) with the
U.S. Marine Corps for the supply of small and supporting arms simulators. The
U.S. Army has also purchased systems under 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 U.S. General Services Administration ("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 Company was selected to provide exclusively all weapon
simulators to support the U.S. Army Engagement Skills Trainer ("EST")
procurement. The Company is part of a contractor team which was selected for a
multi-year contract with ECC International as prime contractor and the Company
as its sole provider of weapon simulators.

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     For fiscal 1999, 17.1% of the Company's total revenues and 47.8% of the
Company's U.S. revenues were attributable to sales to U.S. military authorities.
As of March 31, 1999, the Company had a backlog of $1.7 million for contracts or
purchase orders awarded to the Company by 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 fragmented and 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; (iv) federal, state,
and private correctional facilities. The federal agencies, whose procurement
process generally follows the PPBES method, 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 processes vary
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 1,000
systems sold to U.S. federal and local law enforcement authorities to date (of
which approximately 900 are FATS(R) 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 may be 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 1999, 14.2% of the Company's total revenues and 39.5% 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 recently begun to focus on the
U.S. hunter and sports training component of the market. The customers for
firearms training in this emerging market component include state and federal
hunting agencies such as the U.S. Fish and Wildlife Service, the U.S. Department
of Natural Resources, various state agencies, as well as conservation
associations such as Ducks Unlimited, Inc. and the National Wild Turkey
Federation, Inc. These organizations have recognized the use of firearms
simulation as a means of promoting hunter safety and conservation. Moreover, the
firearms dealer market offers the potential to use simulators for competitive
shooting exercises, hunter training and home security programs. Simulators are
currently being used at some shooting competitions as a supplement to live fire
matches. The Company believes that as some states already require the successful
completion of a formal firearms training course as a prerequisite to owning a
hunting license or a gun, in the future, training on simulators may become an
integral part of such courses in many jurisdictions. 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 that business
opportunities may exist in the hunter and sports training component of the
market.

     For fiscal 1999, 4.5% 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, with separate sales operations for domestic and
international customers. The Company's marketing strategy focuses on developing
relationships with potential customers very early in their decision-making
processes and educating

                                        8
<PAGE>   9

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.

     The acquisition of Simtran and Dart will allow the Company to focus
marketing and sales staff, engineering, and operations on particular markets to
support various customer needs. FATS is responsible for small arms trainers and
gunnery related simulators to support military and law enforcement simulation
needs. Simtran compliments these efforts by offering training products used by
military elements worldwide which meet the supporting combat mission of air
defense or anti-armor areas. Dart focuses on the retail or commercial market.

     Marketing staffs for each company, FATS, Simtran and DART, 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 to support the
international sales effort with a network of agents and business
representatives. DART supports its sales effort within the United States using
established dealer representatives and in-house sales staff.

     The Company believes that an integrated marketing and sales approach
combining both FATS and Simtran products ties closely to procurement plans of
overseas military forces. Acquisition strategies for gunnery related simulators
for countries include use of small arms, indirect fire, anti-armor, air defense,
and armored vehicle training needs. The Company's ability to offer a coordinated
approach to develop and manufacture products using a single architecture should
meet both training standardization needs as well as provide support efficiencies
over the life cycle of the fielding.

CUSTOMERS

     Most of the Company's customers to date 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 64.2% of the Company's
revenues for fiscal 1999 were attributable to sales to military and law
enforcement authorities internationally, 17.1% were attributable to sales to
military authorities in the U.S. and 14.2% 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 1999
in each of its principal target market components:

<TABLE>
<CAPTION>
     U.S. MILITARY                 U.S. LAW ENFORCEMENT                  INTERNATIONAL
     -------------                 --------------------                  -------------
<S>                       <C>                                     <C>
U.S. Air Force            Immigration and Naturalization Service  Canadian Army
U.S. Army National Guard  Federal Bureau of Investigation         British Ministry of Defense
U.S. Marine Corps         Pennsylvania State Police               Singapore Army
</TABLE>

     In fiscal 1999, the Company's five largest customers accounted for
approximately 62.3% of the Company's revenues, with the Canadian Army accounting
for approximately 36.5%. In fiscal 1998, the

                                        9
<PAGE>   10

Company's five largest customers accounted for approximately 60.7% of the
Company's revenues, with the U.S. Marine Corps and the Italian Air Force
accounting for approximately 28.5% and 12.1%, respectively. No other customer
accounted for more than 10% of revenues in either period. 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.
Electronic and mechanical R&D expenditures totaled $4.0 million, $6.5 million
and $4.2 million in fiscal 1999, 1998, and 1997, 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.

     Electronics R&D combines the engineering disciplines of system design,
software design, hardware design, and embedded software design as well as other
electro-optical fields to produce programs and equipment responsive to specific
training needs. The Company's electronic R&D capabilities include 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 platforms. On an ongoing basis,
engineering works with Training Development personnel and customers to
continuously improve the technology and feature sets of the Company's various
product lines and associated training modes.

     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 Company's training R&D
department is staffed with world-class competitive shooters, 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 and pioneered the use
of multi-screen projection in small arms simulation.

MANUFACTURING OPERATIONS

     The Company's manufacturing operations are conducted primarily at its
headquarters near Atlanta, Georgia, and to a limited extent at the facility of
its U.K. subsidiary, Firearms Training Systems Ltd. Simtran's products are
manufactured at its facility in Montreal, and Dart's products are manufactured
at its facility in Denver, Colorado. Atlanta manufacturing operations are
divided into two departments, systems manufacturing and weapons manufacturing.
The systems manufacturing department assembles the simulator components of the
FATS(R) systems. As the components are completed, they are tested for both
function and durability and are subjected to a comprehensive quality assurance
program. Systems manufacturing occurs at

                                       10
<PAGE>   11

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 weapon manufacturing activities in the U.S. and the U.K.
have a capacity of 280 simulated firearms per month on a single-shift basis. As
with systems manufacturing, this capacity can readily be expanded to 470 by
using additional shifts and/or by acquiring additional facilities and
workstations.

PRODUCT SUPPORT

     The Company has established a worldwide customer service network consisting
of personnel at its headquarters near Atlanta, and at the Company's
subsidiaries, subcontractors and agents. 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 web site. The Company headquarters, and the Company's
U.K., Netherlands, Singapore and Australian subsidiaries, maintain an inventory
of repair parts, tools, test equipment and trained technicians to respond to
customer requirements. Dart and Simtran both maintain a fully equipped service
department to support their individual product lines. Simtran is equipped and
trained to support the full Company product line in Canada. Technical assistance
is available through the 24-hour hotline. The Company seeks to remedy customer
service needs as quickly as possible after notification by the customer. 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 U.S. Marine Corps or U.S. Army customer experiences a failure, they
are returned to service within 24 to 48 hours by express shipping a spare
component from this inventory. This same concept has been successfully applied
to support the British Ministry of Defense, the Royal Netherlands Land Army, the
Canadian Department of National Defense, the Australian Department of Defense
and the Singapore Military through their respective in country 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 next generation
products use a Windows(R)-based operating system; however, some of the Company's
current products, as well as earlier model simulators, use a software operating
system known as OS-9 which is a proprietary system owned by Microware
Corporation. The Company has licensed the OS-9 system from Microware on a
non-exclusive, royalty-paying basis for a term currently expiring October 31,
2001 (unless sooner terminated for breach by the Company of the license terms).
Although loss of its OS-9 license could have a material adverse effect on the
future conduct of its business operations and financial condition, the Company
is in compliance with the terms of such license and believes its relationship
with Microware Corporation to be satisfactory. 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.

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
                                       11
<PAGE>   12

and supporting arms simulation products, which now include indirect fire, air
defense and armored vehicles. Principal among the competitors for military
business are CAE Invetron Ltd., a U.K. division of CAE Electronics, Short
Brothers, a division of Bombardier, Simtech, a subsidiary of TADIRAN, Solatron,
a subsidiary of Lockheed Martin and ECC International. 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., Inc.
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, for example, with respect to the U.S.
Army EST program. Many of the Company's current and potential competitors have
significantly greater financial, technical and marketing resources than the
Company.

EMPLOYEES

     As of March 31, 1999, the Company and its subsidiaries, including Simtran
and Dart, employed 385 persons. As of such date, the Company employed a total of
229 persons domestically, including 111 in manufacturing, assembly, customer
service and quality control, 55 in R&D, 31 in sales and marketing, 21 in
administration and finance and 11 in program and contract management; the
Company's U.K. subsidiary employed a total of 17 persons, including 12 in
manufacturing, assembly and customer service, one in R&D, two in sales and
marketing and two in administration and finance; the Company's Netherlands
subsidiary employed a total of six persons, including four in manufacturing,
assembly and customer service and two in administration and finance; the
Company's Dart subsidiary employed a total of 15 persons, including 5 in
manufacturing, assembly and customer service, 2 in R&D, 5 in sales and marketing
and 3 in administration and finance; the Company's Canadian subsidiaries
employed a total of 111 persons, including 53 in manufacturing, assembly and
customer service, 44 in R&D, 2 in sales and marketing and 12 in administration
and finance; the Company's Australian subsidiary employed a total of 6 persons,
including 3 in manufacturing, assembly and customer service, 1 in program
management and 2 in administration and finance; and the Company's Singapore
subsidiary contracted with one person in program management. The majority of the
Company's employees are located at its headquarters, with salespersons in
California, Colorado, Georgia, Illinois, Kentucky, New Jersey, New Mexico,
Virginia and Wyoming. None of the employees is unionized.

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 socio-economic 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.

     Government contracts may generally be terminated by the U.S. government or
the relevant agency in whole or in part for its convenience 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.

     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
                                       12
<PAGE>   13

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 and in any such case 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     The Company is subject to the export licensing jurisdiction of the U.S.
Department of State (the "State Department") and the U.S. Department of Commerce
(the "Commerce Department") with respect to the temporary or permanent export of
certain of its products and the import of certain other products based on,
respectively, 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 addition, in
certain circumstances, export licenses and other authorizations may be revoked,
suspended or amended without notice. Each of the State Department and the
Commerce Department has 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.

     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(R)
systems.

     Certain FATS(R) 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, as recently revised, 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.

EXECUTIVE OFFICERS

     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.

                                       13
<PAGE>   14

     The executive officers of the Company and their ages and positions with the
Company as of June 29, 1999 are as follows:

<TABLE>
<CAPTION>
  NAME                                    AGE                  POSITION
  ----                                    ---                  --------
  <S>                                     <C>   <C>
  Peter A. Marino.......................  56    President, Chief Executive Officer and
                                                  Director
  Robert F. Mecredy.....................  51    Executive Vice President
  John A. Morelli.......................  50    Chief Financial Officer and Treasurer
  Juan C. G. de Ledebur.................  43    Vice President, Sales and Marketing
  C. Glenn Marsh........................  60    Vice President, Operations
</TABLE>

     Peter A. Marino has served as a Director of the Company since September 17,
1996 and became President and Chief Executive Officer on October 15, 1996. Prior
to joining the Company, Mr. Marino served as Senior Vice President of Raytheon
E-Systems, Inc. from 1991 to 1996. Mr. Marino previously served as President and
Chief Operating Officer of Fairchild Industries and prior to such service was
President and Chief Operating Officer of Lockheed Electronics Co., Inc. Prior to
such service, Mr. Marino held various positions at the Central Intelligence
Agency, including Director of the Office of Technical Services. Mr. Marino
serves as a director of Space Imaging, Inc. and is a member of the Defense
Science Board.

     Robert F. Mecredy has served as Executive Vice President since July 18,
1997. Prior thereto, Mr. Mecredy served as Vice President, Domestic from 1996 to
1997, Director of the Company from 1993 to 1996, as Director of Domestic Sales
and Marketing from 1994 to 1996 and as Director of U.S. Military Marketing from
1990 to 1994. Before joining the Company, Mr. Mecredy served as Director of Army
and Marine Corps Marketing -- Washington Operations at Raytheon Corporation from
1988 to 1990. Mr. Mecredy served as an infantry and aviation officer in the U.S.
Army for 20 years, retiring in 1986 with the rank of lieutenant colonel.

     John A. Morelli has served as Chief Financial Officer and Treasurer since
March 1999. Mr. Morelli previously served 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
their 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
with the defense industry. From 1979 to 1990, Mr. Morelli served as Controller
for Fairchild-ASD, an aircraft manufacturing & modification company. From 1974
to 1979, Mr. Morelli served as Finance Manager with Fairchild-Republic, an
aircraft manufacturing company.

     Juan C. G. de Ledebur has served as Vice President, Sales and Marketing
since July 18, 1997. Mr. de Ledebur previously served as Vice President,
International from 1996 to 1997 and Director of International Sales & Marketing
from 1987 to 1996. Prior to joining the Company in 1987, Mr. De Ledebur served
as manager of European sales for Information Handling Services, a provider of
technical and regulatory information.

     C. Glenn Marsh has served as Vice President , Operations since January
1999. Mr. Marsh previously served as Director of Operations from June 1998 to
January 1999. Mr. Marsh previously served as Director of Programs from March
1997 to June 1998. Prior to joining the Company, Mr. Marsh served as a
commissioned officer in the U.S. Army for over 30 years, retiring in 1996 as a
Lieutenant General. During his military service, General Marsh commanded at
every level in the U.S. Army from platoon to corps.

ITEM 2.  PROPERTIES

     The Company's headquarters and primary facility, at which it performs
manufacturing, assembly, R&D, sales, marketing, financial and administrative
functions, is a leased property of approximately 98,100 square feet located near
Atlanta. The lease expires in 2008 with three five-year options to extend the
lease beyond such date. The Company also leases an 18,600 square foot facility
located close to its primary facility, which it uses for certain test functions.
The lease expires in 2002, however, the Company has pursued sublease
opportunities throughout Fiscal Year 1999. See "Management's Discussion and
Analysis of Financial

                                       14
<PAGE>   15

Condition and Results of Operations." The Company's U.K. subsidiary occupies a
leased facility in Lincolnshire, England, of approximately 12,000 square feet,
at which the subsidiary performs manufacturing, assembly, service, training and
administrative functions. The lease on the U.K. facility expires in 2003. The
Company's Netherlands subsidiary occupies a leased facility of approximately
4,800 square feet in Waardenburg, the Netherlands, at which the Netherlands
subsidiary performs service and administrative functions. The lease expires in
2000. Simtran, one of the Company's Canadian subsidiaries, performs its
operations in Quebec in leased facilities containing approximately 38,800 square
feet. The lease expires in 2001. The Company's Australian subsidiary occupies a
leased facility in Albury, New South Wales, of approximately 8,000 square feet.
The subsidiary performs assembly, service, training and administrative
functions. The lease expires in 2000. Dart, located in Aurora, Colorado, leases
an approximately 7,800 square foot facility. The lease expires in 2000. Dart
performs assembly, service, training and administrative functions.

ITEM 3.  LEGAL PROCEEDINGS

     The Company actively participated in a competitive bidding process for the
U.S. Army Engagement Skills Trainer ("EST") program, a U.S. Military procurement
anticipated to be at least as large as the Company's U.S. Marine Corps Contract
2014. On May 14, 1998, the Company received notification on behalf of the U.S.
Army that its proposal in response to the ongoing competition had been excluded
from further consideration. On June 2, 1998, the Company filed an action in the
United States Court of Federal Claims to protest this decision, and to obtain an
injunction against any award of the EST contract until the Court could rule on
the Company's protest. As part of this action, the Company requested that the
Court order the procurement authority to continue its consideration of the
Company's proposal and to engage in meaningful discussions with the Company. On
November 17, 1998, the Company filed a motion in the US Court of Federal Claims
to dismiss the action thus enabling the U.S. Army to award a contract to ECC
International for the EST program. ECC International subsequently awarded a
contract to the Company which provides that the Company is the exclusive
supplier of all weapons simulators for the U.S. Army program. The Company is
performing under this multi-year contract.

     On October 3, 1997, Dart, was sued by Advance Interactive Systems, Inc.
("AIS") for alleged infringement of a patent owned by AIS, U.S. Patent No.
5,649,706 (the "706 Patent"). Dart filed its answer on December 2, 1997, denying
all material allegations, asserting numerous affirmative defenses, and
counterclaiming for a judicial declaration of noninfringement, patent
invalidity, patent unenforceability, and for damages for unjust enrichment.
Discovery is ongoing at this time, and no dispositive motions have been filed or
heard. In the opinion of the Company's management, this proceeding will not have
a material adverse effect on the Company's financial position, liquidity, or
results of operations.

     On January 1999, FATS was sued by AIS for alleged infringement of a patent
owned by AIS, U.S. Patent No. 5,823,779 (the "779 Patent"). FATS filed its
answer on May 21, 1999 denying infringement and counter-claimed seeking
declaratory judgement that the 779 Patent is invalid, among other claims.
Discovery has not yet begun on this case. In the opinion of the Company's
management, this proceeding will not have a material adverse effect on the
Company's financial position, or results of operations.

     The Company is involved in additional 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.

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock has been traded on The Nasdaq Market since
November 27, 1996. Prior to such date, there was no public trading market for
the Common Stock. The listing of the Company's stock was moved from the Nasdaq
National Market to the Nasdaq Small Cap Market effective January 27, 1999. In
                                       15
<PAGE>   16

the future, should the Company meet the National Market requirements, it will
reapply for listing. As of June 29, 1999, there were 123 holders of record of
the Company's Common Stock. The high and low sales prices of the Common Stock
during the period from April 1, 1997 through the year ended March 31, 1999 were
as follows:

                          QUARTERLY STOCK PRICE RANGE

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
First Quarter 1998..........................................  $15.50   $9.13
Second Quarter 1998.........................................   14.25    5.75
Third Quarter 1998..........................................    7.50    5.00
Fourth Quarter 1998.........................................   10.44    5.34
First Quarter 1999..........................................    8.88    2.44
Second Quarter 1999.........................................    4.00    0.69
Third Quarter 1999..........................................    3.25    0.75
Fourth Quarter 1999.........................................    1.75    1.03
</TABLE>

     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
NationsBank Credit Agreement prohibits the payment of any dividends in respect
of the Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

     On November 13, 1998, the Company entered into a Securities Purchase
Agreement 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. (the "Centre Entities") whereby the Centre Entities, for
$3,000,030, purchased 18,182 units of a security comprised of 18,182 shares of
Series A Preferred Stock (the "Preferred Stock") and an aggregate 2,909,120
non-detachable warrants at a price of $1.03125. The security includes one share
of Preferred Stock and 160 warrants, and bears a divided of 8% per annum payable
quarterly in additional units of the security. The warrants and the Preferred
Stock is subject to mandatory redemption on November 13, 2003 at the liquidation
value thereof. Exemption for such transaction from registration under the
Securities Act is claimed in a reliance on the exemption from registration under
Section 4(2) of the Securities Act.

                                       16
<PAGE>   17

ITEM 6.
                            SELECTED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The selected financial data of the Company for each of the last five years
set forth below have been derived from the Company's consolidated financial
statements for each of the five fiscal years ended March 31, 1999, which
financial statements have been audited by Arthur Andersen LLP. 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).

<TABLE>
<CAPTION>
                                                                       FISCAL YEAR ENDED MARCH 31,
                                                                       ---------------------------
                                                    1999      1998      1997      1996      1995
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues.........................................  $55,514   $73,547   $90,806   $65,439   $29,164
  Cost of revenues...............................   35,537    33,867    44,214    30,902    14,230
                                                   -------   -------   -------   -------   -------
  Gross profit...................................   19,977    39,680    46,592    34,537    14,934
                                                   -------   -------   -------   -------   -------
  Operating expenses:
     Selling, general and administrative
       expenses..................................   10,204    15,036    15,016    12,087     8,169
  Research and development expenses..............    3,963     6,475     4,224     2,781     2,296
  Depreciation and amortization..................    1,938     1,042       473       386       330
  Nonrecurring Restructuring Charge..............      870        --        --        --        --
  Acquired in-process research and development
     charge......................................       --     4,000        --        --        --
                                                   -------   -------   -------   -------   -------
          Total operating expenses...............   16,975    26,553    19,713    15,254    10,795
                                                   -------   -------   -------   -------   -------
Operating income.................................    3,002    13,127    26,879    19,283     4,139
Interest income (expense), net...................   (7,316)   (5,905)   (6,069)      165        12
Nonrecurring recapitalization expenses...........       --        --    (1,181)       --        --
Other income (expense), net......................     (400)      (97)       71       (93)       66
                                                   -------   -------   -------   -------   -------
(Loss)/Income before income taxes and
  extraordinary item.............................   (4,714)    7,125    19,700    19,355     4,217
(Benefit)/Provision for income taxes.............   (1,700)    3,892     7,359     6,565     1,387
                                                   -------   -------   -------   -------   -------
(Loss)/Income before extraordinary item..........   (3,014)    3,233    12,341    12,790     2,830
Extraordinary item, net of income tax............       --        --    (3,327)       --        --
                                                   -------   -------   -------   -------   -------
Net (loss)/Income before Accretion of Preferred
  Stock..........................................  $(3,014)  $ 3,233   $ 9,014   $12,790   $ 2,830
                                                   -------   -------   -------   -------   -------
Accretion of Preferred Stock.....................      (93)       --        --        --        --
                                                   -------   -------   -------   -------   -------
Net (loss)/income attributable to Common.........   (3,107)  $ 3,233   $ 9,014   $12,790   $ 2,830
                                                   -------   -------   -------   -------   -------
Shareholders
Basic (loss)/earnings per share(1)...............  $ (0.15)  $  0.16   $  0.55   $  0.89   $  0.20
                                                   =======   =======   =======   =======   =======
Diluted (loss)/earnings per share(1).............  $ (0.15)  $  0.15   $  0.50   $  0.80   $  0.18
                                                   =======   =======   =======   =======   =======
Weighted average common shares -- basic(1).......   20,686    20,408    16,489    14,402    14,402
                                                   =======   =======   =======   =======   =======
Weighted average common shares -- diluted(1).....   20,686    21,456    18,009    16,029    16,029
                                                   =======   =======   =======   =======   =======
</TABLE>

                                       17
<PAGE>   18

<TABLE>
<CAPTION>
                                                                     FISCAL YEAR
                                                                        ENDED
                                                                      MARCH 31,
                                                              --------------------------
                                                               1999     1998      1997
                                                              ------   -------   -------
<S>                                                           <C>      <C>       <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:(2)
Operating income............................................  $3,002   $13,127   $26,879
(Loss)/Income before income taxes...........................  (4,714)    7,125    21,408
Net (loss)/income...........................................  (3,107)  $ 3,233   $13,560
                                                              ======   =======   =======
Basic (loss)/earnings per share.............................  $(0.15)  $  0.16   $  0.66
                                                              ======   =======   =======
Diluted (loss)/earnings per share...........................  $(0.15)  $  0.15   $  0.62
                                                              ======   =======   =======
Shares used in computation -- basic(3)......................  20,686    20,408    20,402
Shares used in computation -- diluted(3)....................  20,686    21,456    21,741
</TABLE>

<TABLE>
<CAPTION>
                                                     1999      1998      1997      1996      1995
                                                    -------   -------   -------   -------   ------
<S>                                                 <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital...................................  $27,010   $18,907   $20,350   $20,260   $7,657
Total assets......................................   60,150    56,380    42,121    33,820   16,817
Total debt, including current maturities..........   72,200    63,000    58,600        --       --
Stockholders' equity (deficit)....................  (29,633)  (28,231)  (31,378)   21,262    8,484
</TABLE>

---------------

(1) Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
    No. 83, common stock and common stock equivalents issued at prices below the
    public offering price during the 12-month period prior to the Company's
    initial public offering, (the "Offering") that was consummated on November
    26, 1996 have been included in the calculation of weighted average common
    shares as if they were outstanding for all periods prior to the Offering,
    regardless of whether they are dilutive. Accordingly, the weighted average
    common shares for all periods presented reflects: (i) the issuance of shares
    to the Centre Entities and the repurchase of shares from THIN International
    pursuant to the Recapitalization; (ii) all shares issuable upon exercise of
    stock options granted (using the treasury stock method); (iii) 288,434
    shares issuable upon exercise of the NationsBridge Warrants; (iv) all shares
    granted to management within 12 months of the Offering; and (v) all shares
    purchased by management within 12 months of the Offering.
(2) Pro forma statement of operations data give effect to the Recapitalization,
    the consummation of the Offering and the application of the net proceeds
    from the Offering after deducting the underwriting discount and offering
    expenses as if they occurred at the beginning of the respective period.
    Adjustments to the historical statement of operations data represent the net
    effect of: (i) interest on borrowings under the Senior Bank Debt at
    effective interest rates of 8.4% to 9.1% representing interest rates in
    effect at the time of the Recapitalization and the Bridge Notes at an
    average effective interest rate of 13.3% and amortization of related
    deferred financing costs; (ii) elimination of interest and amortization of
    deferred financing costs due to repayment of the Bridge Notes and repayment
    of a portion of the Senior Bank Debt; and (iii) the effect of the pro forma
    adjustments on the provision for income taxes. The effect of the
    nonrecurring recapitalization expenses and the extraordinary loss on the
    early extinguishment of debt as a result of the repayment of the Bridge
    Notes and repayment of a portion of the Senior Bank Debt have not been
    included in the pro forma statement of operations data as the nonrecurring
    recapitalization expenses and the extraordinary loss are assumed to occur
    immediately prior to the period presented. See "Management's Discussion and
    Analysis of Financial Condition and Results of Operations -- General --
    Extraordinary Loss," "-- Recapitalization" and Notes 4 and 10 of Notes to
    Consolidated Financial Statements.
(3) Shares used in computation include the effect of 6,000,000 shares of Common
    Stock issued and sold by the Company as part of the Offering and 1,338,248
    shares of Common Stock issuable upon the exercise of outstanding options
    (net of 404,586 shares assumed to be repurchased by the Company using the
    treasury stock method). See "Business -- History", "Management's Discussion
    and Analysis of Financial Condition and Results of
    Operations -- Recapitalization" and Note 5 of Notes to Consolidated
    Financial Statements.

                                       18
<PAGE>   19

                              RECENT DEVELOPMENTS

     The Company, on April 30, 1999, agreed to a revision of certain financial
covenants under its senior credit facility, which will result in payment of a
1.00% fee to members of the NationsBank syndicate on their outstanding
commitments to the Company as of April 30, 1999 and the reduction of $1,500,000
in permitted borrowings under the revolving credit line. In addition, on June 1,
1999, the Company established an additional line of credit in the amount of
$3,000,000 with a financial institution with a maturity date of May 26, 2000.
The payment of obligations under this revolving credit facility is guaranteed by
the Centre Entities, as defined. The line of credit bears interest at the rate
of 2.50% over LIBOR or 1.00% over the Prime rate.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL

     The Company is the leading worldwide producer of interactive simulation
systems designed to provide training in the handling and use of small and
supporting arms. As a result of the Simtran acquisition, the Company acquired
contracts to deliver air defense and armored vehicle products. The Company has
focused its sales efforts primarily in the U.S. and international military and
law enforcement market and more recently has begun to sell simulation training
systems in the hunter and sports training component of the market.

     The Company derives most of its revenues from the sale of its products,
which include simulators, simulated firearms, scenarios, software and auxiliary
equipment, and certain additional revenues from service operations. The Company
receives purchase commitments for its products and services from its customers
largely through purchase orders and short- and long-term contracts principally
with governmental entities. Sales revenues are recognized primarily upon
shipment with advanced billings related to contracts recorded as deferred
revenue and recognized primarily as units are delivered or on a percentage of
completion method for a contract in which completion and delivery exceeds one
year. Service revenues are comprised of revenues from individual purchase
orders, which are recognized as services are provided, and revenues from
extended service contracts, which are recognized over the life of the service
contracts.

     Although the Company sells its products and services to a large number of
military and law enforcement agencies in the U.S. and internationally, the top
five customers accounted for approximately 62.3%, 60.7% and 76.3% of the
Company's revenues in fiscal 1999, 1998 and 1997, respectively. A significant
increase or decrease in demand by a large customer can have a substantial effect
on the Company's revenues, and revenues from any one customer can vary
materially from period to period. In addition, although the Company has
experienced an increased demand for its products in recent years despite
decreases in general levels of defense spending, 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. A significant portion of the Company's sales
are also made to customers located outside the U.S., primarily in Europe and
Asia. During fiscal 1999, 1998 and 1997, approximately 64.2%, 46.0%, and 31.3%,
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 for simulation-based training systems continues to grow and
U.S. military orders are less significant. 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 has experienced some 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 expenses and depreciation and amortiza-

                                       19
<PAGE>   20

tion. 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 15 years primarily through internally generated funds.

  U.S. Marine Corps Contract

     In August 1994, through competitive bidding, the Company was awarded a
fixed-price contract ("Contract 2014") with the U.S. Marine Corps for the supply
of small and supporting arms simulators. This contract also contains provisions
which have enabled purchases under the contract of firearms simulators by the
U.S. Army. The total initial contract amount was $16.1 million, and options
exercised and contract modifications made have increased that amount by a total
of $98.6 million through March 31, 1999. Deliveries under Contract 2014
commenced in the fourth quarter of fiscal 1995 and totaled $97.6 million prior
to contract expiration on March 31, 1999.

  U.S. Army EST Procurement Process

     The Company actively participated in a competitive bidding process for the
U.S. Army Engagement Skills Trainer ("EST") program, a U.S. Military procurement
anticipated to be at least as large as the Company's U.S. Marine Corps Contract
2014. On May 14, 1998, the Company received notification on behalf of the U.S.
Army that its proposal in response to the ongoing competition had been excluded
from further consideration. On June 2, 1998, the Company filed an action in the
United States Court of Federal Claims to protest this decision, and to obtain an
injunction against any award of the EST contract until the Court could rule on
the Company's protest. As part of this action, the Company requested that the
Court order the procurement authority to continue its consideration of the
Company's proposal and to engage in meaningful discussions with the Company. On
November 17, 1998, the Company filed a motion in the US Court of Federal Claims
to dismiss the action thus enabling the U.S. Army to award a contract to ECC
International for the EST program. ECC International subsequently awarded a
contract to the Company which provides that the Company is the exclusive
supplier of all weapons simulators for the U.S. Army program. The Company has
begun performing under this multi-year contract which did not have a material
effect on fiscal year 1999 revenues.

  Backlog

     Backlog represents customer orders that have been contracted for future
delivery. Accordingly, these orders have not yet been recognized as revenue, but
represent potential revenue. As of March 31, 1999, the Company had a backlog of
approximately $28.0 million, comprised of $21.9 million from FATS international
customers, $4.1 from Simtran's Canadian customers and $1.7 million from FATS
U.S. military customers. Recognition of Simtran's backlog will be dependent upon
delivery and acceptance of its products currently under development.
Approximately $22.7 million of the contracted orders are scheduled for delivery
during fiscal year 2000. As of March 31, 1998, the Company had a backlog of
approximately $49.4 million, comprised of $27.4 million from FATS international
customers, $18.9 from Simtran's Canadian customers and $2.2 million from FATS
U.S. military customers.

     Contracts with U.S. and other governments may generally be terminated by
the customer, in whole or in part, for default or its 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 costs incurred
through the date of termination.

  Acquired In-Process Research and Development Charge

     The Company recognized a non-recurring acquired in-process research and
development charge in connection with the acquisition of Simtran completed on
March 5, 1998. Based on an assessment by the Company, in conjunction with an
independent valuation firm, it was determined that $4.0 million (or $0.19

                                       20
<PAGE>   21

per diluted share) of Simtran's purchase price represented technology that did
not meet the accounting definition of completed technology, and thus should be
charged to earnings under generally accepted accounting principles.

  Nonrecurring Restructuring Charge

     The Company recognized a non-recurring restructuring charge of $870,000 (or
$.03 per diluted share) related to a workforce reduction and certain other
measures implemented to enhance future profitability in fiscal year 1999.

  Growth Strategy

     The Company has experienced significant growth in its sales during recent
years, primarily, due to large program sales such as to the U.S. Marine Corps,
U.S. Army National Guard, U.S. Air Force, U.K. Ministry of Defence, Italian
Armed Forces, Royal Netherlands Army, and various other armed forces and law
enforcement activities. The company intends to seek further growth through
expanded sales of its existing products in its target markets as well as the
development of new products and markets and through strategic partnerships. The
Company's growth strategy includes the following core elements:

     Increase Market Penetration.  The Company is seeking to broaden acceptance
of its products and increase sales to military, law enforcement agencies and
commercial firearms and archery dealers in the U.S. and internationally. While
continuing to acquire new customers by demonstrating the cost-effectiveness and
training benefits of its products, the Company also focuses on generating repeat
orders from existing customers. The Company has found that its customers often
order additional simulation systems after an initial purchase once they
experience the advantages of the FATS(R), Simtran and DART systems. In addition,
in recent years, the Company has begun to focus on generating follow-on orders
through systems upgrades, software and other auxiliary products.

     Continue New Product Development.  A key element of the Company's growth
strategy is new product development. The Company believes that it can continue
to develop new products as a result of its R&D efforts and its understanding of
the needs of its customers. Addition of an indirect fire simulator for artillery
and naval gunfire has resulted in the award of an additional contracts with the
Canadian and Australian Armed Forces beyond small arms simulators and may assist
the Company in gaining additional new contracts. The Company is also developing
simulators for newly emerging weaponry and products integrating current systems
with larger weapons system simulators, such as those currently being developed
by Simtran. In addition, the Company is currently developing simulation products
for training law enforcement personnel in the use of less-than-lethal force
(e.g., tear gas, batons, sticky foam and bean bag shotguns).

     Expand into New Markets.  Management believes that opportunities exist for
sales beyond the Company's traditional military and law enforcement customers.
The Company sought to increase its penetration in the hunter and sports training
component of the market by acquisition of Dart. The Company believes that
potential customers for products related to hunter education include both state
and federal agencies which have shown interest in simulation as a means of
promoting hunter safety and conservation as well as firearms dealers interested
in the use of simulators for competitive shooting exercises, hunter training and
home security programs.

     Pursue Selected Strategic Alliances.  As an alternative or a supplement to
the internal development of additional product lines, new products could be
developed or added to the FATS(R) line by means of strategic acquisitions, joint
ventures or partnerships. In particular, an acquisition of a company with a
strong brand name in lower price point or different products could permit the
Company to expand its product line, while maintaining the premium position of
the FATS(R) brand name such as the earlier acquisitions of ICAT, Simtran and
Dart completed within the last eighteen months.

                                       21
<PAGE>   22

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                            FISCAL YEAR ENDED MARCH 31,
                                                            ----------------------------
                                                             1999       1998       1997
                                                            ------     ------     ------
<S>                                                         <C>        <C>        <C>
Revenues..................................................  100.0%     100.0%     100.0%
Cost of revenues..........................................   64.0       46.1       48.7
                                                            -----      -----      -----
Gross profit..............................................   36.0       53.9       51.3
                                                            -----      -----      -----
Operating expenses:
  Selling, general and administrative expenses............   18.4       20.5       16.5
  Research and development expenses.......................    7.1        8.8        4.7
  Depreciation and amortization...........................    3.5        1.4        0.5
  Nonrecurring restructuring charge.......................    1.6         --         --
  Acquired in-process research and development charge.....     --        5.4         --
                                                            -----      -----      -----
          Total operating expenses........................   30.6       36.1       21.7
                                                            -----      -----      -----
Operating income..........................................    5.4       17.8       29.6
Interest income (expense), net............................  (13.2)      (8.0)      (6.7)
Nonrecurring recapitalization expenses....................     --         --       (1.3)
Other income (expense), net...............................   (0.7)      (0.1)       0.1
                                                            -----      -----      -----
(Loss)/Income before income taxes and extraordinary
  item....................................................   (8.5)       9.7       21.7
(Benefit)/Provision for income taxes......................   (3.1)       5.3        8.1
                                                            -----      -----      -----
(Loss)/Income before extraordinary item...................   (5.4)       4.4       13.6
Extraordinary item, net of income tax.....................     --         --       (3.7)
Accretion of preferred stock..............................    (.2)        --         --
                                                            -----      -----      -----
Net (loss)/income.........................................   (5.6)%     4.4%       9.9%
                                                            =====      =====      =====
</TABLE>

  Fiscal Year Ended March 31, 1999 Compared to the Fiscal Year Ended March 31,
1998

     Revenues.  Revenues decreased $18.0 million, or 24.5%, to $55.5 million for
fiscal 1999 as compared to $73.5 million for fiscal 1998. This decline was
attributable to a $20.5 million decrease, or 68.3%, to a level of $9.5 million
in sales to the U.S. military. The decline in sales to the U.S. military was due
primarily to a decrease in sales to the U.S. Marine Corps as Contract 2014
expired. This decrease was partially offset by an increase of $1.8 million, or
5.3%, to $35.6 million, in international sales. Sales to U.S. law enforcement
customers for fiscal 1999 decreased by $.7 million, or 8.8%, to $7.9 million.
Sales to U.S. Hunter/Sports customers increased by $1.4 million, or 129.2%, to
$2.5 million primarily as a result of the Dart acquisition.

     Cost of Revenues.  Cost of revenues increased $1.7 million, or 4.9%, to
$35.5 million for fiscal year 1999 as compared to $33.9 million for fiscal 1998.
As a percentage of revenues, cost of revenues increased to 64.0% for fiscal 1999
as compared to 46.1% for fiscal 1998. This increase was due to customer and
product mix changes, the effect of greater competition eroding traditionally
high international gross margins, and the absorption of low margin programs from
the acquisition of existing Simtran contracts.

     Gross Profit.  As a result of the foregoing, gross profit decreased $19.7
million, or 49.7% to $20.0 million, or 36.0% of revenues, for fiscal 1999 as
compared to $39.7 million, or 53.9% of revenues, for fiscal 1998.

     Total Operating Expenses.  Total operating expenses decreased $9.6 million,
or 36.1% to $17.0 million for fiscal 1999 as compared to $26.6 million for
fiscal 1998. Total operating expenses as a percentage of revenues decreased to
30.6% for fiscal 1999 from 36.1% for fiscal 1998. This decrease was primarily a
result of a $4.0 million acquired research and development charge included in
fiscal 1998 related to the Simtran acquisition in addition to cost reductions in
marketing and administration. Selling, general and administrative expenses
decreased as a percentage of revenue to 18.4% for fiscal 1999 from 20.5% for
fiscal 1998 as a result of

                                       22
<PAGE>   23

work force and other operating expense reductions. Research and development
costs decreased $2.5 million, or 38.8%, from fiscal 1998 to fiscal 1999 due to
the completion of next generation digital products.

     Operating Income.  As a result of the foregoing, operating income decreased
$10.1 million, or 77.1%, to $3.0 million, or 5.4% of revenues, for fiscal 1999
as compared to $13.1 million, or 17.8% of revenues, for fiscal 1998.

     Other Income (Expense), net.  Net interest expense totaled $7.3 million, or
13.2% of revenues for fiscal 1999 as compared to net interest expense of $5.9
million, or 8.0% for fiscal 1998. Other income (expense), net for fiscal 1999
primarily includes a charge of $.4 million related to foreign currency exchange
cost associated with international revenues. In addition, higher amounts of
interest expense were incurred because of additional borrowings at higher
interest rates by the Company.

     (Benefit)/Provision for Income Taxes.  The effective tax rate decreased to
36.0% of income before income taxes for fiscal 1999 compared to 54.6% of income
before taxes for fiscal 1998. This decrease reflects the current federal tax
rate for the company's current taxable income level. Fiscal 1998 earnings
included a charge for acquired in-process research and development expense
related to the Simtran acquisition, which was not deductible for income tax
purposes.

     (Loss)/Income Before Extraordinary Item.  As a result of the foregoing,
(loss)/income before extraordinary item decreased $6.2 million, to a loss of
$3.0 million, or -5.4% of revenues for fiscal 1999 as compared to income of $3.2
million, or 4.4% of revenues for fiscal 1998.

     Accretion of Preferred Stock.  The issuance of $3.0 million in class A
preferred stock in November 1998 resulted in an expense for accretion of $.09
million for fiscal year 1999.

     Net (Loss)/Income.  As a result of the foregoing, net income as reported
decreased $6.3 million, to a loss of $3.1 million or ($0.15) per diluted share,
or -5.6% of revenues for fiscal 1999 as compared to income of $3.2 million or
$0.15 per diluted share, or 4.4% of revenues for fiscal 1998.

  Fiscal Year Ended March 31, 1998 Compared to the Fiscal Year Ended March 31,
1997

     Revenues.  Revenues decreased $17.3 million, or 19.0%, to $73.5 million for
fiscal 1998 as compared to $90.8 million for fiscal 1997. This decrease was
attributable to a $23.8 million decrease, or 44.2%, to 30.0 million in sales to
the U.S. military due primarily to a decrease in sales to the U.S. Marine Corps
as significant portions of Contract 2014 were completed. This decrease was
partially offset by an increase of $5.4 million, or 18.9%, to $33.8 million, in
international sales. Sales to U.S. law enforcement customers for fiscal 1998
increased by $1.5 million, or 21.8%, to $8.6 million. Sales to U.S.
Hunter/Sports customers decreased by $0.4 million, or 25.9%, to $1.1 million.

     Cost of Revenues.  Cost of revenues decreased $10.3 million, or 23.4%, to
$33.9 million for fiscal year 1998 as compared to $44.2 million for fiscal 1997.
As a percentage of revenues, cost of revenues decreased to 46.1% for fiscal 1998
as compared to 48.7% for fiscal 1997. This decrease was due to customer and
product mix changes primarily due to a decrease in sales to U.S. military
customers which traditionally have lower gross margins.

     Gross Profit.  As a result of the foregoing, gross profit decreased $6.9
million, or 14.8% to $39.7 million, or 53.9% of revenues, for fiscal 1998 as
compared to $46.6 million, or 51.3% of revenues, for fiscal 1997.

     Total Operating Expenses.  Total operating expenses increased $6.8 million,
or 34.7% to $26.6 million for fiscal 1998 as compared to $19.7 million for
fiscal 1997. Total operating expenses as a percentage of revenues increased to
36.1% for fiscal 1998 from 21.7% for fiscal 1997. This increase was primarily a
result of the $4.0 million acquired research and development charge related to
the Simtran acquisition. Selling, general and administrative expenses increased
as a percentage of revenue to 20.5% for fiscal 1998 from 16.5% for fiscal 1997
as a result of the decrease in revenues. Research and development costs
increased $2.3 million, or 53.3%, from fiscal 1997 to fiscal 1998 due to
continued efforts in developing new and improving existing products.

                                       23
<PAGE>   24

     Operating Income.  As a result of the foregoing, operating income decreased
$13.8 million, or 51.2%, to $13.1 million, or 17.8% of revenues, for fiscal 1998
as compared to $26.9 million, or 29.6% of revenues, for fiscal 1997.

     Other Income (Expense), net.  Net interest expense totaled $5.9 million, or
8.0% of revenues for fiscal 1998 as compared to net interest expense of $6.1
million, or 6.7% for fiscal 1997. Other income (expense), net for fiscal 1997
includes a nonrecurring charge of $1.2 million for expenses incurred in
connection with the Recapitalization.

     Provision for Income Taxes.  The effective tax rate increased to 54.6% of
income before income taxes for fiscal 1998 compared to 37.4% of income before
taxes for fiscal 1997. This increase was primarily attributable to the acquired
in-process research and development charge related to the Simtran acquisition,
which is not deductible for income tax purposes.

     Income Before Extraordinary Item.  As a result of the foregoing, income
before extraordinary item decreased $9.1 million, or 73.8%, to $3.2 million, or
4.4% of revenues for fiscal 1998 as compared to $12.3 million, or 13.6% of
revenues for fiscal 1997.

     Extraordinary Item.  A portion of the proceeds from the Offering was used
to repay the $40 million Bridge Notes and reduce the Senior Bank Debt by $11.2
million. As a result, an extraordinary loss occurred on the early extinguishment
of debt in fiscal 1997. This extraordinary item includes legal fees, unamortized
deferred financing costs, unamortized basis of the NationsBridge Warrants and a
fee paid in connection with the repayment of the Bridge Notes.

     Net Income.  As a result of the foregoing, net income as reported decreased
$5.8 million, or 64.1%, to $3.2 million ($0.15 per diluted share), or 4.4% of
revenues for fiscal 1998 as compared to $9.0 million ($0.50 per diluted share),
or 9.9% of revenues for fiscal 1997.

     Pro Forma Results.  The pro forma results give effect to the
Recapitalization and the Offering as if it occurred at the beginning of the
period. The pro forma results exclude the nonrecurring expenses incurred in
connection with the Recapitalization and the extraordinary loss related to the
early extinguishment of debt and also reflect interest expense for all periods
presented, based on the Senior Bank Debt of $58.6 million outstanding after the
Offering. The net income for fiscal 1998 was $3.2 million ($0.15 per diluted
share), or 4.4% of revenues, a decrease of $10.3 million, or 76.2%, over the
$13.6 million ($0.62 per diluted share) pro forma net income for fiscal 1997.

                                       24
<PAGE>   25

QUARTERLY RESULTS OF OPERATIONS

     The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning April 1, 1997 and
ending March 31, 1999. Such information, in the opinion of management, includes
all adjustments consisting only of normal recurring 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.

<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                ----------------------------------------------------------------------------------
                                           FISCAL YEAR 1999                           FISCAL YEAR 1998
                                ---------------------------------------    ---------------------------------------
                                MARCH 31   DEC. 31   SEPT. 30   JUNE 30    MARCH 31   DEC. 31   SEPT. 30   JUNE 30
                                --------   -------   --------   -------    --------   -------   --------   -------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                             <C>        <C>       <C>        <C>        <C>        <C>       <C>        <C>
Revenues......................  $14,824    $16,314   $12,111    $12,265    $17,421    $18,102   $19,415    $18,609
Gross Profit..................    4,634      6,579     4,050      4,714      9,979      9,023    10,310     10,368
Operating Income..............    1,560      2,207       577     (1,342)      (514)     4,034     4,710      4,897
Income/(Loss) before income
  taxes and extraordinary
  item........................      109       (389)   (1,377)    (3,057)    (2,020)     2,465     3,264      3,416
Net income/(loss) before
  extraordinary item..........        8       (271)     (826)    (2,018)    (2,693)     1,651     2,089      2,186
Net income/(loss).............        8       (271)     (826)    (2,018)    (2,693)     1,651     2,089      2,186
Basic earnings/(loss) per
  share before extraordinary
  item........................     0.00      (0.01)    (0.04)     (0.10)     (0.13)      0.08      0.10       0.11
Diluted Earnings/(loss) per
  share before extraordinary
  item........................     0.00      (0.01)    (0.04)     (0.10)     (0.13)      0.08      0.10       0.10
Basic earnings/(loss) per
  share.......................     0.00      (0.01)    (0.04)     (0.10)     (0.13)      0.08      0.10       0.11
Diluted Earnings/(loss) per
  share.......................     0.00      (0.01)    (0.04)     (0.10)     (0.13)      0.08      0.10       0.10
</TABLE>

     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 in advance of any
particular quarter. 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 AND GOING CONCERN CONSIDERATIONS

     The Company's primary sources of liquidity and capital resources are cash
generated from operating activities, the NationsBank Credit Agreement, a
revolving line of credit in the amount of $3,000,000 and the additional equity
investment from the Centre Entities.

     At March 31, 1999, the Company's ability to continue as a going concern is
subject to several business and market risks. The risks are (1) a large
receivable which is supported by a performance letter of credit from an
international customer must be received by the Company in the immediate future;
(2) the Company has not generated significant revenue or cash flow from its
current operations, and the expectation of future revenues or cash flow cannot
be assumed; and (3) the Company must receive new contracts for product to be
delivered in the current fiscal year in order to achieve its revenue projections
since the Company has entered the new fiscal year with a significantly smaller
backlog than in the previous two fiscal years. The Company's large international
receivable is secured by a performance letter of credit. The Company has been
orally assured by the relevant authority that performance will be certified but
is awaiting completion of necessary payment authorization documentation.

     Management's plans in response to the above risks are (1) the Company
continues to take steps to further reduce cost and reinforce cost control
measures related to assure operations are conducted at the lowest cost possible;
(2) the Company remains focused on revenue maximization and has determined to
place

                                       25
<PAGE>   26

greater emphasis on the domestic and international law enforcement business
through release of new products in this market sector; (3) the Company has begun
aggressively pursuing third party relationships in order to develop additional
new revenue and cash generating opportunities; and (4) Management efforts have
been focused to insure prompt collection of the large international receivable
which it believes is likely to occur.

     The Company believes that this business strategy may achieve positive
operating margins over time, provided that the Company collects the large
international receivable outstanding and achieves the new business revenue
targets needed to finance working capital needs. There can be no assurances that
this strategy will be successful or that the new business revenue targets can be
met in order to meet working capital needs. These factors, discussed in the note
above, raise substantial doubt about the ability of the Company to continue as a
going concern. The accompanying financial statements have been prepared under
the assumption that the Company will continue as a going concern and do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue in existence.

     On March 31, 1999, the Company and the Lenders amended the NationsBank
Credit Agreement (the "third amendment") to provide among other things for a
reduction in available borrowings of $1,500,000 as of April 30, 1999, payment of
a reduction fee to the lenders of 1.00% of the total borrowings outstanding,
certain financial reporting requirements to the Lenders and the forbearance of
the Lenders from exercising rights and remedies during the period of time until
April 30, 1999 while the Company negotiated further amendments of the financial
covenants. On April 30, 1999 the Company and the Lenders amended the NationsBank
Credit Agreement (the "fourth amendment") to provide for payment of an amendment
fee, waiver of certain financial covenants and agreement on new levels of
financial covenants for the next operating year. However, there is no assurance
that the Company will meet these covenants and further borrowing will be
available should it fail to do so. The Company currently has borrowings of $20.5
million and has outstanding letters of credit of approximately $1.5 million
under the $22.0 million revolving credit facility of the NationsBank Credit
Agreement. The Company believes that the cash flow from operations combined with
bank borrowings and the additional equity investment from the Centre investors
will be sufficient to meet the Company's presently anticipated working capital ,
capital expenditure and debt service needs for the next 12 months.

     On June 1, 1999, certain subsidiaries of the Company established a
revolving line of credit (the "Subsidiary Line") in the amount of $3,000,000
with a financial institution with a maturity date of May 26, 2000. The payment
of obligations under the Subsidiary Line are guaranteed by Centre Entities as
well as by the Company and certain of its subsidiaries. The Subsidiary Line of
credit bears interest at the rate of 2.50% over LIBOR or 1.00% over the Prime
rate. The Company currently has borrowings of $2,000,000 under the Subsidiary
Line.

     The Company entered into the Senior Bank Debt and borrowed an aggregate of
$76 million in connection with the Recapitalization. See "Business -- History."
The Senior Bank Debt provided for credit facilities in an aggregate amount of
$85 million, consisting of (i) a $15 million revolving credit line, (ii) a
Tranche A Term Loan Facility with an initial amount of $30 million, and (iii) a
Tranche B Term Loan Facility with an initial amount of $40 million. The Company
used approximately $11.2 million of the net proceeds from the Offering to reduce
the borrowings under the Senior Bank Debt and as of October 15, 1997 amended the
credit facility to provide an additional $10 million under the revolving credit
line. See Notes 5 and 11 of Notes to Consolidated Financial Statements. As a
result of and after giving effect to the application of the net proceeds of the
Offering to reduce the borrowed amount, the quarterly principal payments in
respect to Tranche A Term Loan Facility and the Tranche B Term Loan Facility
commenced on December 31, 1997; from December 31, 1997 through June 30, 1998,
the aggregate amount of such scheduled principal payments was approximately $0.8
million per quarter and from September 30, 1998 through March 31, 2001, the
aggregate amount of such scheduled principal payments will be approximately $1.5
million per quarter. In addition, the Company will be required to make quarterly
interest payments on such indebtedness. The amendment entered into as of
November 13, 1998 provided for an additional increase to the interest rates to
the revolving credit line, the Tranche A Term Loan Facility and Tranche B Term
Loan Facility of .50%. The revolving credit line, the Tranche A Term Loan
Facility and the Tranche B Term Loan Facility bear interest at variable rates,
which were approximately 8.97%, 8.90% and 9.15%, respectively, at March 31,
1999. The Senior Bank Debt is

                                       26
<PAGE>   27

guaranteed by the Company and is secured by a pledge of all of the stock of the
Drop Down Subsidiary and a security interest in the assets of the Drop Down
Subsidiary.

     The Company's indebtedness and the related covenants will have several
important effects on the future operations, including but not limited to, the
following: (i) a portion of the Company's cash flow from operations must be
dedicated to the payment of interest on and principal of its indebtedness and
will not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
R&D, acquisitions, general corporate purposes or other purposes may be limited;
and (iii) the Company's level of indebtedness could limit its flexibility in
reacting to business developments and changes in its industry and economic
conditions generally.

     The Company's operating activities used cash of approximately $9.0 million
in fiscal year 1999 and generated cash of approximately $6.4 million and $6.1
million in fiscal 1998 and 1997, respectively. The cash used by operations in
fiscal year 1999 was primarily from recognition of deferred revenue and payment
of accrued liabilities. The cash generated from operations was partially offset
by increases in accounts receivable and inventories in fiscal 1998 and 1997. The
Company's investing activities used cash of approximately of $3.0 million, $8.2
million and $2.0 million in fiscal 1999, 1998 and 1997, respectively. The
Company's use of cash for investing activities in 1998 was due to payments for
acquisitions and capital expenditures. The Company's use of cash in investing
activities in 1999 and 1997 was due to capital expenditures. In fiscal year
1999, the Company generated cash of $11.5 million in financing activities,
primarily in connection with long-term debt borrowed to finance fiscal year 1998
acquisitions.

RECENT ACCOUNTING PRONOUNCEMENTS

     In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will be effective for the Company's fiscal year ending March 31, 2001.
Management does not believe that the adoption of this pronouncement will have a
material impact on the Company's financial position or results of operations.

YEAR 2000 ISSUES

     The Year 2000 issue, which is common to most businesses, concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date-sensitive information on and beyond January
1, 2000. The Company believes that it has modified or replaced its affected
systems. A complete evaluation has been made on all internal systems, including
items such as voice mail, automated badge entry, email, payroll, accounting and
manufacturing. There are no known problems at this time. The Company has
completed the modifications to all of its information systems. All network
servers have been assessed and tested as Year 2000 compliant. In addition, the
Company has an ongoing policy of upgrading and testing for Year 2000 compliance,
as new software packages become available. The Company is satisfied that its
customer base is aware of the Year 2000 issue and is proactively working to
ensure that there are no problems associated with Year 2000. The Company expects
that its systems will be fully operational and will not cause any material
disruptions because of Year 2000 issues. Because of the uncertainties associated
with assessing preparedness of suppliers and customers, there is a risk of a
material adverse effect on the Company's future results of operations if these
groups are not capable of correcting their Year 2000 issues, if any. The Company
expects that its systems will be fully operational and will not cause any
material disruption because of Year 2000 issues. The Company has an ongoing
process to continue evaluation of all critical systems, products, suppliers and
customers from now until the Year 2000 and beyond. The Company does not expect
to incur any additional costs for the Year 2000 issue. The Year 2000 issue
resolution includes a final re-verification test of all systems and a
contingency plan (manual backup) to be implemented and validated by the fourth
quarter of calendar year 1999. The Company does not expect that the Year 2000
issue will have a material impact on the results of operations, liquidity or
consolidated financial position of the Company.

                                       27
<PAGE>   28

ITEM 7A  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 non trading
assets utilized to manage the interest rate cost of the outstanding long term
liabilities. The Company's net exposure to interest rate risk consists of its
floating rate debt which is tied to changes in U.S. and European LIBOR rates.
Assuming a 10% increase in interest rates, interest expense, net for 1999 would
have increased by approximately $.50 million. The current interest rate swap
agreement provides for payments to be made to the swap holder (NationsBank), if
interest rates fall from current levels and for payments to be made to the
Company if interest rates increase above a specific level. The Company has
examined the exposures to all of these risks and has concluded that none of
these exposures is material to fair values, cash flows or earnings.

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-25 and S-1 of this Annual Report
on Form 10-K are incorporated herein by reference.

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

     Not applicable.

                                       28
<PAGE>   29

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The information contained under the heading "Nominees for Election to the
Board of Directors" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for the Company's 1999 Annual Meeting of
Stockholders, to be filed with the Commission, including any information with
respect to compliance by directors, officers and beneficial owners of more than
10% of the Class A Common Stock with respect to Section 16(a) of the Securities
Exchange Act of 1934, is incorporated herein by reference. Pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K, information
relating to the executive officers of the Company is included in Item 1 of this
report.

ITEM 11.  EXECUTIVE COMPENSATION

     The information contained under the headings "Summary Compensation Table"
"Option Grants in the Last Fiscal Year", "Fiscal Year-End Option Values", and
"Directors' Compensation" in the definitive Proxy Statement to be used in
connection with solicitation of proxies for the Company's 1999 Annual Meeting of
Shareholders, to be filed with the Commission, is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information contained under the headings "Ownership of Stock by
Directors, Executive Officers and Principal Stockholders" in the definitive
Proxy Statement to be used in connection with the solicitation of proxies for
the Company's 1999 Annual Meeting of Stockholders, to be filed with the
Commission, including any information with respect to compliance by directors,
officers and beneficial owners of more than 10% of the Class A Common Stock with
respect to Section 16(a) of the Securities Exchange Act of 1934, is incorporated
herein by reference. For purposes of determining the aggregate market value of
the Company's voting stock held by nonaffiliates, shares held by all directors
and executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1999 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.

                                       29
<PAGE>   30

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (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

<TABLE>
<S>                                                           <C>
Report of Independent Public Accountants....................  F-1
Consolidated Balance Sheets as of March 31, 1999 and 1998...  F-2
Consolidated Statements of Operations for the Fiscal Years
  Ended March 31, 1999, 1998 and 1997.......................  F-3
Consolidated Statements of Changes in Stockholders' Equity
  for the Fiscal Years Ended March 31, 1999, 1998 and
  1997......................................................  F-4
Consolidated Statements of Cash Flows for the Fiscal Years
  Ended March 31, 1999, 1998 and 1997.......................  F-5
Notes to Consolidated Financial Statements..................  F-6
</TABLE>

     2. Financial Statement Schedule.

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

     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:

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER         DESCRIPTION OF EXHIBITS
--------        -----------------------
<C>        <C>  <S>
 2.01       --  Recapitalization and Stock Purchase and Sale Agreement,
                dated as of June 5, 1996, among THIN International N.V.
                (formerly known as Firearms Training Systems International
                N.V.), the Company, Centre Capital Investors II, L.P.,
                Centre Partners Coinvestment L.P., Centre Parallel
                Management Partners, L.P., Centre Capital Offshore
                Investors, II, L.P., Centre Capital Tax-exempt Investors II,
                L.P., State Board of Administration of Florida and Centre
                Partners Management LLC. (filed as Exhibit 2.01 to the
                Company's Registration Statement No. 333-13105)
 2.01-01    --  Letter Agreement, dated July 9, 1996, amending the
                Recapitalization and Stock Purchase and Sale Agreement.
                (filed as Exhibit 2.02 to the Company's Registration
                Statement No. 333-13105)
 2.01-02    --  First Amendment, dated as of July 31, 1996, to the
                Recapitalization and Stock Purchase and Sale Agreement.
                (filed as Exhibit 2.03 to the Company's Registration
                Statement No. 333-13105).
 2.02       --  Letter Agreement, dated November 1, 1996, from the Company
                to THIN International N.V. regarding payment of the
                Contingent Payment pursuant to the Recapitalization and
                Stock Purchase and Sale Agreement. (filed as Exhibit 2.04 to
                the Company's Registration Statement No. 333-13105)
 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)
</TABLE>

                                       30
<PAGE>   31

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER         DESCRIPTION OF EXHIBITS
--------        -----------------------
<C>        <C>  <S>
 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).
10.01-01    --  Amended and Restated Credit Agreement, dated as of October
                15, 1997, among the Company, FATS, Inc., NationsBank, N.A.
                (South) and the other Lenders named therein. (filed as
                Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q
                for the Fiscal Quarter ended September 30, 1997)
10.01-02    --  First Amendment to the Amended and Restated Credit
                Agreement, dated as of June 26, 1998, among the Company,
                FATS, Inc., NationsBank, N.A. and the other Lenders named
                therein. (Filed as Exhibit 10.01-02 to the Company's Annual
                Report on Form 10-K for the Fiscal Year ended March 31,
                1998)
10.01-03    --  Second Amendment to the Amended and Restated Credit
                Agreement, dated as of November 13, 1998, among the Company,
                FATS, Inc., NationsBank, N.A. and the other Lenders named
                therein. (Filed as Exhibit 10.01 to the Company's Quarterly
                Report on Form 10-Q for the Fiscal Quarter ended September
                30, 1998)
10.01-04    --  Third Amendment to the Amended and Restated Credit
                Agreement, dated as of March 31, 1999, among the Company,
                FATS, Inc., NationsBank, N.A. and the other Lenders named
                therein.
10.01-05    --  Fourth Amendment to the Amended and Restated Credit
                Agreement, dated as of April 30, 1999, among the Company,
                FATS, Inc., NationsBank, N.A. and the other Lenders named
                therein.
10.02       --  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)
10.03       --  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)
10.04       --  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)
10.05       --  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)
10.06       --  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)
10.07       --  Option to Lease, dated May 4, 1993, between the Company and
                Technology Park/Atlanta, Inc. (filed as Exhibit 10.07 to the
                Company's Registration Statement No. 333-13105)
10.08       --  Lease, dated May 4, 1993, between the Company and Technology
                Park/Atlanta, Inc. (filed as Exhibit 10.08 to the Company's
                Registration Statement No. 333-13105)
10.08-01    --  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)
10.08-02    --  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).
</TABLE>

                                       31
<PAGE>   32

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER         DESCRIPTION OF EXHIBITS
--------        -----------------------
<C>        <C>  <S>
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)
10.15       --  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)
10.16       --  Registration Rights Agreement, dated as of July 31, 1996,
                among the Company, THIN International N.V. (formerly known
                as Firearms Training Systems International N.V.) and the
                Institutional Holders set forth on Schedule I thereto.
                (filed as Exhibit 10.18 to the Company's Registration
                Statement No. 333-13105)
10.17       --  Firearms Training Systems, Inc. Executive Severance Benefit
                Plan. (filed as Exhibit 10.19 to the Company's 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)
10.19       --  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 identifying 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 December 31, 1998).
10.22       --  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).
</TABLE>

                                       32
<PAGE>   33

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER         DESCRIPTION OF EXHIBITS
--------        -----------------------
<C>        <C>  <S>
10.23       --  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).
10.24       --  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.
10.25       --  Officer Resignation agreement between the Company and Emory
                O. Berry dated March 19, 1999.
10.26       --  Employment Agreement, dated as of April 1, 1999, between the
                Company and John A. Morelli.
11.01       --  Statement Regarding Computation of Pro Forma Net Income Per
                Common Share.
21.01       --  Subsidiaries of the Company.
23.01       --  Consent of Arthur Andersen, LLP, dated July 14, 1999.
24.01       --  Power of Attorney (set forth on page V-1).
27.01       --  Financial Data Schedule.
</TABLE>

        (b) Reports on Form 8-K:

            None

        (c) Exhibits.

            See (a) (3) above.

        (d) Financial Statement Schedule.

            See (a) (2) above.

                                       33
<PAGE>   34

                    REPORT OF 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 SUBSIDIARIES as of March 31,
1999 and 1998 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1999. 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 schedule based on our
audits.

     We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a decrease in cash flows from
its current operations which raises doubt about its ability to meet its
obligations as they become due and therefore raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements 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, 1999 (Except with respect to the matter discussed in Note 12 as to which
the date is July 14, 1999)

                                       F-1
<PAGE>   35

                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                            MARCH 31, 1999 AND 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  1999        1998
                                                                ---------   ---------
  <S>                                                           <C>         <C>
                                        ASSETS
  CURRENT ASSETS:
    Cash and cash equivalents.................................  $   2,805   $   3,395
    Accounts receivable, net of allowance for doubtful
       accounts of $228 and $100 in 1999 and 1998,
       respectively...........................................     19,116      22,710
    Unbilled receivables......................................      4,744          --
    Inventories...............................................     17,854      17,725
    Prepaid expenses and other current assets.................        702         594
    Deferred income taxes.....................................      2,107       1,050
                                                                ---------   ---------
            Total current assets..............................     47,328      45,474
  PROPERTY AND EQUIPMENT, net.................................      5,306       3,971
  DEFERRED FINANCING COSTS, net...............................      2,795       3,007
  GOODWILL, net of accumulated amortization of $654 and $145
    in 1999 and 1998, respectively............................      4,496       2,751
  DEFERRED INCOME TAXES.......................................        225       1,065
  OTHER ASSETS................................................         --         112
                                                                ---------   ---------
                                                                $  60,150   $  56,380
                                                                =========   =========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
  CURRENT LIABILITIES:
    Accounts payable..........................................  $   5,384   $   3,389
    Accrued liabilities.......................................      7,500      11,060
    Income taxes payable......................................        345         390
    Deferred revenue..........................................      1,089       6,428
    Current maturities of long-term debt......................      6,000       5,300
                                                                ---------   ---------
            Total current liabilities.........................     20,318      26,567
                                                                ---------   ---------
  LONG-TERM DEBT, less current maturities.....................     66,200      57,700
                                                                ---------   ---------
  OTHER NONCURRENT LIABILITIES................................        172         344
                                                                ---------   ---------
  COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 11)
  MANDATORY REDEEMABLE PREFERRED STOCK (Note 5)...............      3,093          --
                                                                ---------   ---------
  STOCKHOLDERS' EQUITY (Notes 3 and 6):
    Preferred stock, $0.10 par value; 200 shares authorized,
       no shares issued in 1999 and 1998......................         --          --
    Class A common stock, $0.000006 par value; 68,060 shares
       authorized; 19,020 and 20,415 shares issued and
       outstanding in 1999 and 1998, respectively.............         --          --
    Class B nonvoting common stock, $0.000006 par value; 2,200
       shares authorized, 1,695 and 0 shares issued and
       outstanding in 1999 and 1998...........................         --          --
    Additional paid-in capital................................    114,324     112,390
    Accumulated deficit.......................................   (143,676)   (140,569)
    Accumulated other comprehensive income....................       (281)        (52)
                                                                ---------   ---------
            Total stockholders' (deficit) equity..............    (29,633)    (28,231)
                                                                ---------   ---------
                                                                $  60,150   $  56,380
                                                                =========   =========
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                       F-2
<PAGE>   36

                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               1999      1998      1997
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
REVENUES....................................................  $55,514   $73,547   $90,806
COST OF REVENUES............................................   35,537    33,867    44,214
                                                              -------   -------   -------
GROSS PROFIT................................................   19,977    39,680    46,592
                                                              -------   -------   -------
OPERATING EXPENSES:
  Selling, general, and administrative expenses.............   10,204    15,036    15,016
  Research and development expenses.........................    3,963     6,475     4,224
  Depreciation and amortization.............................    1,938     1,042       473
  Nonrecurring restructuring charge (Note 3)................      870        --        --
  Acquired in-process research and development charge.......       --     4,000        --
                                                              -------   -------   -------
          Total operating expenses..........................   16,975    26,553    19,713
                                                              -------   -------   -------
OPERATING INCOME............................................    3,002    13,127    26,879
                                                              -------   -------   -------
OTHER (EXPENSE) INCOME, net:
  Interest expense, net.....................................   (7,316)   (5,905)   (6,069)
  Nonrecurring recapitalization expenses (Note 11)..........       --        --    (1,181)
  Other income (expense), net...............................     (400)      (97)       71
                                                              -------   -------   -------
          Total other expense, net..........................   (7,716)   (6,002)   (7,179)
                                                              -------   -------   -------
(LOSS)/INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM....   (4,714)    7,125    19,700
(BENEFIT)/PROVISION FOR INCOME TAXES........................   (1,700)    3,892     7,359
                                                              -------   -------   -------
(LOSS)/INCOME BEFORE EXTRAORDINARY ITEM.....................   (3,014)    3,233    12,341
EXTRAORDINARY ITEM, net of income tax benefit of $1,913
  (Note 5)..................................................       --        --    (3,327)
                                                              -------   -------   -------
(LOSS)/INCOME BEFORE ACCRETION OF PREFERRED STOCK...........   (3,014)    3,233     9,014
                                                              -------   -------   -------
ACCRETION OF PREFERRED STOCK (Note 5).......................      (93)       --        --
                                                              -------   -------   -------
NET (LOSS)/INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS.......  $(3,107)  $ 3,233   $ 9,014
                                                              =======   =======   =======
BASIC NET (LOSS)/EARNINGS PER SHARE BEFORE EXTRAORDINARY
  ITEM......................................................  $ (0.15)  $  0.16   $  0.75
                                                              =======   =======   =======
DILUTED NET (LOSS)/EARNINGS PER SHARE BEFORE EXTRAORDINARY
  ITEM......................................................  $ (0.15)  $  0.15   $  0.69
                                                              =======   =======   =======
BASIC NET (LOSS)/EARNINGS PER SHARE.........................  $ (0.15)  $  0.16   $  0.55
                                                              =======   =======   =======
DILUTED NET (LOSS)/ EARNINGS PER SHARE......................  $ (0.15)  $  0.15   $  0.50
                                                              =======   =======   =======
WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING -- BASIC (Note 3).............................   20,686    20,408    16,489
                                                              =======   =======   =======
WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING -- DILUTED (Note 3)...........................   20,686    21,456    18,009
                                                              =======   =======   =======
</TABLE>

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

                                       F-3
<PAGE>   37

                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

               FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997

                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                         CLASS B
                                                   CLASS A              NONVOTING
                                                COMMON STOCK           COMMON STOCK      ADDITIONAL              ACCUMULATED
                            COMPREHENSIVE   ---------------------   ------------------    PAID-IN                 EARNINGS
                               INCOME          SHARES      AMOUNT    SHARES     AMOUNT    CAPITAL     WARRANTS    (DEFICIT)
                            -------------   ------------   ------   ---------   ------   ----------   --------   -----------
<S>                         <C>             <C>            <C>      <C>         <C>      <C>          <C>        <C>
Balance, March 31, 1996...          --        49,800,000      --           --      --        1,931         --     $  19,343
 Net income...............       9,014                --      --           --      --           --         --         9,014
 Common stock issued in
   connection with the
   Recapitalization
   (Note 11)..............          --        11,165,241      --           --      --       36,000         --            --
 Common stock retired in
   connection with the
   Recapitalization (Note
   11)....................          --       (46,832,022)     --           --      --       (1,816)        --      (150,034)
 Common stock issued to
   management in
   connection with the
   Recapitalization (Note
   11)....................          --           269,185      --           --      --          876         --            --
 Warrants issued in
   connection with the
   Recapitalization (Note
   11)....................          --                --      --           --      --           --        930            --
 Common stock issued in
   connection with initial
   public offering, net of
   issuance costs.........          --         6,000,000      --           --      --       75,340         --            --
 Contingent payment to
   THIN International
   (Note 11)..............          --                --      --           --      --           --         --       (19,300)
 Warrants repurchased in
   connection with the
   retirement of Bridge
   Notes (Note 5).........          --                --      --           --      --           --       (930)       (2,825)
 Foreign currency
   translation adj........         105                --      --           --      --           --         --            --
                               -------      ------------   -----    ---------   -----     --------     ------     ---------
 Comprehensive Income.....       9,119
Balance, March 31, 1997...                    20,402,404      --           --      --      112,331         --      (143,802)
 Net income...............       3,233                --      --           --      --           --         --         3,233
 Common Stock issued to
   employees exercising
   stock options,
   including tax
   benefit................          --             2,679      --           --      --           17         --            --
 Common Stock issued to
   Company Employee Stock
   401k Plan..............          --            10,239      --           --      --           42         --            --
 Foreign currency
   translation adj........        (145)               --      --           --      --           --         --            --
                               -------      ------------   -----    ---------   -----     --------     ------     ---------
 Comprehensive Income.....       3,088
Balance, March 31, 1998...                    20,415,322      --           --      --      112,390         --      (140,569)
 Net loss.................      (3,107)               --      --           --      --           --         --        (3,107)
 Common Stock issued in
   connection with Dart
   acquisition............          --           257,577      --           --      --        1,829         --            --
 Common Stock purchased
   and retired............          --           (15,000)     --           --      --          (75)        --            --
 Exchange of Shares Class
   A to Class B by Centre
   Entities...............                    (1,694,569)     --    1,694,569      --           --         --            --
 Compensatory stock
   options issued.........          --                --      --           --      --           71         --            --
 Common Stock issued to
   Company Employee Stock
   401k Plan..............          --            56,883      --           --      --          109         --            --
 Foreign currency
   translation adj........        (229)               --      --           --      --           --         --            --
                               -------      ------------   -----    ---------   -----     --------     ------     ---------
 Comprehensive Income.....     $(3,336)
Balance, March 31, 1999...                    19,020,213   $  --    1,694,569   $  --     $114,324     $   --     $(143,676)
                               =======      ============   =====    =========   =====     ========     ======     =========

<CAPTION>
                            CUMULATIVE
                              FOREIGN
                             CURRENCY
                            TRANSLATION
                            ADJUSTMENT      TOTAL
                            -----------   ---------
<S>                         <C>           <C>
Balance, March 31, 1996...     $ (12)     $  21,262
 Net income...............        --          9,014
 Common stock issued in
   connection with the
   Recapitalization
   (Note 11)..............        --         36,000
 Common stock retired in
   connection with the
   Recapitalization (Note
   11)....................        --       (151,850)
 Common stock issued to
   management in
   connection with the
   Recapitalization (Note
   11)....................        --            876
 Warrants issued in
   connection with the
   Recapitalization (Note
   11)....................        --            930
 Common stock issued in
   connection with initial
   public offering, net of
   issuance costs.........        --         75,340
 Contingent payment to
   THIN International
   (Note 11)..............        --        (19,300)
 Warrants repurchased in
   connection with the
   retirement of Bridge
   Notes (Note 5).........        --         (3,755)
 Foreign currency
   translation adj........       105            105
                               -----      ---------
 Comprehensive Income.....
Balance, March 31, 1997...        93        (31,378)
 Net income...............        --          3,233
 Common Stock issued to
   employees exercising
   stock options,
   including tax
   benefit................        --             17
 Common Stock issued to
   Company Employee Stock
   401k Plan..............        --             42
 Foreign currency
   translation adj........      (145)          (145)
                               -----      ---------
 Comprehensive Income.....
Balance, March 31, 1998...       (52)       (28,231)
 Net loss.................        --         (3,107)
 Common Stock issued in
   connection with Dart
   acquisition............        --          1,829
 Common Stock purchased
   and retired............        --            (75)
 Exchange of Shares Class
   A to Class B by Centre
   Entities...............        --             --
 Compensatory stock
   options issued.........        --             71
 Common Stock issued to
   Company Employee Stock
   401k Plan..............        --            109
 Foreign currency
   translation adj........      (229)          (229)
                               -----      ---------
 Comprehensive Income.....
Balance, March 31, 1999...     $(281)     $ (29,633)
                               =====      =========
</TABLE>

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

                                       F-4
<PAGE>   38

                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
                                                                  1999       1998       1997
                                                                ---------   -------   ---------
                                                                        (IN THOUSANDS)
  <S>                                                           <C>         <C>       <C>
  CASH FLOWS FROM OPERATING ACTIVITIES:
    Net (loss)/income.........................................  $  (3,107)  $ 3,233   $   9,014
                                                                ---------   -------   ---------
    Adjustments to reconcile net (loss)/income to net
      cash(used in)/provided by operating activities:
      Depreciation and amortization...........................      2,669     1,679         987
      Noncash portion of extraordinary item...................         --        --       3,871
      Compensatory stock options issued.......................         71        --          --
      Stock grant.............................................         --        --         120
      Accretion of preferred stock............................         93        --          --
      Deferred income taxes...................................       (296)      440        (625)
      Employee stock compensation plan........................        109        42          --
      Acquired in-process research and development charge.....         --     4,000          --
      Changes in assets and liabilities:
        Accounts receivable, net..............................     (1,136)   (1,298)    (10,598)
        Inventories...........................................       (257)   (2,203)        871
        Prepaid expenses and other current assets.............        (90)        4         178
        Escrow and other deposits.............................        103        59         (65)
        Accounts payable......................................      1,885    (1,476)        919
        Accrued liabilities...................................     (3,752)    1,273       2,593
        Income taxes payable..................................        (46)     (255)       (652)
        Deferred revenue......................................     (5,094)    1,060        (866)
        Noncurrent liabilities................................       (195)     (207)        347
                                                                ---------   -------   ---------
           Total adjustments..................................     (5,936)    3,118      (2,920)
                                                                ---------   -------   ---------
           Net cash (used in)/provided by operating
             activities.......................................     (9,043)    6,351       6,094
                                                                ---------   -------   ---------
  CASH FLOWS FROM INVESTING ACTIVITIES:
    Payments for business acquisitions........................       (394)   (6,801)         --
    Sale of business..........................................        200        --          --
    Additions to property and equipment, net..................     (2,783)   (1,445)     (1,989)
                                                                ---------   -------   ---------
           Net cash used in investing activities..............     (2,977)   (8,246)     (1,989)
                                                                ---------   -------   ---------
  CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from borrowings of long-term debt................     24,700     6,000     110,000
    Repayments of long-term debt..............................    (15,599)   (1,600)    (51,400)
    Proceeds from sale of common stock........................         --         9     112,096
    Proceeds from mandatory preferred stock...................      3,000        --          --
    Deferred financing costs..................................       (520)     (640)     (6,459)
    Repurchase of warrants....................................         --        --      (3,755)
    Repurchase of common stock................................        (75)       --    (171,150)
                                                                ---------   -------   ---------
           Net cash provided by/(used in) financing
             activities.......................................     11,506     3,769     (10,668)
                                                                ---------   -------   ---------
  EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES.................        (76)     (142)        105
                                                                ---------   -------   ---------
  NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS........       (590)    1,732      (6,458)
  CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................      3,395     1,663       8,121
                                                                ---------   -------   ---------
  CASH AND CASH EQUIVALENTS, END OF YEAR......................  $   2,805   $ 3,395   $   1,663
                                                                =========   =======   =========
  SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
    Interest..................................................  $   6,265   $ 5,244   $   5,278
                                                                =========   =======   =========
    Income taxes..............................................  $     241   $ 3,856   $   6,723
                                                                =========   =======   =========
</TABLE>

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

                                       F-5
<PAGE>   39

                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         MARCH 31, 1999, 1998, AND 1997

1. ORGANIZATION AND NATURE OF BUSINESS

     Firearms Training Systems, Inc. ("FATS" or the "Company"), a Delaware
corporation, was incorporated in 1984. The Company was a wholly owned subsidiary
of THIN International N.V. (previously Firearms Training Systems International
N.V.) ("THIN International"), a Netherlands Antilles corporation, until July 31,
1996, at which time approximately 79% of the outstanding stock of the Company
was sold to a group of entities (the "Centre Entities") managed by Centre
Partners Management LLC, in connection with a recapitalization and stock
purchase and sale agreement (the "Recapitalization") (Note 11).

     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."), Europe and
Asia.

     The Company has one wholly-owned subsidiary, FATS, Inc., which is the
operating subsidiary (the "Operating Subsidiary"). As of March 31, 1999, FATS,
Inc. had eight wholly owned subsidiaries (collectively, the "Subsidiaries").
Firearms Training Systems Limited, the Operating Subsidiary's U.K. subsidiary
established in 1992 ("FATS U.K."), has been subcontracted by the Operating
Subsidiary to perform manufacturing and maintenance work with respect to certain
of the Operating Subsidiary's contracts. F.A.T.S. Singapore Pte, Ltd., the
Operating Subsidiary's Singapore subsidiary established in 1994, conducts
certain activities of the Company in Asia. Firearms Training Systems
Netherlands, B.V., the Operating Subsidiary's Netherlands subsidiary established
in 1995, was organized to perform certain contractual obligations of the Company
with respect to the Company's contract with the Royal Netherlands Army and to
provide services to other customers in the region. F.A.T.S. Foreign Sales
Corporation was organized in April 1995 to act as an agent with respect to
export sales of products and services outside the U.S. On October 1, 1998, the
Operating Subsidiary sold all the assets of FSS, Inc., a Florida based weapons
simulation company. FATS Canada, Inc., the Operating Subsidiary's Canadian
subsidiary established in 1996, was organized to support the performance of
servicing obligations to Canadian customers. On March 1, 1998, FATS Canada, Inc.
acquired all of the outstanding stock of Simtran Technologies, Inc. ("Simtran"),
a Canadian-based simulation company. Effective April 1, 1998, FATS Canada, Inc.
and Simtran were amalgamated. The amalgamated company became Simtran. In
conjunction with the acquisition of Simtran, FATS Canada Holdings, a Canadian
corporation was formed. FATS Canada Holdings primary activity is the holding of
investments. On April 1, 1998 Dart International, Inc. ("Dart") became a wholly
owned subsidiary of FATS, Inc. Dart, a Colorado company, provides products and
services to the hunter and sports markets. On December 16, 1998, FATS, Inc.
established a wholly owned subsidiary, Firearms Training Systems Australia Pty
Ltd., to support the performance and service requirements for Australian
customers, principally the Australian Army.

     In fiscal 1997, THIN International contributed FATS U.K. to the Company and
FATS U.K., subsequently, became a wholly owned subsidiary of the Operating
Subsidiary. The accompanying financial statements have been retroactively
restated at historical cost to reflect the consolidation of FATS U.K. into the
Company. A significant majority of FATS U.K.'s operations involve intercompany
sales to the Operating Subsidiary, and such sales have been eliminated in these
consolidated statements. Remaining operations of FATS U.K. are not material.

     GOING CONCERN

     At March 31, 1999, the Company's ability to continue as a going concern is
subject to several business and market risks. The risks are (1) a large
receivable which is supported by a performance letter of credit from an
international customer must be received by the Company in the immediate future;
(2) the Company has not generated significant revenue or cash flow from its
current operations, and the expectation of future
                                       F-6
<PAGE>   40
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

revenues or cash flow cannot be assumed; and (3) the Company must receive new
contracts for product to be delivered in the current fiscal year in order to
achieve its revenue projections since the Company has entered the new fiscal
year with a significantly smaller backlog than in the previous two fiscal years.
The Company's large international receivable is secured by a performance letter
of credit. The Company has been orally assured by the relevant authority that
performance will be certified but is awaiting completion of necessary payment
authorization documentation.

     Management's plans in response to the above risks are (1) the Company
continues to take steps to further reduce cost and reinforce cost control
measures related to assure operations are conducted at the lowest cost possible;
(2) the Company remains focused on revenue maximization and has determined to
place greater emphasis on the domestic and international law enforcement
business through release of new products in this market sector; (3) the Company
has begun aggressively pursuing third party relationships in order to develop
additional new revenue and cash generating opportunities; and (4) Management
efforts have been focused to insure prompt collection of the large international
receivable which it believes is likely to occur.

     The Company believes that this business strategy may achieve positive
operating margins over time, provided that the Company collects the large
international receivable outstanding and achieves the new business revenue
targets needed to finance working capital needs. There can be no assurances that
this strategy will be successful or that the new business revenue targets can be
met in order to meet working capital needs. These factors, discussed in the note
above, raise substantial doubt about the ability of the Company to continue as a
going concern. The accompanying financial statements have been prepared under
the assumption that the Company will continue as a going concern and do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue in existence.

2. ACQUISITIONS

     On June 26, 1997, FATS, Inc. acquired certain operating assets of the ICAT
Judgmental Use of Force Business from SBS Technology, Inc. ("ICAT") for
approximately $2.2 million in cash and acquisition costs. The Company recorded
the acquisition using the purchase method of accounting with approximately $1.9
million of the purchase price allocated to goodwill. The results of operations
of ICAT have been included in the Company's consolidated statements of
operations since the effective date of the acquisition.

     On October 1, 1997, FSS, Inc. ("FSS") acquired all of the operating assets
of a Florida based simulation company. The consideration included shares of
common stock that could be issued based on future financial performance of the
subsidiary. On October 1, 1998, FSS, including all assets, was sold for
approximately $200,000 in cash and other receivables. With the sale of FSS, the
Company no longer has the possibility of issuing additional shares to the former
owners of FSS. The results of FSS operations have been included in the Company's
consolidated statements of operations through the effective date of the sale. In
connection with the sale, approximately $120,000 in goodwill associated with the
purchase of FSS was removed from the Company's books.

     On March 1, 1998, a Company subsidiary acquired all of the outstanding
common stock of Simtran for approximately $4.4 million in cash and acquisition
costs and assumed liabilities of $500,000. In addition, the Company could
potentially pay up to an additional $4 million in cash consideration if certain
future Simtran revenue performance criteria are met. Since March 1, 1998 the
Company has paid approximately $10,000 in additional cash consideration. Based
on an assessment by the Company, in conjunction with an independent valuation
firm, it was determined that $4 million of Simtran's purchase price represented
technology that does not meet the accounting definition of completed technology,
and thus should be charged to earnings under generally accepted accounting
principles. The Company recorded the acquisition using the purchase method of
accounting with $4 million of the purchase price allocated to acquired
in-process research and development
                                       F-7
<PAGE>   41
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and charged to the consolidated statements of operations in March 1998 and
approximately $900,000 of the purchase price allocated to goodwill. The results
of operations of Simtran have been included in the Company's consolidated
statements of operations since the effective date of the acquisition.

     On April 1, 1998, the Operating Subsidiary acquired the outstanding stock
of Dart, a Colorado-based hunter and sports simulation company, in exchange for
257,577 Class A common shares of the Company. The Company recorded the
acquisition using the purchase method of accounting with approximately $2.4
million of the price allocated to goodwill. The results of operations of Dart
have been included in the Company's consolidated statements of operations since
the effective date of the acquisition.

     The Company amortizes all goodwill associated with acquisitions over a ten
year period. The unaudited pro forma consolidated results of operations of the
Company for the years ended March 31, 1998 and 1997 are summarized below as if
the acquisitions of ICAT, Simtran and Dart described above had occurred on April
1, 1997 and 1996, respectively (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              MARCH 31,
                                                              ---------
                                                                1998
                                                              ---------
<S>                                                           <C>
Revenues....................................................   $77,510
Net income before extraordinary item........................     4,738
Net income..................................................     4,738
Basic earnings per share....................................      0.23
Diluted earnings per share..................................      0.22
</TABLE>

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

     REVENUE RECOGNITION

     Substantially all revenue is derived from the sale of small and supporting
arms training simulators and accessories. Revenue is primarily recognized upon
shipment. A significant portion of the Company's revenues is derived from
shipments under contract with various governmental agencies. Such contracts
generally specify pricing terms by product and provide for shipment of the
Company's simulators and other products over an extended period of time, with
billings related to the shipment schedule. These contracts generally do not
include reimbursement of product development costs. Advanced billings related to
contracts are recorded as deferred revenue and are recognized primarily as units
are delivered or on a percentage of completion method for contracts in which
completion typically exceeds one year. Amounts billed for extended warranties
are recorded as deferred revenue and are recognized as income over the lives of
the service agreements, which generally range from one to three years. Unbilled
receivables represent shipments or contract deliverables made but not invoiced
to the customer.

                                       F-8
<PAGE>   42
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     INVENTORIES

     Inventories consist primarily of simulators, computer hardware, projectors
and component parts. Inventories are valued at the lower of cost (on a first-in,
first-out basis) or market. Cost includes materials, labor, and manufacturing
overhead. Market is defined as net realizable value.

     Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Raw materials...............................................  $ 8,810   $11,635
Work in progress............................................    7,226     3,341
Finished goods..............................................    1,818     2,749
                                                              -------   -------
                                                              $17,854   $17,725
                                                              =======   =======
</TABLE>

     PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which 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, 1999, 1998 and
1997 was $1,419,000, $897,000, and $473,000, respectively.

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

<TABLE>
<CAPTION>
                                                                 MARCH 31,
                                                              ---------------
                                                               1999     1998
                                                              ------   ------
<S>                                                           <C>      <C>
Machinery and equipment.....................................  $5,870   $4,451
Demonstration equipment.....................................   1,704    1,427
Furniture and fixtures......................................     405      691
Vehicles....................................................     340      400
Leasehold improvements......................................     182      224
                                                              ------   ------
                                                               8,501    7,193
Less accumulated depreciation and amortization..............  (3,195)  (3,222)
                                                              ------   ------
                                                              $5,306   $3,971
                                                              ======   ======
</TABLE>

     LONG-LIVED ASSETS

     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," 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 cash flows expected to result from the
use of the asset and its eventual disposition. Having found no instances whereby
the sum of expected future cash flows (undiscounted and without interest
charges) was less than the carrying amount of the asset, thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.

                                       F-9
<PAGE>   43
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 MARCH 31,
                                                              ----------------
                                                               1999     1998
                                                              ------   -------
<S>                                                           <C>      <C>
Sales commissions, bonuses and agents' commissions..........  $1,659   $ 4,175
Accrued salaries and related expenses.......................   1,259     2,069
Professional fees...........................................     101       380
Accrued interest............................................     759       369
Accrued warranty costs......................................     499     1,282
Other.......................................................   3,223     2,785
                                                              ------   -------
                                                              $7,500   $11,060
                                                              ======   =======
</TABLE>

     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 which 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.

     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.

     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, 1999 and 1998. 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 long-term debt, approximate their fair values due to the
immediate or short-term maturity of these financial instruments at March 31,
1999 and 1998. As the variable interest rate on the Company's long-term debt is
set for a maximum of 180 days, the carrying value of long-term debt approximates
fair value at March 31, 1999.

     NET (LOSS)/INCOME PER COMMON SHARE

     Basic net (loss)/income per common share is computed using the weighted
average number of shares of common stock outstanding. Diluted net (loss)/income
per share is computed using the weighted average

                                      F-10
<PAGE>   44
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

number of shares of common stock outstanding and common equivalent shares
("CESs") from warrants and from stock options (using the treasury stock method).
No CESs were included in the computation of diluted net loss per share for the
year ended March 31, 1999 as all were anti-dilutive. Total CESs included in the
computation of diluted net income per share for the years ended March 31, 1998
and 1997 were 1,048,000 and 1,520,000, respectively. The net income per share
effect of the extraordinary item incurred for the year ended March 31, 1997 was
$0.20 and $0.18 per share for basic and diluted net income per share,
respectively. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock and CESs issued at prices below the
initial public offering price during the 12-month period prior to the Company's
initial public offering (the "Offering") (Note 4) have been included in the
calculation of basic and diluted net income per share as if they were
outstanding for all periods prior to the Offering, regardless of whether they
are dilutive. Accordingly, the shares issued in the Recapitalization (Note 11),
all shares issuable upon exercise of stock options granted (Note 6), and all
shares issuable upon exercise of warrants (Note 5) are included in the earnings
per share calculations for all periods presented. As the Company also
repurchased shares in connection with the Recapitalization, the effect of the
repurchased shares is also included in the earnings per share calculations for
all periods presented prior to the Offering.

     STOCK SPLIT

     In connection with the Recapitalization (Note 11), the Company effected a
100,000-for-one stock split during fiscal year 1997. In anticipation of the
Offering, the Company effected another stock split of 1.66-for-one during fiscal
year 1997. All references in the accompanying financial statements to number of
shares and per share amounts of the Company's common stock prior to the
Recapitalization and the Offering have been retroactively restated to reflect
the increased number of common shares outstanding from both the 100,000-for-one
stock split and the 1.66-for-one stock split.

     CLASS A TO CLASS B COMMON SHARES EXCHANGE

     On April 24, 1998, 1,694,569 shares of the Company's voting Class A Common
Stock were exchanged by the Centre Entities for an equal amount of non-voting
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 Class A
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
Class A Common Stock outstanding immediately following such conversion, unless
concurrently with such conversion the shares of Class A Common Stock are
transferred to an unaffiliated person.

     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 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will be effective for the Company's fiscal year ending March 31, 2001.
Management does not believe that the adoption of this pronouncement will have a
material impact on the Company's financial position or results of operations.

                                      F-11
<PAGE>   45
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles 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.

     NONRECURRING RESTRUCTURING CHARGE

     The Company recognized a nonrecurring restructuring charge of $870,000
related to a workforce reduction and certain other measures implemented to
enhance future profitability in fiscal year 1999. As of March 31, 1999 a balance
of $318,000 remains in the restructuring accrual.

     EMPLOYEE BENEFIT PLAN

     The Company has a defined contribution profit sharing plan (the "Plan") for
substantially all Company employees meeting the eligibility requirements as
defined in the plan document. 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. Total contributions by the
Company to the Plan were approximately $266,000, $226,000 and $101,000 for the
years ended March 31, 1999, 1998 and 1997, respectively.

4. THE OFFERING

     In November 1996, the Company completed an initial public offering of
6,000,000 shares of its Class A Common Stock. Net proceeds to the Company were
approximately $75.3 million and were used to repay the $40 million senior
subordinated bridge notes (the "Bridge Notes") (Note 5) issued in connection
with the Recapitalization to reduce by $11.2 million the NationsBank Credit
Agreement (Note 5), to make a $19.3 million contingent payment to THIN
International (Note 11) and to fund certain nonrecurring obligations of the
Company.

5. LONG-TERM DEBT

     NATIONSBANK CREDIT AGREEMENT

     On July 31, 1996, the Company replaced its existing credit agreement and
entered into a credit agreement with a group of financial institutions (the
"NationsBank Credit Agreement"). The NationsBank Credit Agreement was amended
and restated on October 15, 1997. The three components of the NationsBank Credit
Agreement are as follows:

     - Revolving credit facility with an aggregate principal amount of up to $25
       million (which includes a $10 million letter-of-credit subfacility and a
       $2 million swing line subfacility) (the "Revolving Credit Facility"). The
       Revolving Credit Facility matures and is payable July 31, 2002. At March
       31, 1999, the Company had $20.5 million of outstanding borrowings under
       this facility.

     - A term loan with an initial principal amount of $30 million maturing July
       31, 2002 (the "Tranche A Loan"). At March 31, 1999, $18.7 million was
       outstanding under the Tranche A Loan, with quarterly principal payments
       ranging from $1,400,000 to $1,600,000.

                                      F-12
<PAGE>   46
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     - A term loan with an initial principal amount of $40 million maturing July
       31, 2003 (the "Tranche B Loan"). At March 31, 1999, $33.0 million was
       outstanding under the Tranche B Loan, with quarterly principal payments
       ranging from $100,000 to $8,000,000.

     At March 31, 1999 and 1998, long-term debt consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Tranche A Loan..............................................  $18,700   $23,600
Tranche B Loan..............................................   33,000    33,400
Revolving Credit Facility...................................   20,500     6,000
                                                              -------   -------
                                                               72,200    63,000
Current portion.............................................   (6,000)   (5,300)
                                                              -------   -------
                                                              $66,200   $57,700
                                                              =======   =======
</TABLE>

     The Company had outstanding irrevocable standby letters of credit in the
principal amount of approximately $1,485,000 and $2,147,000 at March 31, 1999
and 1998, respectively, in connection with the performance of certain sales
contracts.

     The Tranche A Loan and the NationsBank Revolving Credit Facility bear
interest at the Company's option of either:

     - The greater of (i) prime plus 1.25% to 2.25% (based on the Company's
       leverage ratio and certain other factors defined in the NationsBank
       Credit Agreement) or (ii) the federal funds rate plus .50% plus 1.25% to
       2.25% (based on the Company's leverage ratio and certain other factors
       defined in the NationsBank Credit Agreement) or

     - A function of the Eurodollar rate plus 2.25% to 3.75% (based on the
       Company's leverage ratio and certain other factors defined in the
       NationsBank Credit Agreement).

     The Tranche B Loan bears interest at the Company's option of either:

     - The greater of (i) prime plus 2.5% (based on the Company's leverage ratio
       and certain other factors defined in the NationsBank Credit Agreement) or
       (ii) the federal funds rate plus 3.0% (based on the Company's leverage
       ratio and certain other factors defined in the NationsBank Credit
       Agreement) or

     - A function of the Eurodollar rate plus 4.0% (based on the Company's
       leverage ratio and certain other factors defined in the NationsBank
       Credit Agreement).

     At March 31, 1999, the interest rates in effect were 8.97% for the
Revolving Credit Facility and 8.90% for the Tranche A Loan and 9.15% for the
Tranche B Loan.

     On December 5, 1997, the Company entered into an interest rate swap
agreement that expires on December 5, 2002 (the "swap period"), unless
NationsBank elects to terminate the swap agreement on December 5, 2000. Nothing
in the agreement shall obligate NationsBank to elect the termination date. The
agreement protects outstanding floating rate debt of $10,000,000 over the swap
period. Under the agreement, the Company will pay a fixed rate of interest per
quarter as measured by changes in 90-day LIBOR over the length of the swap.

     The NationsBank Credit Agreement also provides for a commitment fee of 0.5%
per year, paid quarterly, on the unused portion of the NationsBank Revolving
Credit Facility and a yearly agency fee of $75,000.

     The borrowings under the NationsBank 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

                                      F-13
<PAGE>   47
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the capital stock of the Company's foreign subsidiaries. The NationsBank Credit
Agreement also contains restrictive covenants, which, among other things, limit
borrowings and capital expenditures and require certain leverage, fixed charge,
and interest coverage ratios, as defined, to be maintained and require a minimum
net worth, as defined. Borrowings at March 31, 1999 were $72.2 million.

          The aggregate annual maturities of long-term debt at March 31, 1999
     are as follows (in thousands):

<TABLE>
<S>                                                           <C>
2000........................................................  $ 6,000
2001........................................................    6,000
2002........................................................    6,300
2003........................................................   45,900
2004........................................................    8,000
                                                              -------
                                                              $72,200
                                                              =======
</TABLE>

     BRIDGE NOTES

     Also in July 1996, the Company received $40 million from the sale of Bridge
Notes to a financing institution. The Bridge Notes were repaid from the proceeds
of the Offering (Note 4).

     MANDATORY REDEEMABLE PREFERRED STOCK

     On November 13, 1998, the NationsBank credit agreement was amended to
provide, among other things, for an immediate capital investment of $3,000,030
by affiliates of Centre Partners Management, LLC. The Company entered into a
Securities Purchase Agreement with the Centre Entities whereby the Centre
Entities, for $3,000,030, purchased 18,182 units of a security comprised of
18,182 shares of Series A Preferred Stock (the "Preferred Stock") and an
aggregated 2,909,120 non-detachable warrants to purchase Class B Non-Voting
Common Stock ("Class B Stock") with an exercise price of $1.03125. Each unit of
the security includes one share of Preferred Stock and 160 warrants, and the
security bears a dividend of 8% per annum payable quarterly in additional units
of the security. The warrants in a unit can be exercised by tendering one share
of Preferred Stock, and the Preferred Stock is subject to mandatory redemption
on November 13, 2003 at the liquidation value thereof. It is also subject to
redemption at the option of the holder in the event of change of control of the
Company as defined. As of March 31, 1999, 18,743 shares of Series A Preferred
Stock and 2,998,954 warrants were outstanding. The Company recorded an accretion
of the preferred stock dividend of approximately $93,000 in fiscal year ended
March 31, 1999.

     WARRANTS

     In connection with the issuance of the Bridge Notes, the Company entered
into a warrant escrow agreement (the "warrants") which required the Company to
release from escrow warrants for between 288,434 and 2,019,034 shares of common
stock (in any combination of voting or nonvoting as the holder may elect),
contingent upon how and when the Bridge Notes were repaid and, if issued, the
senior preferred stock redeemed. In connection with the Offering, the holder of
the warrants agreed to cancel the warrants in exchange for a payment of
approximately $3.8 million from the net proceeds of the Offering. The fair value
of these warrants at the date of grant was estimated to be approximately $3.22
per share, which is the price paid per share by the Centre Entities in
connection with the Recapitalization (Note 11). The effective interest rate of
the Bridge Notes, taking into consideration the issuance of such warrants, was
approximately 12.8% to 13.3%. Additionally, as noted above, 2,998,954 warrants
to purchase shares of Class B common stock were issued to the Centre Entities.

                                      F-14
<PAGE>   48
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     FEES AND EXPENSES

     The Company capitalized approximately $520,000 and $640,000 in 1999 and
1998, respectively, of fees and expenses incurred in connection with the
NationsBank Credit Agreement and the amendments thereto and the issuance of the
Preferred Stock. The fees were paid to the bank upon consummation of the
transactions, and the expenses consisted primarily of legal, accounting and
other miscellaneous expenses. Fees of approximately $3 million were expensed as
a result of the repayment of the Bridge Notes and the repayment of a portion of
the Tranche A Loan and the Tranche B Loan and are included in the extraordinary
loss in the accompanying statement of operations. The remaining capitalized fees
and expenses have been included in deferred financing costs, net of accumulated
amortization, and are being amortized over the life of the related debt. The
accumulated amortization included in deferred financing costs is $1,735,000 and
$1,151,000 in 1999 and 1998, respectively.

     EXTRAORDINARY ITEM

     A portion of the proceeds from the Offering was used to repay the $40
million Bridge Notes and to reduce the outstanding borrowings of the NationsBank
Credit Agreement by $11.2 million. As a result, an extraordinary loss occurred
on the early extinguishment of debt in the fiscal year ended March 31, 1997.
This extraordinary item includes legal fees, unamortized deferred financing
costs, unamortized basis of warrants and a fee paid in connection with the
repayment of the Bridge Notes.

6. STOCK-BASED COMPENSATION PLAN

     The Company adopted the Firearms Training Systems, Inc. Stock Option Plan
(the "Plan") in fiscal year 1997. The Company has reserved a total of 2,490,000
shares of Class A common stock for issuance under the Plan under four different
nonqualified option series. The Plan provides for antidilution in the event of
certain defined circumstances. The 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. 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. 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.

                                      F-15
<PAGE>   49
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     SERIES C OPTIONS

     Options under this series are available for grant to nonemployee directors.
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 of the optionee's ceasing to be a director.

SERIES D OPTIONS

     Options under this series are available for grant to officers and other
employees. 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.

     A summary of changes in outstanding options during the years ended March
31, 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                                                  AVERAGE
                                                                    EXERCISE      EXERCISE
                                                      OPTIONS        PRICE         PRICE
                                                     ---------   --------------   --------
<S>                                                  <C>         <C>              <C>
March 31, 1997.....................................  1,758,296   $3.25 - $14.00    $3.44
Granted............................................    400,100   $5.19 - $14.25     9.28
Canceled...........................................    (64,068)  $3.25 - $14.00     5.97
Exercised..........................................     (2,679)  $         3.25     3.25
                                                     ---------   --------------    -----
March 31, 1998.....................................  2,091,649   $3.25 - $14.25     4.48
Granted............................................    827,401   $.688 - $12.00     3.58
Canceled...........................................   (697,898)  $1.25 - $14.25     6.08
Exercised..........................................          0                        --
                                                     ---------                     -----
March 31, 1999.....................................  2,221,152   $.688 - $14.00     3.65
                                                     =========
Shares exercisable as of March 31, 1999............    289,169   $1.03 - $14.00     3.83
                                                     =========
Shares available for future grants.................    266,169
                                                     =========
</TABLE>

     Grants and cancelations for fiscal year 1999 include 189,950 shares
reissued at a price of $3.253 on December 11, 1998. The options were canceled
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, 1999 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following ranges of weighted average assumptions used for
grants:

<TABLE>
<CAPTION>
                                                            1999        1998       1997
                                                         ----------   --------   --------
<S>                                                      <C>          <C>        <C>
Risk-free interest rate................................   5.75-5.85%   5.7-5.9%   6.5-7.0%
Expected dividend yield................................           0          0          0
Expected lives (in years)..............................       4-9.0      4-9.0    2.5-8.0
Expected volatility....................................      104.30      78.84      50.53
</TABLE>

                                      F-16
<PAGE>   50
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The total value of options at March 31, 1999, 1998 and 1997 was computed as
approximately $6,860,000, $5,141,000 and $17,989,000, 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 (loss)/ income and basic and diluted net (loss)/ income per share
would be (increased)/ decreased by the following pro forma amounts on an annual
basis (net of tax):

<TABLE>
<CAPTION>
                                                          1999       1998        1997
                                                        --------   --------   ----------
<S>                                                     <C>        <C>        <C>
Net (loss)/income.....................................  $815,000   $672,000   $2,142,000
Basic net (loss)/ income per share....................     (0.04)      0.03         0.13
Diluted net (loss)/income per share...................     (0.04)      0.03         0.12
</TABLE>

     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, 1999:

<TABLE>
<CAPTION>
                                                                                     OPTIONS EXERCISABLE
                                                            WEIGHTED                ----------------------
OPTIONS OUTSTANDING                                          AVERAGE     WEIGHTED   EXERCISABLE   WEIGHTED
--------------------------------------------------------    REMAINING    AVERAGE       AS OF      AVERAGE
                                               NUMBER OF   CONTRACTUAL   EXERCISE    MARCH 31,    EXERCISE
RANGE OF EXERCISE PRICES                        SHARES        LIFE        PRICE        1999        PRICE
------------------------                       ---------   -----------   --------   -----------   --------
<S>                                            <C>         <C>           <C>        <C>           <C>
$0.00 -- $1.43...............................    108,000       9.6        $ 1.03       26,675      $ 1.03
$1.43 -- $2.85...............................     76,300       9.5          1.78            0           0
$2.85 -- $4.28...............................  1,790,381       5.9          3.25      229,825        3.25
$4.28 -- $5.70...............................     16,600       5.8          5.19        5,534        5.18
$5.70 -- $7.13...............................     14,967       4.6          6.43        3,402        6.51
$7.13 -- $8.55...............................    102,400       6.0          7.61           --          --
$8.55 -- $9.98...............................        100       6.0          9.00           34        9.00
$11.40 -- $12.83.............................     92,351       5.1         11.80       22,789       11.75
$12.83 -- $14.25.............................     20,000       6.0         14.00          910       14.00
                                               ---------       ---        ------      -------      ------
                                               2,221,152       6.1          3.65      289,169        3.83
</TABLE>

     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.

                                      F-17
<PAGE>   51
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                              -------------------------
                                                               1999      1998     1997
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Current:
  Federal income tax (benefit)/expense......................  $(2,001)  $3,046   $6,844
  Foreign income tax expense................................      868      172      529
  State income tax (benefit)/expense........................     (271)     234      611
  Deferred income tax (benefit) expense.....................     (296)     440     (625)
                                                              -------   ------   ------
                                                              $(1,700)  $3,892   $7,359
                                                              =======   ======   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                              -------------------------
                                                               1999      1998     1997
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Tax at statutory federal rate...............................  $(1,603)  $2,422   $6,895
State taxes, net of federal income tax benefit..............       --      128      389
Nondeductible goodwill......................................       83       --       --
Research and development tax credit.........................       --       --       --
Foreign sales corporation benefit...........................     (201)    (294)    (516)
Nondeductible recapitalization expenses.....................       --       --      350
Acquired research and development charge....................       --    1,360       --
Other.......................................................       21      276      241
                                                              -------   ------   ------
          Total.............................................  $(1,700)  $3,892   $7,359
                                                              =======   ======   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred Tax Assets:
  Inventory reserves........................................  $   358   $   380
  Accrued liabilities.......................................      183       569
  Warranty reserve..........................................      140       245
  Deferred revenue..........................................      245       156
  Net Domestic operating loss carryforwards.................    1,319         0
  Net Foreign operating loss carryforwards..................      445     1,065
  Other.....................................................      134        58
                                                              -------   -------
          Total Gross Deferred Tax Assets...................  $ 2,824   $ 2,473
                                                              =======   =======
  Deferred Tax Liabilities:
  Accelerated depreciation..................................  $   217   $    75
  Other.....................................................      275       283
                                                              -------   -------
          Total Gross Deferred Tax Liabilities..............      492       358
                                                              -------   -------
  Net Deferred Tax Assets...................................    2,332     2,115
  Less: Current Net Deferred Tax Assets.....................   (2,107)   (1,050)
                                                              -------   -------
          Noncurrent Net Deferred Tax Assets................  $   225   $ 1,065
                                                              =======   =======
</TABLE>

                                      F-18
<PAGE>   52
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In fiscal year 1998, the Company recorded a deferred tax asset of
$1,065,000, in connection with the acquisition of Simtran, related to the net
operating loss carryforwards of Simtran of approximately $3.4 million. The
Company used approximately $1.9 million in fiscal year 1999 to offset taxable
income, leaving $445,000 of deferred tax assets as of March 31, 1999. These net
operating loss carryforwards expire in 2002.

     Additionally, the Company's net loss in fiscal year 1999 resulted in the
generation of approximately $2.8 million in domestic operating loss
carryforwards and a related deferred tax asset of $1,319,000. This net operating
loss carryforward expires in 2019. The Company's management has determined that
it is more likely than not that the Company will be able to fully utilize the
deferred tax assets.

8. CONCENTRATION OF REVENUES

     Most of the Company's customers to date have been in the public sector of
the United States ("U.S."), including the federal, state and local governments,
and in the public sectors of a number of other countries. Approximately 17.1% of
the Company's revenues for fiscal 1999 was attributable to sales to military
authorities in the U.S., 14.2% were attributable to sales to law enforcement
authorities in the U.S. and 64.2% was attributable to sales to military and law
enforcement authorities internationally. 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.

     For the year ended March 31, 1999, the Company's five largest customers
accounted for approximately 62.3% of the Company's total revenues. For any
period, a "major customer" is defined as a customer from which the Company
generated more than 10% of its revenues for that period. The following table
summarizes information about the Company's major customers for the years ended
March 31, 1999, 1998, and 1997:

<TABLE>
<CAPTION>
                                                                                  PERCENT
                                                                      AGGREGATE      OF
                                                                      REVENUES     TOTAL
                              MAJOR CUSTOMERS                          (000'S)    REVENUES
                              ---------------                         ---------   --------
<S>     <C>                                                           <C>         <C>
1999..  Canada Dept. National Defence                                  $20,247      36.5%
1998..  U.S. Marine Corps                                               20,994      28.5
        Italian Airforce                                                 8,926      12.1
1997..  U.S. Marine Corps                                               44,802      49.3
</TABLE>

     At March 31, 1999 and 1998, the Company had approximately $9,742,000 and
$9,260,000, respectively, in outstanding accounts receivable related to revenues
recognized from major customers for the related year. In addition, approximately
$4.8 million of the March 31, 1999 accounts receivable was due from one
international customer, all of which was secured by a letter of credit.

     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.

                                      F-19
<PAGE>   53
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, including its largest current
contract (Contract 2014 with the U.S. Marine Corps), 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 are made to customers located
outside the U.S., primarily in Europe and Asia. In fiscal 1999, 1998 and 1997,
64.2%, 46.0% and 31.3% of the Company's revenues, respectively, were derived
from sales to customers located outside the U.S. 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. Political and economic factors have been identified by the Company
with respect to certain of the markets in which it competes. 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.

9. 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 noncancelable operating leases was approximately $925,000,
$755,000 and $743,000 for the years ended March 31, 1999, 1998, and 1997,
respectively.

     At March 31, 1999, future minimum payments under noncancelable operating
leases were as follows (in thousands):

<TABLE>
<S>                                                           <C>
2000........................................................  $  969
2001........................................................     976
2002........................................................     863
2003........................................................     626
2004........................................................     557
Thereafter..................................................   2,381
                                                              ------
                                                              $6,372
                                                              ======
</TABLE>

     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.

                                      F-20
<PAGE>   54
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     EMPLOYMENT AGREEMENT

     In September 1996, the Company entered into an employment agreement with
its president and chief executive officer. In March 1999, the Company entered
into an employment agreement with its Chief Financial Officer. The amount of
these contracts is not material to the Company's financial position.

     LEGAL

     On October 3, 1997, Dart, a Company subsidiary, was sued by Advance
Interactive Systems, Inc. ("AIS") for alleged infringement of a patent owned by
AIS, U.S. Patent No. 5,649,706 (the "706 Patent"). Dart filed its answer on
December 2, 1997, denying all material allegations, asserting numerous
affirmative defenses, and counterclaiming for a judicial declaration of
noninfringement, patent invalidity, patent unenforceability, and damages for
unjust enrichment. Discovery is ongoing at this time, and no dispositive motions
have been filed or heard. In the opinion of the Company's management, this
proceeding will not have a material adverse effect on the Company's financial
position, liquidity, or results of operations.

     On January 27, 1999, FATS, Inc. was sued by Advanced Interactive Systems,
Inc ("AIS") for alleged infringement of a patent owned by AIS, U.S. Patent No.
5,823,779 (the "779 Patent"). FATS filed its answer on May 21, 1999 denying
infringement and counter claimed seeking declaratory judgement that the 779
Patent is invalid, among other claims. Discovery has not yet begun on this case.
In the opinion of the Company's management, this proceeding will not have a
material adverse effect on the Company's financial position, or results of
operations.

     The Company is also involved in various other legal actions arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.

10. 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 and operates primarily in the U.S. Export sales
are handled through F.A.T.S. Foreign Sales Corporation and, to a lesser extent,
through certain other subsidiaries. Geographic financial information on
international sales is as follows (in thousands):

<TABLE>
<CAPTION>
                                                               YEAR ENDED MARCH 31,
                                                            ---------------------------
                                                             1999      1998      1997
                                                            -------   -------   -------
<S>                                                         <C>       <C>       <C>
International sales:
  Europe..................................................  $ 9,480   $25,404   $22,302
  Asia....................................................    5,109     5,719     5,008
  Canada..................................................   20,259     1,574       745
  Other...................................................      767     1,135       398
                                                            -------   -------   -------
          Total...........................................  $35,615   $33,832   $28,453
                                                            =======   =======   =======
</TABLE>

11. THE RECAPITALIZATION

     In connection with the Recapitalization and prior to the Offering:

     - The Company effected a 100,000-for-one stock split, resulting in
       49,800,000 shares of Class A common stock outstanding and owned by THIN
       International.

                                      F-21
<PAGE>   55
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     - The Company sold a total of 11,165,241 shares of Class A common stock and
       Class B nonvoting common stock to the Centre Entities for $36 million
       (the "Stock Sale"). The shares of Class B nonvoting common stock were
       subsequently converted to Class A common stock.

     - The Company obtained $116 million in borrowings (including certain
       warrants) under the NationsBank Credit Agreement and the Bridge Notes
       (collectively, the "Borrowings") (Note 5). Proceeds from the Borrowings
       and the Stock Sale were then used to repurchase 46,832,022 shares of
       common stock from THIN International for approximately $151.9 million, of
       which $15 million was placed in escrow for up to two years pending the
       occurrence of certain events as defined in the escrow agreement. The
       repurchased shares were canceled by the Company. A contingent payment of
       $19.3 million in cash was made to THIN International upon consummation of
       the Offering.

     - The Company also sold 232,333 shares to management at fair market value,
       granted 36,852 shares to the new president, and granted stock options for
       1,742,834 shares at fair market value (Note 6).

     Assuming the Recapitalization and the use of the proceeds of the Offering
to repay debt had occurred on April 1, 1995, net income would have been $13.560
million and diluted net income per share would have been $0.62 for the year
ended March 31, 1997.

     The pro forma information for the Recapitalization and the Offering
includes the effects of the Recapitalization, and the sale of 6,000,000 shares
of common stock in the Offering and application of $51.2 million of the proceeds
of the Offering to repay indebtedness incurred in the Recapitalization,
resulting in a net interest expense, including amortization of deferred
financing costs, of $5.7 million for the year ended March 31, 1997, less the
related income tax effect. The pro forma net income and earnings per share data
do not include approximately $1.2 million of expenses related to the
Recapitalization incurred in fiscal 1997, as well as an extraordinary loss of
approximately $3.3 million, net of tax, incurred upon repayment of indebtedness
with the proceeds from the Offering, as such expenses will not have a continuing
impact on operations. The extraordinary loss was comprised of (1) approximately
$566,000, net of tax, recorded as a discount against the Bridge Notes for the
fair value of the warrants attached to the Bridge Notes (Note 5); (2)
approximately $825,000, net of tax, which relates to a fee in connection with
the Bridge Notes; and (3) approximately $2 million, net of tax, related to the
write-off of capitalized transaction fees on the Bridge Notes and a pro rata
portion of capitalized transaction fees on the Tranche A Loan and Tranche B
Loan. The pro forma information may not be indicative of what results of
operations would have been had the Recapitalization and the Offering actually
occurred at the beginning of the respective periods.

12. SUBSEQUENT EVENTS

     The Company, on April 30, 1999, agreed to a revision of certain financial
covenants under its senior credit facility, which will result in payment of a
1.00% fee to members of the NationsBank syndicate on their outstanding
commitments to the Company as of April 30, 1999 and the reduction of $1,500,000
in permitted borrowings under the revolving credit line. In addition, on June 1,
1999, the Company established an additional line of credit in the amount of
$3,000,000 with a financial institution with a maturity date of May 26, 2000.
The payment of obligations under this revolving credit facility is guaranteed by
the Centre Entities, as defined. The line of credit bears interest at the rate
of 2.50% over LIBOR or 1.00% over the Prime rate.

                                      F-22
<PAGE>   56

                                                                      SCHEDULE I

                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
                         MARCH 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
                                                                     ADDITIONS
                                                        BALANCE AT   CHARGED TO                BALANCE AT
                                                        BEGINNING    COSTS AND                   END OF
                                                        OF PERIOD     EXPENSES    DEDUCTIONS     PERIOD
                                                        ----------   ----------   ----------   ----------
<S>                                                     <C>          <C>          <C>          <C>
Fiscal year ended March 31, 1999:
  Allowance for doubtful accounts.....................     $100         $128          $ --        $228
Fiscal year ended March 31, 1998:
  Allowance for doubtful accounts.....................      100           --           --          100
Fiscal year ended March 31, 1997:
  Allowance for doubtful accounts.....................       75           25           --          100
Fiscal year ended March 31, 1999:
  Restructuring Reserve...............................        0          870          552(1)       318
</TABLE>

---------------

(1) Represents amounts charged against the restructuring reserve.

                                       S-1
<PAGE>   57

                                   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 14, 1999.

                                             FIREARMS TRAINING SYSTEMS, INC.

                                          By:      /s/ PETER A. MARINO
                                            ------------------------------------
                                                      Peter A. Marino
                                             President, Chief Executive Officer
                                                         and Director
                                               (Principal Executive Officer)

                        POWER OF ATTORNEY AND SIGNATURES

     Each person whose signature appears below constitutes and appoints Peter A.
Marino 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.

<TABLE>
<CAPTION>
                     SIGNATURES                                      TITLE                    DATE
                     ----------                                      -----                    ----
<C>                                                    <S>                                <C>

                 /s/ PETER A. MARINO                   President, Chief Executive         July 14, 1999
-----------------------------------------------------    Officer and Director (Principal
                   Peter A. Marino                       Executive Officer)

                 /s/ JOHN A. MORELLI                   Chief Financial Officer and        July 14, 1999
-----------------------------------------------------    Treasurer (Principal Financial
                   John A. Morelli                       and Accounting Officer)

                /s/ ROBERT F. MECREDY                  Executive Vice President           July 14, 1999
-----------------------------------------------------
                  Robert F. Mecredy

                 /s/ LESTER POLLACK                    Chairman of the Board and          July 14, 1999
-----------------------------------------------------    Director
                   Lester Pollack

               /s/ WILLIAM J. BRATTON                  Director                           July 14, 1999
-----------------------------------------------------
                 William J. Bratton

                /s/ GILBERT F. DECKER                  Director                           July 14, 1999
-----------------------------------------------------
                  Gilbert F. Decker

                 /s/ CRAIG I. FIELDS                   Director                           July 14, 1999
-----------------------------------------------------
                   Craig I. Fields
</TABLE>

                                       V-1
<PAGE>   58

<TABLE>
<CAPTION>
                     SIGNATURES                                      TITLE                    DATE
                     ----------                                      -----                    ----
<C>                                                    <S>                                <C>

                 /s/ FRANK S. JONES                    Director                           July 14, 1999
-----------------------------------------------------
                   Frank S. Jones

                /s/ JONATHAN H. KAGAN                  Director                           July 14, 1999
-----------------------------------------------------
                  Jonathan H. Kagan

                 /s/ SCOTT PEREKSLIS                   Director                           July 14, 1999
-----------------------------------------------------
                   Scott Perekslis

                  /s/ PAUL J. ZEPF                     Director                           July 14 1999
-----------------------------------------------------
                    Paul J. Zepf
</TABLE>

                                       V-2