<PAGE>   1
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549

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

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

     (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, 2000

                                       OR

        [ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                         COMMISSION FILE NUMBER 0-21773


                        FIREARMS TRAINING SYSTEMS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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


                7340 MCGINNIS FERRY ROAD, SUWANEE, GEORGIA 30024
              (Address of principal executive offices) (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 [ ] No [X]

         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 [X].

         Aggregate market value of the voting stock held by non-affiliates of
the registrant as of August 31, 2000: $2,878,853 (based on 9,596,177 shares of
non-affiliates Class A Common Stock outstanding at $0.30 per share; the last
sale price on The NASDAQ OTC:BB on August 31, 2000)

         At August 31, 2000, there were issued and outstanding 68,747,632
shares of Class A Common Stock, par value $0.000006 per share and there were
issued and outstanding 1,139,017 shares of Class B nonvoting Common Stock, par
value $0.000006 per share.


                                    Page 1
<PAGE>   2

                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, to be filed with the Commission, are
incorporated by reference into Part III hereof.

================================================================================

                                     PART I

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


ITEM 1.  BUSINESS

RESTRUCTURE TRANSACTION

         On August 25, 2000, the Company, its lenders and its largest
shareholders (a group of entities affiliated with Centre Partners Management
LLC (the "Centre Entities") completed a restructuring transaction with
retroactive effect to April 1, 2000 which significantly reduced the Company's
outstanding indebtedness.

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

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

-        $12 million of senior secured debt with cash interest payable at prime
         plus 1% and no principal payments due until maturity in 2003, with a
         one year extension at the Company's option.

-        $23 million of junior secured debt with 10% interest payable in
         additional notes or cash, depending on the Company's profitability,
         and no principal payments until maturity in 2003, with a one year
         extension at the Company's option.

-        Approximately $21 million of new preferred stock with a 10% cumulative
         dividend rate payable in additional shares of preferred stock. This
         new preferred stock must be redeemed by the Company when junior
         secured debt is repaid.

-        48,695,212 additional shares of Class A Voting Common Stock (the
         "Class A Common Stock") valued at $0.50 per share based upon the
         twenty trading days ending April 27, 2000. As a result of this share
         issuance, the Company's senior lenders have the power to vote a
         majority of the Company's voting common stock. See Change of Control.

-        Warrants to purchase 2,000,000 shares of Class A Common Stock with an
         exercise price of $0.25 issued to the Centre Entities.

-        Amended warrants already held by the Centre Entities to purchase
         3,246,164 shares of Class A Common stock at $1.00 per share by
         providing for payment of the exercise price in cash rather than the
         Series A Preferred Stock and making a slight adjustment in the
         original exercise price of $1.03 per share.


                                    Page 2
<PAGE>   3

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

CHANGE OF CONTROL

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

<TABLE>
<CAPTION>
(1) CLASS A VOTING            (2) NAME OF BENEFICIAL            (3) NUMBER OF SHARES       (4) PERCENT OF CLASS AS OF
    COMMON STOCK                     OWNER(1)                     BENEFICIALLY OWNED             AUGUST 31, 2000
------------------            ----------------------            --------------------       --------------------------
<S>                           <C>                               <C>                        <C>
Class A Voting Common          Bank of America                    12,307,203 shares                  17.90%
Stock
Class A Voting Common          BHF Capital Corp.                  7,100,391 shares                   10.33%
Stock
Class A Voting Common          U.S. Bank National                 4,260,375 shares                    6.20%
Stock                          Association
Class A Voting Common          First Source Financial LLP         9,467,188 shares                   13.77%
Stock
Class A Voting Common          Centre Entities(2)                 7,100,391 shares                   10.33%
Stock
</TABLE>

(1)      The named beneficial owner may have a parent entity or other party
which also beneficially owns such shares. The Company has not yet received
sufficient information from the registered holders in this regard. Such
information should be available upon filing of the requisite Form 13-D's by
such owners in the near future.

(2)      The foregoing shares are registered in the names of various of
the Centre Entities and are in addition to that share ownership set forth in
Item 12. The Centre Entities received the foregoing shares as a result of the
acquisition by such entities of the senior obligations held by one member of
the original Lender group.

All of the foregoing shares are held pursuant to a Voting and Stock Restriction
Agreement dated as of April 1, 2000 (the "Voting Agreement") and entered into
on August 25, 2000 whereby the Lenders agreed to vote such shares as determined
by Lenders holding a majority of the commitments to provide revolving credit
advances (the "Required Lenders") and granted an irrevocable proxy to Bank of
America, N.A., the Agent, to vote as so directed. In addition, the Centre
Entities agreed that on or before September 30, 2000, three of the four
Directors of the Company affiliated with the Centre Entities would resign
unless the Required Lenders asked them not to resign. The Required Lenders
agreed for so long as the Voting Agreement was in effect to vote their shares
for election of one qualified person affiliated with the Centre Entities
nominated by the Centre Entities to the Board of Directors such that one such
person was serving on the Board at all times. The Centre Entities also agreed
to cooperate with the Lenders to identify and urge the selection of mutually
acceptable, qualified candidates to constitute a majority of the current Board
of Directors to serve in the interim before the next election of Directors. In
addition, all parties agreed to cooperate to identify and urge the selection of
a mutually acceptable, qualified candidate to serve as an active Chairman of
the Board of Directors and to give due consideration in that regard to
selection of a representative of the management consultant required to be
retained by the Company pursuant to the Senior Credit Agreement.

COMPANY OVERVIEW

         FATS continues to be the world leader in the development and
production of interactive simulation systems designed to provide training in
safety and use of small arms, dismounted and mounted military operations, total
weapons systems integration and judgmental and use of force for law enforcement
and military peacekeeping activities. The Company has broadened its array of
products to accommodate the most recent tactics, training and equipment
available to both law enforcement and military communities. Examples include
providing simulators and courseware to support indirect fire, less than lethal
weapon applications, and multiple room engagements. Every system features
embedded capabilities for authoring scenarios and feedback. Keeping pace with
national and international concerns, FATS has added significant improvements to
courseware and software focusing on safety and conditions requiring
extraordinary judgment - including operations in peace keeping/making, crowd
control and hostage negotiations. Additional emphasis has been placed on night
operations in all environments - in most cases allowing the customers to
utilize their organic night vision equipment.


                                    Page 3
<PAGE>   4

         As technology has evolved, so has FATS. Recognizing that commercial
technological capabilities are moving faster than any one Company can
replicate; the Company takes advantage of commercially available off the shelf
components that ensure reuse and upgrade capability as well as commonality and
the ability to integrate with other simulation systems. This change in
philosophy ensures each customer receives the best technical and economical
solutions to their training needs while providing options for life cycle
management of their systems. While maintaining paces with technology, FATS has
retained the finest qualities of the past, ensuring all systems are backward
compatible and our core philosophy of providing the best available solution for
customers individual training requirements. Additionally, FATS continues to
partner with each customer individually to ensure the training solution is
complete, integrated and functional from the embedded technology and courseware
to the unique language requirements. Each simulated firearm or weapons system
is integrated and compatible with the customer's system and replicates their
precise ballistic data, desired environmental effects, and target damage
realism. The Company has focused its sales efforts for small arms simulators
primarily on 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.

         Over its 16-year history, FATS has developed over 200 types of
simulated weapons, manufactured and delivered over 25,000 simulated weapons,
developed over 1,000 training scenarios, and has delivered over 4,000
simulators to 44 countries. FATS is committed to be the simulation Company of
choice, providing simulation training solutions for the hunter and sports
shooting enthusiast as well as the entire spectrum of conflict from law
enforcement through small unit military operations.


                                    Page 4
<PAGE>   5

INDUSTRY OVERVIEW

         While the simulation industry has largely been focused on large weapon
systems such as flight simulators or large and expensive mainframe computing
simulators, FATS has focused on individual users and their personal gunnery
system using affordable technology applications. FATS developed low cost
simulation with high fidelity graphics that allows individual decision-making
and realism. During the last few years, rapid advancements in commercial
computer technology have allowed replacement of FATS-proprietary technology
with commercial technology that supports newer combat training objectives such
as "semi-automated forces". FATS simulators use highly interactive three
dimensional computer generated training scenarios that allow battles to take
place through highly realistic computer battlefields. With our
commercial-off-the-shelf philosophy, FATS is ensuring that all FATS systems are
capable of utilizing these computer-generated battlefields.

         Focused on taking advantage of the changing simulation landscape, FATS
is continuing to "partner with Government" on several programs and team with
fellow industry members to ensure the best, most cost effective solutions are
made available to the customer. With an eye on current social concerns like the
increased shooting amongst school aged children, FATS is teamed with law
enforcement agencies to develop courseware to assist in training "first
responders" in these new environments and on techniques that will result in the
measured correct response.

         Understanding the current military environment of joint and combined
operations in very complex environments, FATS has developed, and continues to
improve its capability to communicate with other types of simulators through
use of high-end simulation techniques such as High Level Architecture (HLA)
compliance. FATS understands the need to network simulations and to interact in
simulated environments across international boundaries with other law
enforcement and allied militaries. Management believes that no company is
better suited for this - given FATS' international deployment of systems. FATS
currently enables forces of varied countries to rehearse incident reaction at
home station prior to deployment to areas where peacekeeping and law
enforcement types of actions can easily escalate to full-scale military
operations. FATS systems have proven well suited for these situations as
evidenced through the several years of use in Bosnia and Kosovo.

         Because more military and law enforcement agencies are deployed
throughout the world today than at any other time in history, with different
missions and methods to respond, management believes that the focus of the
Company on simulation of state of the art munitions, weaponry and tactics will
increase the use of simulation both in preparation for operations and for
sustainment training once deployed. In the law enforcement arena, social issues
centered on levels of force used by police and increased school violence all
require extraordinary training. This coupled with the increase in
less-than-lethal munitions has changed the available tools for an appropriate
measured response. Today the professionals put in these environments have more
tools available than time to train on them making simulation not just a desired
supplement but rather a necessity. Management believes that FATS is well
positioned to take advantage of these conditions by understanding best how
simulation technology enhances the capabilities of individuals and
organizations that may be required to use force in this new and evolving
environment.

PRODUCTS

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

         Simulators. The major simulator products encompass Law Enforcement
judgmental trainers, Military Small Arms trainers, Indirect Fire trainers,
deployable appended and standalone Armored Vehicle trainers, Missile trainers,
Naval Shipboard trainers (including large bore cannons), Live Fire systems, and
Sportsman Archery and Firearms Handling trainers. Hardware and software
components have been standardized across multiple FATS product lines, to ensure
system compatibility and supportability are minimized and reasonable. The
Company has the capability to utilize many means to deliver visual imagery and
media including laser disc, DVD, computer generated imagery and video. Images
can be displayed on standard computer monitors or on large screens ranging from
10 to 50 feet and surround screen up to 150X45-degree fidelity.


                                    Page 5
<PAGE>   6

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

         Indirect Fire Trainer. The indirect fire trainer (IFT) has the
capability to accurately portray the call for fire procedures and effects of
all artillery, mortars, naval gunfire, close air support, and attack helicopter
supporting arms platforms. These systems may be integrated into a combined arms
battle space while conducting direct fire engagements with the simulated
forces. The IFT package further supports the training with real or simulated
fire direction center personnel and equipment, and facilitates the use of fully
simulated 60mm, 81mm and 120mm mortars. Forward Observer training is conducted
in the 3-dimensional CGI terrain database using all the associated tools
available to the observer (maps, modified military binoculars, laser range
finders and laser target markers).

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

         Armored Vehicle Trainer. The deployable armored vehicle trainer is the
main product of the Canadian subsidiary - Simtran. This trainer is configured
in an appended mode where computer equipment is attached to the actual vehicle
or in a stand-alone mode where an actual simulated vehicle is constructed.
These trainers are complete crew training systems that include the Commander,
Gunner, and Driver. Systems can be linked together so the unit can train from
individual crew gunner skills through collective engagements at the platoon or
higher level. While this simulator has all the same features of the small arms
trainer, courseware or terrain data bases are typically much larger to allow
for full maneuver and navigation/driving skills.

         Missile Trainer. Missile trainers range from the anti-tank through the
air-defense missile families. To date the TOW, Eyrx, Javelin Air Defense, AT4
and Karl Gustaf are all included as fielded systems. The missile trainers can
be fielded as stand-alone trainers (TVIGS, EVIGS and Javelin) or as part of the
small arms trainer. In the Stand-alone system, the air defense system has a
unique weight shift, weight loss feature that replicates the actual missile
with its flight effects.

         Weaponry. FATS is very proud of our weapons capability. The Company
has fielded over 200 types of simulated weapons with features ranging from
stand -alone weapons using simple laser inserts to fully sensored weapons that
detect user behavior by measuring data collected from butt pressure, cant of
the firearm, trigger pressure, and the actual dispersion of the rounds. Fully
sensored weapons with recoil are available with backpack allowing the student
to move more freely than the tethered versions. Over 25,000 simulated weapons
are in use today.

         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 2000. 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.


                                    Page 6
<PAGE>   7

         Dart. The Company believes Dart's product line of video simulation
technology to be a part of the shooting sports industry, which includes
portable and mobile firearms and archery applications. While not the market
leader, Dart plays an integral role in hunter and sportsman development and
training.

         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.

         The Company has been active in creating training concepts for hunter
and sportsman education. Dart's interactive training products enhance the
learning process of shooters in proper hunting ethics, shot placement and shot
selection. Dart systems have been integrated into 13 states and one federal aid
region representing a total of 23 systems and have been endorsed by the
International Hunter Education Association (IHEA) and the National Bowhunter
Education Foundation (NBEF) for the Dart Hunter and Bowhunter Core Curriculum
as a supplement to their instructor program. The Company believes that as
states increasingly requiring formal firearms training coursework as a
prerequisite to purchasing a hunting license and/or firearm, that training on
simulators may become an important part of all such courses in such states.
However, the Company believes the market is not as substantial as once thought
and is now in decline.

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.
The following table sets forth dollar amounts and percentages of sales for each
of the Company's major markets on an historic basis for the fiscal years ended
March 31st.

<TABLE>
<CAPTION>
                                       Actual                        Actual                        Actual
                                        FY98                          FY99                          FY00
                                -------------------           -------------------           -------------------
                                Sales           %             Sales           %             Sales           %
                                ------        -----           ------        -----           ------        -----
<S>                             <C>            <C>            <C>           <C>             <C>           <C>
International                   33,831         46.0%          35,615         64.2%          27,419         70.5%
U.S. Military                   29,990         40.8%           9,507         17.1%           4,268         11.0%
U.S. Law Enforcement             8,626         11.7%           7,868         14.2%           5,560         14.3%
Hunter / Sports                  1,100          1.5%           2,524          4.5%           1,642          4.2%
                                ------        -----           ------        -----           ------        -----
Total                           73,547        100.0%          55,514        100.0%          38,889        100.0%
                                ======        =====           ======        =====           ======        =====
</TABLE>


         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 40 countries, including Canada,
Great Britain, the Netherlands, Italy, Australia, and Singapore. Interest in
the Company's products tends to be greatest in countries in which limited land
is available for live fire training or in which budgetary constraints or
interest in technological upgrades 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 2000, 70.5% 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 7 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


                                    Page 7
<PAGE>   8

ensure proper readiness. Moreover, according to budget estimates of the U.S.
Department of Defense ("DOD") for the government's fiscal 1999 and 2000,
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 is part of a
contractor team that was selected for a multi-year contract to support the U.S.
Army Engagement Skills Trainer ("EST") procurement with ECC International as
prime contractor and the Company as its sole provider of weapon simulators.

         For fiscal 2000, 11.0% of the Company's total revenues and 37.2% of
the Company's U.S. revenues were attributable to sales to U.S. military
authorities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

         U.S. Law Enforcement. The U.S. law enforcement segment of the market
is highly diversified but can be divided into four principal components: (i)
U.S. government entities including the U.S. Department of Treasury (including
its agencies and bureaus such as the Federal Law Enforcement Training Center,
Secret Service, Bureau of Alcohol, Tobacco and Firearms and the Internal
Revenue Service), the U.S. Postal Service, the Federal Bureau of Investigation,
the Drug Enforcement Administration and the Central Intelligence Agency; (ii)
state and local law enforcement departments such as the Los Angeles and New
York City Police Departments, and smaller urban and rural counterparts, (iii)
colleges and universities offering criminal justice training programs; (iv)
federal, state, and private correctional facilities. The federal agencies
generally use a centralized procurement process and are typically headquartered
in or near Washington, D.C. By contrast, the state and local law enforcement
agencies are widely dispersed, with more than 17,000 different law enforcement
departments in the U.S. Given this diversity, the procurement process varies
substantially depending upon the requirements of the particular jurisdiction.
The Company believes that its most likely potential local law enforcement
customers may be found among the approximately 3,600 law enforcement agencies
and departments with more than 25 officers. With only approximately 1,000
systems sold to U.S. federal and local law enforcement authorities to date (of
which approximately 900 are FATS systems), the Company believes that this
market can provide additional opportunities to the Company in the future. Law
enforcement authorities face increasing budgetary constraints as well as
increasing threats of litigation and damage awards relating to claims
concerning the excessive or improper use of force, lethal or otherwise, by law
enforcement personnel. Accordingly, the Company believes that there are
opportunities for increased sales to U.S. law enforcement and correctional
authorities of cost-effective simulation products designed to enhance tactical
skills and judgment and to lower liability costs.

         For fiscal 2000, 14.3% of the Company's total revenues and 48.5% 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 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. In FY 2000,


                                    Page 8
<PAGE>   9

management analyzed the goodwill of Dart in accordance with FAS 121 and
wrote-off the remaining $ 1.9 million balance of its goodwill due to a limited
potential in the market because of a softened product demand.

         For fiscal 2000, 4.2% 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 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 allows 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 continue
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 70.5% of the
Company's revenues for fiscal 2000 were attributable to sales to military and
law enforcement authorities internationally, 11.0% were attributable to sales
to military authorities in the U.S. and 14.3% were attributable to sales to law
enforcement authorities in the U.S. Sales to public sector customers are
subject to a multiplicity of detailed regulatory requirements and public
policies. Such contracts may be conditioned upon the continuing availability of
public funds, which in turn depends upon lengthy and complex budgetary
procedures, and may be subject to certain pricing constraints. Moreover, U.S.
government contracts and those of many international government customers may
generally be terminated for a variety of factors when it is in the best
interests of the government. There can be no assurance that these factors or
others unique to government contracts will not have a material adverse effect
on the Company's future results of operations and financial condition.


                                    Page 9
<PAGE>   10

         The following table lists certain of the Company's customers in fiscal
2000 in each of its principal market components:

<TABLE>
<CAPTION>
                U.S. MILITARY                  U.S. LAW ENFORCEMENT                  INTERNATIONAL
                -------------                  --------------------                  -------------
                <S>                            <C>                                   <C>
                U.S. Air Force                 Federal Bureau of Investigation       Canadian Army


                U.S. Army National Guard       Drug Enforcement Agency               Australia Army


                U.S. Marine Corps              Federal Protective Services           Norwegian Army
</TABLE>

         In fiscal 2000, the Company's five largest customers accounted for
approximately 58.2% of the Company's revenues, with the Canadian Army and
Australian Army accounting for approximately 27.7% and 13.6%, respectively. 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%. 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.
Electrical and mechanical R&D expenditures totaled $4.0 million, $4.0 million
and $6.5 million in fiscal 2000, 1999, and 1998, 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.

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

         FATS small arms weapon simulators are foremost in industry for
fidelity and reliability. The FATS weapon R&D team of engineers and technicians
carefully evaluate all of the operational characteristic and functions inherent
in each live weapon to be developed. These operational characteristics are then
replicated within the simulator so as to provide the utmost degree of realism
in form, fit, and function. The post development process includes an exhaustive
test evaluation to ensure long term reliability and cost effectiveness.

         Electrical R&D combines the engineering disciplines of system,
software, hardware, and embedded software design as well as other
electro-optical fields to produce programs and equipment responsive to specific
training needs. The Company's electronic R&D capabilities include real-time
system hardware design object-oriented software design, simulation system
development, video and audio, interactive computer generated graphics, High
Level Architecture (HLA), display technologies, video special effects, lasers,
weapon ballistics, optics, image processing, target modeling and motion
simulations. On an ongoing basis, engineering works with Training Development
personnel (Subject Matter Experts) 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


                                    Page 10
<PAGE>   11

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

         Weapons manufacturing involves the production of simulated firearms
and non-lethal simulators by either modifying actual firearms and other devices
into simulators or assembling simulators from kits manufactured to the
Company's specifications by a variety of outside sources. The assembly process
encompasses the fitting of modified weapons or kits with the Company's
pneumatic and electrical components, followed by the functional testing of the
completed assembly. The combined weapon manufacturing activities in the U.S.
and the U.K. have a capacity of 400 simulated firearms per month on a
single-shift basis. As with systems manufacturing, this capacity can readily be
expanded to 700 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 in Atlanta, and a Field Service
Office on the West Coast. The Company's subsidiaries, subcontractors and agents
provide worldwide support. Accessories, parts, service, system
upgrades/enhancements and training are available through the 24-hour customer
service hotline, or through the customer service electronic mail, either direct
or through the Company 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 FATS Helpdesk hotline. The Company seeks to
provide customer service 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 applied
successfully to support the British Ministry of Defense, the Royal Netherlands
Land Army, the Belgian Army, the Swiss Army, the Canadian Department of
National Defense, the Australian Department of Defense and the Singapore
Military through local subsidiaries.

PROPRIETARY OPERATING SYSTEM; RAW MATERIALS AND SUPPLIERS

         The Company currently purchases from numerous suppliers on both a
competitive bid and long-term contract basis. The Company's current products
use a Windows based operating system; however, some of the Company's earlier
model simulators, use a software operating system known as OS-9 which is a
operating system developed and 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


                                    Page 11
<PAGE>   12

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.

BACKLOG

         As of March 31, 2000, the Company had a backlog of approximately $25.8
million compared with $28.0 million as of March 31, 1999. Management expects
that approximately $18.0 million of backlog will be delivered in fiscal 2001.
Revenue from sales of standard products are recorded when title transfers,
which is typically upon shipment. Revenue from development programs under
contract are recorded on the percentage-of-completion method of accounting,
measured on the basis of costs incurred to estimated total costs, which
approximates contract performance to date (see Note 3 to the accompanying
consolidated financial statements). Contracts with U.S. and other governments
may generally be terminated by the customer, in whole or in part, for default
or convenience if such termination would be in the best interest of the
customer. Accordingly, there can be no assurance that the Company's backlog
will result in future revenues. However, these contracts generally provide for
reimbursement of actual cost incurred through the date of termination.

COMPETITION

         The recent increase in sales and acceptance of small arms simulation
products has brought about an increase in competition from both domestic and
international companies. The Company competes with divisions or subsidiaries of
larger companies solely dedicated to simulation for sales of the Company's
small and supporting arms simulation products, which 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, 2000, the Company and its subsidiaries employed 323
employees, of which 198 were employed at FATS, Inc., 56 were employed at
Simtran, 30 were employed at FATS-Australia, 28 were employed by FATS-Europe,
and 11 employed at Dart. Unions represent none of the employees. The Company
considers relations with its employees to be satisfactory.

GOVERNMENT CONTRACTS AND REGULATION

         Sales to public sector customers are subject to a multiplicity of
detailed regulatory requirements and public policies that may affect the
ability of the Company to increase or even maintain such sales. In particular,
the choice of a contractor by a customer may be affected by the size of the
contractor, the place of manufacture of the contractor's products or whether
the contractor is given preferential consideration based upon 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


                                    Page 12
<PAGE>   13

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 are obtained through a competitive bidding process rather than as sole
source contracts may affect the Company's profit margins. There can be no
assurance that changes in the type of government contracts and other contracts
entered into by the Company in the future will not have a material adverse
effect on future results of operations or financial condition of the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         The Company is subject to export licensing jurisdiction of the U.S.
Department of State ("State Department") and the U.S. Department of Commerce
("Commerce Department") with respect to the temporary or permanent export of
certain of its products and the import of certain other products based on the
Arms Export Control Act and the Export Administration Act which, though
expired, is carried out by Presidential Executive Order issued under the
auspices of the International Emergency Economic Powers Act. In addition to
application to transfer of information and products to customers, such
regulations also may from time to time require a license for the transfer of
technical information from the Company to its foreign subsidiaries, such as
information necessary to enable a subsidiary to modify simulated weapons for
use in systems being supplied by the subsidiary to customers. The respective
jurisdictional statutes provide the State Department and the Commerce
Department with the discretion to change their policies with respect to whether
particular products can be licensed for export to particular countries. In
certain circumstances, export licenses and other authorizations may be revoked,
suspended or amended without notice. Both the State Department and the Commerce
Department 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 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.


                                    Page 13
<PAGE>   14

ITEM 2.  PROPERTIES

<TABLE>
<CAPTION>
                                                   Owned or       Square         Lease        Month of
Facility            Location                        Lease         Footage     Expiration    Expiration
--------            --------                       --------       -------     ----------    ----------
<S>                 <C>                            <C>            <C>         <C>           <C>
FATS, Inc.          Suwanee, Georgia                Lease          98,100        2008          May
FATS, LTD.          Lincolnshire, England           Lease          12,000        2003          July
FATS, B.V.          Waardenburg, Netherlands        Lease           4,800        2000          December
Simtran             Montreal, Canada                Lease          38,800        2001          August
Dart                Denver, Colorado                Lease           7,800        2000          July
FATS Australia      Lavington, Australia            Lease          10,005        2005          February
</TABLE>


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


ITEM 3.  LEGAL PROCEEDINGS

         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. On
October 28, 1998, DART and AIS entered in to an agreement whereby AIS dismissed
the lawsuit against DART entitling DART to continue to sell its products
without liability within the claims of the 706 Patent.

         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. On
June 6, 2000, the Company and AIS agreed to dismiss the lawsuits.

         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.


                                    Page 14
<PAGE>   15

                                    PART II

ITEM 5.  MARKET COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The common stock of Firearms Training Systems, Inc. is traded on the
NASDAQ Over-The-Counter Bulletin Board under the symbol FATS. Prior to March 8,
2000, the Company's common stock was traded on the NASDAQ Small Cap Market. The
listing of the Company's stock was moved from the NASDAQ Small Cap Market as
the company's stock price performance fell below NASDAQ criteria for market
capitalization and minimum share price value. As of July 6, 2000, there were
136 holders of record of the Company's common stock. The table shows the high
and low closing prices of the common stock during the period from April 1, 1998
through the year ended March 31, 2000:

                          QUARTERLY STOCK PRICE RANGE

<TABLE>
<CAPTION>
                                                   High              Low
                                                   ----              ---
                <S>                               <C>              <C>
                FISCAL 1999
                First Quarter                     $ 8.88           $ 2.44
                Second Quarter                      4.00             0.69
                Third Quarter                       3.25             0.75
                Fourth Quarter                      1.75             1.03

                FISCAL 2000
                First Quarter                       1.28             0.88
                Second Quarter                      1.00             0.63
                Third Quarter                       0.75             0.44
                Fourth Quarter                      1.13             0.53

                FISCAL 2001
                First Quarter                       0.59             0.14
</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 Company's Credit Agreement prohibits the payment of any
dividends in respect of the common stock. The closing price of Firearms
Training Systems, Inc. (FATS) common stock on August 29, 2000, as reported by
NASDAQ, was $0.20 per share.


         RECENT SALES OF UNREGISTERED SECURITIES

         In connection with the Restructure, the Company issued on August 25,
2000 the following securities:

         (1) 40,235,548 shares of Class A Common Stock to the Lenders pursuant
to the Senior Credit Agreement as partial consideration for the exchange by the
Lenders of the Company's senior indebtedness at March 31, 2000. See Item 1-
Restructure and Change of Control.

         (2) 20,463.716 shares of Series B Preferred Stock having a liquidation
value of $20,463,716 to the Lenders pursuant to the Senior Credit Agreement as
partial consideration for the exchange by the Lenders of the Company's senior
indebtedness at March 31, 2000. See Item 1 Restructure.

         (3) 1,764,452 shares of Class A Common Stock to the Centre Entities in
partial satisfaction of the obligations owed to such entities as a result of
their repayment of a revolving promissory note in the amount of $3,000,000
including a guarantee fee of $250,000 (the "Guarantee Obligations"). See Item 1
Restructure and Item 13 Certain Relationships and Related Transactions.


                                    Page 15
<PAGE>   16

         (4) 897.397 shares of Series B Preferred Stock, having a liquidation
value of $897,397 to the Centre Entities in partial satisfaction of the
Guarantee Obligation. See Item 1 Restructure and Item 13 Certain Relationships
and Related Transactions.

         (5) Warrants to purchase 2,000,000 shares of Class A Common Stock at
$0.25 per share expiring March 31, 2005 to the Centre Entities. See Item 1
Restructure and Item 13 Certain Relationships and Related Transactions.

         (6) Amended Warrants to purchase 3,246,164 shares of Class A Common
Stock at $1.00 per share. See Item 1 Restructure and Item 13 Certain
Relationships and Related Transactions.

         (7) 6,695,212 shares of Class A Common Stock to the Centre Entities in
exchange for the Series A Preferred Stock previously held by them. See Item 1
Restructure and Item 13 Certain Relationships and Related Transactions.

         Exemptions for all such transactions from registration under the
Securities Act of 1933 is claimed in reliance on an exemption from registration
under Section 4(2) of the Act.



                                    Page 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, 2000,
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 Years Ended March 31,
                                        ----------------------------------------------------------------------------------
                                          2000              1999               1998              1997               1996
                                        --------          --------           --------          --------           --------
<S>                                     <C>               <C>                <C>               <C>                <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue                           $ 38,889          $ 55,514           $ 73,547          $ 90,806           $ 65,439
Gorss Margin                               8,200            19,977             39,680            46,592             34,537
Gross Margin %                              21.1%             36.0%              54.0%             51.3%              52.8%
Operating Expenses                      $ 19,275          $ 16,975           $ 26,553          $ 19,713           $ 15,254
Non-Recurring Expenses                      (143)              870                 --                --                 --
Operating Income (Loss)                  (11,075)            3,002             13,127            26,879             19,283
Interest (Income) Expense                  8,056             7,316              5,905             6,069               (165)
Other (Income) Expense                       325               400                 97             1,110                 93
Net Income (Loss)                        (18,902)           (3,107)             3,233             9,014             12,790
Basic Earnings Per Share                   (0.91)            (0.15)              0.16              0.55               0.89
Diluted Earnings Per Share                 (0.91)            (0.15)              0.15              0.50               0.80

BALANCE SHEET DATA:
Working Capital                           21,020            27,010             18,907            20,350             20,260
Total Assets                              42,021            60,150             56,380            42,121             33,820
Total Debt including
   Current Maturities                     73,772            72,200             63,000            58,600                 --
Stockholders' Equity (Deficit)           (48,201)          (29,633)           (28,231)          (31,378)            21,262
</TABLE>



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

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

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


                                    Page 17
<PAGE>   18

COMPANY OVERVIEW

         The Company is the leading worldwide producer of interactive
simulation systems designed to provide training for multiple markets to include
the handling and use of small and supporting arms; air defense and armored
vehicle weaponry; and commercial hunter and sports activities. The Company
derives most of its revenue from the sale of its products, which include
simulators, simulated firearms, scenarios, software, auxiliary equipment, and
service operations. The Company receives commitments for its products and
services from its customers largely through purchase orders and contracts
principally with governmental entities and law enforcement agencies. Revenues
are recognized primarily upon shipment with milestone billings related to
contracts recorded as deferred revenue and recognized primarily as units are
delivered or on a percentage of completion method for contracts 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 both in the U.S. and abroad, the top
five customers accounted for approximately 58.2%, 62.3% and 60.7% of the
Company's revenues in fiscal 2000, 1999, and 1998, respectively. A significant
increase or decrease in demand by a major customer can have a substantial
effect on the Company's revenues and cash flow. Revenue from any one customer
can vary materially from period to period. In addition, a significant decrease
in the overall level or allocation of defense spending in the U.S. or other
countries could have a material adverse effect on the Company's future results
of operations and financial condition. Significant portions of the Company's
revenue are made to customers located outside the U.S., primarily in Canada,
Europe and Asia. During fiscal 2000, 1999, and 1998, approximately 70.5%,
64.2%, and 46.0%, 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 become 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,
from time to time, experiences 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, research & development (R&D) cost, bid & proposal
expenses, plus depreciation and amortization. Selling, general and
administrative expenses consist primarily of salaries, wages, benefits,
international agents' commissions, and marketing expenses. R&D expenses are
largely comprised of salaries, wages, benefits, prototype equipment and project
supplies. The Company expenses all R&D costs in the period in which they are
incurred and has funded all of its R&D efforts over the past 16 years primarily
through internally generated funds.

RESTRUCTURE TRANSACTION

         On August 25, 2000, the Company, its lenders and the "Centre Entities
completed a restructuring transaction with retroactive effect to April 1, 2000
which significantly reduced the Company's outstanding indebtedness.

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

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

-        $12 million of senior secured debt with cash interest payable at prime
         plus 1% and no principal payments due until maturity in 2003, with a
         one year extension at the Company's option.


                                    Page 18
<PAGE>   19

-        $23 million of junior secured debt with 10% interest payable in
         additional notes or cash, depending on the Company's profitability,
         and no principal payments until maturity in 2003, with a one year
         extension at the Company's option.

-        Approximately $21 million of new preferred stock with a 10% cumulative
         dividend rate payable in additional shares of preferred stock. This
         new preferred stock must be redeemed by the Company when junior
         secured debt is repaid.

-        48,695,212 additional shares of Class A Common Stock. As a result of
         this share issuance, the Company's senior lenders have the power to
         vote a majority of the Company's voting common stock. See Item 1
         Change of Control.

-        Warrants to purchase 2,000,000 shares of Class A Common Stock with an
         exercise price of $0.25 issued to the Centre Entities.

-        Amended warrants already held by the Centre Entities to purchase
         3,246,164 shares of Class A Common Stock at $1.00 per share by
         providing for payment of the exercise price in cash rather than the
         Series A Preferred Stock and making a slight adjustment in the
         original exercise price of $1.03 per share.

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


                  RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                     Fiscal Year Ended March 31,
                                                               ------------------------------------
                                                               2000            1999            1998
                                                               ----            ----            ----
            <S>                                                <C>             <C>             <C>
            Total Revenue                                      100%           100%           100%
            Gross Margin                                        21%            36%            54%
            Operating Expenses:
                Selling, General & Administrative               28%            18%            21%
                Depreciation and Amortization                    6%             4%             1%
                Impairment of Goodwill                           5%             0%             0%
                Research & Development                          10%             7%             9%
                Acquired in-process R&D                          0%             0%             5%
                Nonrecurring restructuring charge                0%             2%             0%
                                                               ---            ---            ---
                    Total Operating Expense                     50%            31%            36%
                                                               ---            ---            ---
            Operating (Loss) Income                            -28%             5%            18%
            Interest Expense, net                               21%            13%             8%
            Other Expense, net                                   1%             1%             0%
                                                               ---            ---            ---
            Net (Loss) Income Before Tax                       -50%            -9%            10%
            (Benefit) Provision for Tax                         -2%            -3%             5%
            Accretion of Preferred Stock                         1%             0%             0%
            Net (Loss) Income                                  -49%            -6%             4%
            Adjusted EBITDA (1)                                -18%            10%            25%
</TABLE>

 (1) Adjusted EBITDA consists of net (loss) income before tax excluding
interest expense, net and depreciation and amortization, as further adjusted to
exclude non-cash impairment of goodwill, non-cash acquired in-process R&D
write-off and nonrecurring restructuring charges.


                                    Page 19
<PAGE>   20

         Fiscal Year Ended March 31, 2000 Compared to the Fiscal Year Ended
March 31, 1999

         Revenues. Revenues decreased $16.6 million, or 29.9%, to $38.9 million
for fiscal 2000 as compared to $55.5 million for fiscal 1999. Each of the four
principal market components experienced a decline. International revenue
decreased $8.2 million, or 23.0% to $27.4 million. U.S. Military decreased $5.2
million, or 55.1% to $4.3 million. U.S. Law Enforcement decreased $2.3 million,
or 29.3%, to $5.6 million. Hunter/Sports decreased $.9 million, or 34.9%, to
$1.6 million. This decline was attributable to several factors: (1) significant
delays in contract awards from major customers including both the U.S. Army
subcontract supporting the Engagement Skills Trainer program and U.S. Air Force
Reserve contracts. These programs have now been awarded to the Company for
delivery in the current fiscal year; (2) loss in a competitive bidding process
of a major competition for the U.K. Caddet air defense trainer program proposed
by Simtran; (3) reduction in investment and development activities, due to lack
of financing; (4) delays in competitive awards due to lengthy government
process exacerbated by uncertainty of the financial status of the Company.

         Gross Margin. As a percentage of revenues, cost of revenues increased
to 78.9% for fiscal 2000 as compared to 64.0% for fiscal 1999. This increase
was due to product mix changes consisting of low margin, non-standard
engineering development programs, the effect of greater competition eroding
traditionally high international gross margins, greater content of low margin
maintenance contracts, and cost overruns on design & development programs. As a
result of the foregoing, gross margin decreased $11.8 million, or 59.0% to $8.2
million, or 21.1% of revenues, for fiscal 2000 as compared to $20.0 million, or
36.0% of revenues, for fiscal 1999.

         Total Operating Expenses. Total operating expenses increased $2.3
million, or 13.5% to $19.3 million for fiscal 2000 as compared to $17.0 million
for fiscal 1999. Total operating expenses as a percentage of revenues increased
to 49.6% for fiscal 2000 from 30.6% for fiscal 1999. Selling, general and
administrative expenses increased as a percentage of revenue to 28.2% for
fiscal 2000 from 18.4% for fiscal 1999. The increase in selling, general, and
administrative expenses is primarily due to the inclusion of certain expenses
related to management changes within the organization. Expenses for fiscal year
2000 include approximately $1.0 million related to costs associated with the
resignation agreements of the former President and CEO and Vice President of
Sales and Marketing. Selling, general, and administrative expenses also
increased as a result of higher volume of international agents' commission
based sales and an increase in D&O insurance. Research and development costs
remain at the same level of $4.0 million for fiscal year 2000 and 1999.

         Non-Recurring Expenses. In fiscal year 1999, the Company recognized a
nonrecurring restructuring charge of $870,000 related to a workforce reduction
and certain other measures implemented to enhance future profitability. The
Company had completed these measures as of March 31, 2000. Of the $870,000
total expense, approximately $727,000 had been incurred as of March 31, 2000.
The Company does not anticipate incurring any additional costs and has thus
reduced expenses by the remaining $143,000 of the charge during fiscal year
2000. The reduction of $143,000 is included in nonrecurring restructuring
charge.

         Operating (Loss) / Income. As a result of the foregoing, operating
income decreased $14.1 million to a loss of $11.1 million, or -28.5% of
revenues, for fiscal 2000 as compared to an income of $3.0 million, or 5.4% of
revenues, for fiscal 1999.

         Other Expense, net. Net interest expense totaled $8.1 million, or
20.7% of revenues for fiscal 2000 as compared to net interest expense of $7.3
million, or 13.2% for fiscal 1999. Other income (expense), net for fiscal 2000
primarily includes a charge of $.1 million related to foreign currency exchange
cost associated with international revenues. The Company incurred higher
amounts of interest expense because of additional borrowings at higher interest
rates.

         Benefit from Income Taxes. The effective tax rate decreased to 4.2% of
income before income taxes for fiscal 2000 compared to 36.0% of income before
taxes for fiscal 1999. This change in effective tax rate primarily reflects the
establishment of a valuation allowance against the Company's net operating loss
carryforwards and certain other deferred tax assets.

         Net Loss. As a result of the foregoing, the net loss increased $15.8
million, to a loss of $18.9 million or ($0.91) per diluted share, or -48.6% of
revenues for fiscal 2000 as compared to a loss of $3.1 million or ($0.15) per
diluted share, or -5.6% of revenues for fiscal 1999.


                                    Page 20
<PAGE>   21

         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.

         Gross Margin. 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. 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 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, the
Company incurred higher amounts of interest expense because of additional
borrowings at higher interest rates.

         (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.

         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.


QUARTERLY RESULTS OF OPERATIONS

    The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning April 1, 1998 and
ending March 31, 2000. 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.


                                    Page 21
<PAGE>   22

<TABLE>
<CAPTION>
                                                                          Quarter Ended
                                                              (In thousands except per share data)
                                  -------------------------------------------------------------------------------------------
                                               Fiscal Year 2000                                   Fiscal Year 1999
                                  ------------------------------------------      -------------------------------------------
                                  June 30     Sept 30     Dec 31     Mar 31       June 30     Sept 30     Dec 31      Mar 31
                                  --------    -------     -------   --------      --------    --------   --------    --------
<S>                               <C>         <C>         <C>       <C>           <C>         <C>        <C>         <C>
Revenues                          $ 15,196    $ 8,328     $ 9,920   $  5,445      $ 12,265    $ 12,111   $ 16,314    $ 14,824
Gross Margin                         5,451      1,511       2,415     (1,177)        4,714       4,050      6,579       4,634
Gross Margin %                          36%        18%         24%       -22%           38%         33%        40%         31%
Operating Expense                 $  3,627    $ 5,168     $ 4,014   $  6,466      $  6,056    $  3,473   $  4,372    $  3,074
                                  --------    -------     -------   --------      --------    --------   --------    --------
Operating Income                     1,824     (3,657)     (1,599)    (7,643)       (1,342)        577      2,207       1,560
Interest Expense                     1,783      1,937       1,866      2,470         1,611       1,782      1,913       2,010
Other Expense                          243        104          60        (82)          104         172        683        (559)
                                  --------    -------     -------   --------      --------    --------   --------    --------
Pre-Tax Income                        (202)    (5,698)     (3,525)   (10,031)       (3,057)     (1,377)      (389)        109
Tax Provision (Benefit)                (69)    (1,949)     (1,022)     2,232        (1,039)       (551)      (149)         39
                                  --------    -------     -------   --------      --------    --------   --------    --------
Net income/(loss) subtotal            (133)    (3,749)     (2,503)   (12,263)       (2,018)       (826)      (240)         70
Accretion of Preferred Stock            62         63          64         65            --          --         31          62
                                  --------    -------     -------   --------      --------    --------   --------    --------
Net income/(loss) applicable to       (195)    (3,812)     (2,567)   (12,328)       (2,018)       (826)      (271)          8
   common stockholders
Earnings per common share
   Basic                             (0.01)     (0.18)      (0.12)     (0.59)        (0.10)      (0.04)     (0.01)       0.00
   Diluted                           (0.01)     (0.18)      (0.12)     (0.59)        (0.10)      (0.04)     (0.01)       0.00
</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

         The Company's principal liquidity and capital needs are to fund
working capital, provide debt service, and make capital expenditures necessary
to support and grow its business. The Company has entered in to a restructured
Credit Agreement as discussed above under "Restructure Transaction." The new
capital structure provides approximately $882,000 to support existing letters
of credit and future working capital requirements in connection therewith.
Therefore, the Company's primary source of liquidity and capital resources is
cash generated from its operating activities. The Company's future operations
will be constrained unless it can achieve new business revenue targets
necessary to finance working capital needs.

         The Company is subject to several business and market risks. The risks
are (1) the Company did not during the year ended March 31, 2000 generate
sufficient revenue or cash flow from its current operations to pay in a timely
manner its outstanding senior indebtedness, necessitating the Restructure; (2)
while the Company's financial position has significantly improved as a result
of the Restructure both in terms of a reduction in total amount and a deferral
of maturity dates of its debt, it must continue to achieve its current business
revenue targets in the current fiscal year in order to discharge its interest
obligations in a timely manner and expand its business opportunities; and (3)
the Company must receive new contracts for production to be delivered in the
current fiscal year in order to achieve its revenue projections. Thus, the
Company's continuation as a going concern is dependent upon its ability to (a)
continue production work on existing contracts; (b) obtain new contracts for
future delivery; and (c) generate sufficient cash flow to meet working capital
obligations on a timely basis. Management's plans in response to the above
objectives are (1) continue to reinforce cost control measures to assure
operations are conducted at the


                                    Page 22
<PAGE>   23

lowest cost possible at all locations; (2) remain focused on revenue
maximization of standard products with higher margin potentials within the
domestic and international law enforcement business segment; (3) minimize
capital expenditures in non-strategic areas; (4) improve inventory turns and
lower inventory investment and; (5) negotiate more favorable terms and
conditions to reduce extended or prolonged payment cycles.

         The Company believes that this business strategy may achieve positive
operating results provided that the Company collects on past due receivables
outstanding, and achieves the new business revenue targets necessary to finance
working capital needs. There can be no assurances that this strategy, and the
objectives cited above, will be successful or that the new contracts will be
awarded to the Company.

         As of March 31, 2000, the Company had working capital of $12.0 million
compared to $27.0 million as of March 31, 1999. The Company's spending for its
fiscal 2000 capital expenditures was $1.5 million. Such expenditures include
leasehold improvements, computer equipment and software, marketing product
demonstration equipment, and manufacturing machinery.

         The Company had a net decrease in cash and cash equivalents of $.9
million in fiscal 2000 compared to a net decrease of $.6 million and an
increase of $1.7 million in fiscal 1999 and 1998, respectively. For fiscal
2000, the Company's operating activities generated cash of approximately $.6
million. The Company's investing activities used cash of approximately $2.8
million that included $1.3 million in restricted cash to secure contract
performance guarantees and $1.5 million in capital expenditures. The Company
generated cash of $1.3 million in financing activities primarily in connection
with long-term debt borrowed to finance fiscal 2000 expenses.


RECENT ACCOUNTING PRONOUNCEMENTS

         In 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues. The
Company is currently reviewing its revenue recognition policy and does not
expect the adoption of SAB No. 101 to have a material impact on its
consolidated results of operations, financial position, or cash flows.


YEAR 2000 ISSUES

         As described in the Form 10-Q for the quarter ended December 31, 1999,
the Company had developed plans to address our potential exposures to our
systems related to the Year 2000. Since entering the Year 2000, we have not
experienced any significant disruptions to our business nor are we aware of any
significant Year 2000 related disruptions impacting our customers and
suppliers. The Company will continue to monitor its systems and operations
until reasonably assured that no significant business interruptions will occur
as a result of any Year 2000 issues. The Company spent a total of approximately
$20,000 on the Y2K Project with no significant additional expenses expected in
FY 2001.

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 2000 would
have increased by approximately $.5 million.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Report of Independent Public Accountants, the Consolidated
Financial Statements, Financial Statement Schedule and Notes to Consolidated
Financial Statements that appear on pages F-1 through F-22 and S-1 of this
Annual Report on Form 10-K are incorporated herein by reference.


                                    Page 23
<PAGE>   24

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

    None.


                                    Page 24
<PAGE>   25

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         INFORMATION IN THIS ITEM SHOULD BE READ IN CONJUNCTION WITH ITEM 1
CHANGE OF CONTROL CONCERNING THE AGREEMENT BY CERTAIN DIRECTORS AFFILIATED WITH
THE CENTRE ENTITIES TO RESIGN AT THE REQUEST OF THE LENDERS, THE LENDERS
AGREEMENT TO VOTE THEIR CONTROLLING INTEREST IN FAVOR OF THE ELECTION OF ONE
DIRECTOR AFFILIATED WITH THE CENTRE ENTITIES, THE JOINT AGREEMENT TO RECOMMEND
SELECTION OF QUALIFIED CANDIDATES TO SERVE UNTIL THE NEXT ANNUAL MEETING OF THE
COMPANY AND THEIR JOINT AGREEMENT TO RECOMMEND APPOINTMENT OF AN ADDITIONAL
DIRECTOR OR ACTIVE CHAIRMAN.

         The following table sets forth the name, age, and position of each
director and executive officer as of March 31, 2000. The Board currently
consists of nine directors. The Company divides the Board of Directors into
three classes, each of which is elected for a three-year term. Executive
officers of the Company are elected by the Board of Directors annually and hold
office until the next annual meeting of stockholders or until they sooner
resign or are removed from office by the Board of Directors.

<TABLE>
<CAPTION>
                  NAME                           AGE                              POSITION
                  ----                           ---                              --------
                  <S>                            <C>       <C>
                  Lester Pollack                 67        Chairman of the Board
                  Scott Perekslis                32        Director
                  William J. Bratton             52        Director
                  Jonathan H. Kagan              44        Director
                  Frank S. Jones                 71        Director
                  Paul J. Zepf                   35        Director
                  Craig F. Fields                54        Director
                  Gilbert F. Decker              63        Director
                  Robert F. Mecredy              52        President, Chief Executive Officer and Director
                  John A. Morelli                51        Vice President, Chief Financial Officer and Treasurer
                  C. Glenn Marsh                 61        Vice President, Operations - Chief Operating Officer
</TABLE>


         The following Class I directors were elected in fiscal 1998 and their
present terms expire with the Annual Meeting of Stockholders in 2000:


LESTER POLLACK
MANAGING DIRECTOR
CENTRE PARTNERS MANAGEMENT LLC

         Lester Pollack, age 67, has served as a Director of the Company since
July 31, 1996 and as Chairman of the Board since September 17, 1996. Mr.
Pollack has served as Managing Director of Centre Partners Management LLC since
1995. Mr. Pollack has been Senior Managing Director of Corporate Advisors,
L.P., the general partner of Corporate Partners, L.P. and Corporate Offshore
Partners, L.P., since 1988, Managing Director of Lazard Freres & Co. LLC since
1995 (prior thereto a General Partner) and Chief Executive Officer of Centre
Partners, L.P. since 1986. Mr. Pollack also serves as a director of LaSalle Re
Holdings Limited, Parlex Corporation, Rembrandt, Inc., Nationwide Credit Inc.,
SunAmerica Inc., and Tidewater, Inc. Mr. Pollack is a member of the
Compensation Committee of the Board of Directors.


SCOTT PEREKSLIS
PRINCIPAL
CENTRE PARTNERS MANAGEMENT LLC

         Scott Perekslis, age 32, has served as a Director of the Company since
July 31, 1996. Mr. Perekslis also served as a Vice President of the Company
from July 31, 1996 through July 18, 1997. Since 1995, Mr. Perekslis has been a
Principal of Centre Partners Management LLC and a Principal of Corporate
Advisors, L.P. From 1991 to 1995, Mr. Perekslis was an Associate of


                                    Page 25
<PAGE>   26

Corporate Advisors, L.P. Mr. Perekslis also serves as a director of Hyco
International, Inc. and KIK Corporation Holdings, Inc. Mr. Perekslis is a
member of the Compensation Committee of the Board of Directors.

         The following Class II directors were elected in fiscal 1999 and their
present terms expire with the Annual Meeting of Stockholders in 2001:


WILLIAM J. BRATTON
CHIEF OPERATING OFFICER AND PRESIDENT
CARCO GROUP, INC.

         William J. Bratton, age 52, has served as a Director of the Company
since September 17, 1996. Mr. Bratton has been the President and Chief
Operating Officer of CARCO Group, Inc. since 1998. From 1996 to 1997, Mr.
Bratton served as Vice Chairman of First Security Services Corporation and
President of its new subsidiary First Security Consulting, Inc. From 1994 to
1996, Mr. Bratton served as Police Commissioner of the City of New York. In
1992 he served as superintendent in Chief of the Boston Police Department and
was appointed Police Commissioner of the Boston Police Department in 1993. From
1990 to 1992, Mr. Bratton served as Chief of the New York City Transit Police.
Mr. Bratton also serves as a director of Rite-Aid Corporation and First
Security Services Corporation.


JONATHAN H. KAGAN
MANAGING DIRECTOR
CENTRE PARTNERS MANAGEMENT LLC

         Jonathan H. Kagan, age 44, has served as a Director of the Company
since July 31, 1996. Mr. Kagan also served as Secretary of the Company from
July 31, 1996 through July 18, 1997. Mr. Kagan has served as Managing Director
of Centre Partners Management LLC since 1995. Mr. Kagan has been a Managing
Director of Corporate Advisers, L.P. since 1990. Mr. Kagan has been associated
with Lazard Freres & Co. LLC since 1980 and has been a Managing Director since
1995 (prior thereto a General Partner). Mr. Kagan also serves as a Director of
Jeepers! Inc. and Hyco International, Inc. Mr. Kagan is a member of the Audit
Committee of the Board of Directors.


FRANK S. JONES
CORPORATE DIRECTOR

         Frank S. Jones, age 71, has served as a Director of the Company since
April 16, 1998. Mr. Jones has served as assistant dean at the Harvard Business
School, a group brand manager at a consumer products company, and as Ford
Professor of Urban Affairs at the Massachusetts Institute of Technology from
which he retired in 1992. Mr. Jones also serves as a Director of Polaroid
Corporation and Scientific Games Holdings Corporation. Mr. Jones is a member of
the Audit Committee of the Board of Directors.


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


PAUL J. ZEPF
MANAGING DIRECTOR,
CENTRE PARTNERS MANAGEMENT LLC

         Paul J. Zepf, age 35, has served as a Director of the Company since
July 31, 1996. Since 1998, Mr. Zepf has been a Managing Director of Centre
Partners Management LLC and a Managing Director of Corporate Advisors, L.P.
From 1995 to 1998, Mr. Zepf was a Principal of Centre Partners Management LLC
and a Principal of Corporate Advisors, L.P. Mr. Zepf also served as a Vice
President of Corporate Advisors, L.P. from 1993 to 1995. Mr. Zepf also serves
as a Director of LaSalle Re Holdings Limited, The Learning Company and
Nationwide Credit, Inc. Mr. Zepf is a member of the Compensation Committee and
is a member of the Option Subcommittee of the Compensation Committee of the
Board of Directors.


                                    Page 26
<PAGE>   27

CRAIG I. FIELDS
CORPORATE DIRECTOR

         Craig I. Fields, age 54, has served as a Director of the Company since
September 17, 1996. From 1994 until the present, Dr. Fields has served on
various boards of directors, including the boards of ENSCO, Projectavision,
Inc., Alliance Gaming Corporation, Perot Systems, Network Solution and Music
Holdings Corp. From 1990 to 1994, Dr. Fields served as Chairman and Chief
Executive Officer of the Microelectronics and Computer Technology Corporation,
a for-profit research and development consortium involved in information
technology. Dr. Fields is Chairman of the Defense Science Board. Mr. Fields is
a member of the Compensation Committee and is a member of the Option
Subcommittee of the Compensation Committee of the Board of Directors.


GILBERT F. DECKER
CORPORATE DIRECTOR

         Gilbert F. Decker, age 63, has served as a Director of the company
since December 31, 1997. Prior to becoming a private consultant in 1997, Mr.
Decker was the Assistant Secretary of the Army, Research, Development and
Acquisition from 1994 to 1997. Prior to 1994, Mr. Decker held positions of
Chief Executive Officer and President in Xeruca Holding, Inc., Acurex
Corporation and Penn Central Federal Systems Company. Mr. Decker has served on
the boards of several government and public organizations including the Army
Science Board, Air Force Studies board, Defense Science Board and Engineering
Advisory board to Johns Hopkins University. Mr. Decker is a member of the Audit
Committee of the Board of Directors.


ROBERT F. MECREDY
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR

         Robert F. Mecredy, age 52, has served as President, Chief Executive
Officer, and Director since October 1,1999. Prior thereto, Mr. Mecredy served
as Executive Vice President from July 18, 1997 to September 30, 1999, 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 a noncommissioned and commissioned officer of infantry and aviation
in the U.S. Army for 20 years, retiring in 1986 with the rank of lieutenant
colonel.

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

         John A. Morelli, age 51, 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.


C. GLENN MARSH
VICE PRESIDENT, OPERATIONS - CHIEF OPERATING OFFICER

         C. Glenn Marsh, age 61, has served as Vice President, Operations and
Chief Operating Officer 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 35
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.


                                    Page 27
<PAGE>   28

         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 2000 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

DIRECTORS' COMPENSATION

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

         Pursuant to the Securities Purchase Agreement dated November 13, 1998
with Centre Capital Investors II, L.P., Centre Partners Coinvestment, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., and Centre Capital Offshore
Investors II, L.P., Messrs. Pollack, Kagan, Perekslis and Zepf, directors of
the Company who are affiliated with the Centre Partnerships agreed to receive
in lieu of annual director's fees of $20,000, for each director, options to
purchase at $1.03125 per share an aggregate of 106,700 shares of Class A Common
Stock, exercisable in equal quarterly installments beginning December 31, 1998
which such directors assigned to Centre Partners Management LLC. As of June 30,
2000, 106,700 shares of Class A Common Stock were exercisable from this grant.

SUMMARY COMPENSATION TABLE

         The following summary compensation table sets forth information
concerning the annual and long-term compensation earned by our chief executive
officer and each of the other highly compensated executive officers whose
annual salary and bonus during fiscal 2000 exceeded $100,000.


                                    Page 28
<PAGE>   29

<TABLE>
<CAPTION>
                                                     ANNUAL COMPENSATION                           LONG TERM COMPENSATION
                                   -----------------------------------------------------       -----------------------------
                                                                               OTHER           RESTRICTED        SECURITIES
OFFICER NAME AND                   FISCAL     SALARY           BONUS           ANNUAL            STOCK           UNDERLYING
PRINCIPAL POSITION                  YEAR        ($)             ($)         COMPENSATION       AWARDS ($)        OPTIONS (#)
------------------                 ------     ------           -----        ------------       ----------        -----------
<S>                                <C>        <C>             <C>           <C>                <C>               <C>
Peter A. Marino                     2000      350,000(1)           --          2,577(2)               --                --
    President and Chief             1999      350,000              --          4,800(2)                             21,000
    Executive Officer - Retired     1998      350,000         150,000          6,865(2)                                 --

Robert F. Mecredy                   2000      160,000(1)           --          5,049(2)               --                --
    President and Chief             1999      158,000              --          4,740(2)                             20,000
    Executive Officer               1998      155,000         120,000          2,435(2)                             10,000

Juan C.G. de Ledebur                2000      135,000              --          5,348(2)               --                  (5)
    Vice President,                 1999      145,000              --          2,417(2)                             10,000
    Sales and Marketing             1998      156,477         110,000          7,115(2)                            212,148

Caryl G. Marsh                      2000      122,000              --              0              12,500            50,000(4)
    Vice President,                 1999      133,901              --              0                                23,000(3)
    Operations                      1998       78,495          20,000              0                                22,000

John A. Morelli                     2000      105,000              --          5,689(2)           18,750            90,000(4)
    Chief Financial Officer         1999       84,950              --          2,482(2)                             13,000(3)
                                    1998       72,000           6,000          1,170(2)                              3,000
</TABLE>


(1)      Mr. Marino retired effective September 30, 1999. Under the terms of
         Mr. Marino's employment agreement, he is entitled to be compensated
         his base salary of $350,000 per year until March 31, 2002 reduced by
         any salary or bonus he receives from another employer. Mr. Mecredy
         became the Company's President and Chief Executive Officer on October
         1, 1999.

(2)      Matching contributions made by the Company to its 401(k) plan.

(3)      Messrs. Marsh and Morelli had 22,000 and 3,000 options, respectively,
         repriced at $3.253 per share during fiscal 1999 (They were not
         executive officers at the time).

(4)      Messrs. Marsh and Morelli received 20,000 and 30,000 grants,
         respectively, priced at $0.625 per share during fiscal 2000.

(5)      Mr. de Ledebur resigned effective March 27, 2000. Under the terms of
         Mr. de Ledebur's resignation agreement, he is entitled to be
         compensated his base salary of $135,000 per year until September 30,
         2000 reduced by any salary and bonus he receives from another
         employer.


                                    Page 29
<PAGE>   30

OPTIONS GRANTED IN FISCAL 2000

         The following table contains certain information regarding stock
options granted to Executive Officers during fiscal 2000.

<TABLE>
<CAPTION>
                                                                                                  POTENTIAL REALIZABLE
                             NUMBER OF       % OF TOTAL                                              VALUE AT ASSUMED
                            SECURITIES         OPTIONS        EXERCISE OF                         ANNUAL RATES OF STOCK
                            UNDERLYING       GRANTED TO       BASE PRICE                           PRICE APPRECIATION
                           OPTIONS/SARS     EMPLOYEES IN       ($/SHARE)      EXPIRATION          FOR OPTION TERMS (2)
OFFICER NAME AND             GRANTED        FISCAL YEAR           (1)            DATE               5%           10%
----------------           ------------     ------------      -----------     ----------          -----         -----
<S>                        <C>              <C>               <C>             <C>                 <C>           <C>
Caryl G. Marsh                30,000           4.47%           0.68750         3/22/2007             --            --
John A. Morelli               60,000           8.94%           0.68750         3/22/2007             --            --
</TABLE>


(1)      Options were granted at the market value based on the last sale price
         on the date of grant of the common stock.

(2)      The dollar amounts are the result of calculations at the 5% and 10%
         rates set by the Securities and Exchange Commission and, therefore,
         are not intended to forecast possible future appreciation, if any, of
         the price of the Company's common stock or the present or future value
         of the options.


FISCAL YEAR-END OPTION VALUES

         The following table contains certain formation regarding stock options
exercised during the fiscal year and options to purchase common stock held as
of March 31, 2000 by each of the Executive Officers.

<TABLE>
<CAPTION>
                                  NUMBER OF SECURITIES UNDERLYING                  VALUE OF UNEXERCISED
                                       UNEXERCISED OPTIONS AT                      IN-THE-MONEY OPTIONS
                                           FISCAL YEAR-END                        AT FISCAL YEAR-END (1)
                                 ----------------------------------            ----------------------------
OFFICER NAME                     EXERCISABLE          UNEXERCISABLE            EXERCISABLE    UNEXERCISABLE
------------                     -----------          -------------            -----------    -------------
<S>                              <C>                  <C>                      <C>            <C>
Peter A. Marino                    272,185                    --                   --              --
Robert F. Mecredy                   67,302               145,298                   --              --
Juan C.G. de Ledebur                76,702               167,446                   --              --
Caryl G. Marsh                      10,350                53,150                   --              --
John A. Morelli                      9,277                76,683                   --              --
</TABLE>


(1)      As required by the rules of the Securities and Exchange Commission,
         the value of unexercised in-the-money options is based on the closing
         sales price of the Company's common stock on the NASDAQ Stock Markey
         as of the last business day of he fiscal year, March 31, 2000, which
         was $ 0.6250 per share.


                                    Page 30
<PAGE>   31

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

OWNERSHIP OF STOCK BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS

    INFORMATION IN THE FOLLOWING TABLE IS PRESENTED AS OF A DATE PRIOR TO THE
RESTRUCTURE IN WHICH APPROXIMATELY 48,695,183 ADDITIONAL SHARES OF VOTING CLASS
A COMMON STOCK WERE ISSUED, INCLUDING 40,235,548 SHARES ISSUED TO THE LENDERS
AND SUBJECT TO A VOTING AGREEMENT AS DESCRIBED IN ITEM 1 RESTRUCTURE AND CHANGE
OF CONTROL. IN ADDITION, IN ANTICIPATION OF THE RESTRUCTURE, THE CENTRE
ENTITIES CONVERTED APPROXIMATELY 555,552 SHARES OF CLASS B NON-VOTING COMMON
STOCK INTO CLASS A COMMON STOCK AND IN CONNECTION WITH THE RESTRUCTURE ACQUIRED
1,764,452 ADDITIONAL SHARES OF CLASS A COMMON STOCK.

         The following table sets forth certain information regarding the
beneficial ownership of Class A Voting Common Stock ("Common Stock") and Class
B Non-voting Common Stock ("Class B Stock") as of August 23, 2000 by: (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock; (ii) each
of the Company's directors; (iii) the Company's chief executive officer and
each of the other employees included in the Summary Compensation Table; and
(iv) the Company's current directors and officers as a group. Except as
indicated in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
indicated as being beneficially owned by them.


                                    Page 31
<PAGE>   32
<TABLE>
<CAPTION>

                                                               NUMBER OF                          NUMBER OF
                                                               SHARES OF                          SHARES OF
                                                                COMMON                             CLASS B
                                                                 STOCK                              STOCK
                                                              BENEFICIALLY                       BENEFICIALLY
NAME OF BENEFICIAL OWNER(1)                                     OWNED(2)         %                  OWNED(3)         %
---------------------------                                   ------------      ----             ------------      -----
<S>                                                             <C>             <C>              <C>               <C>
Centre Capital Investors II, LP                                 6,485,522       32.3%              2,944,001        67.1%
Centre Partners Coinvestment LP                                   959,387        4.8%                413,765         9.4%
Centre Capital Offshore Investors II, LP                        1,282,197        6.4%                616,337        14.1%
Centre Capital Tax-Exempt                                       1,407,457        7.0%                296,176         6.8%
Centre Partners Management LLC (4)             (4)              8,076,500       40.3%              4,140,316        94.4%
Centre Partners II LLC                         (5)             10,026,224       50.0%              4,385,181       100.0%
THIN International                             (6)              2,454,478       12.2%                     --         0.0%
Peter A. Marino - RETIRED                      (7)                370,457        1.9%                     --         0.0%
Juan C.G. de Ledebur                           (7)                171,240          *                      --         0.0%
Robert F. Mecredy                              (7)                134,979          *                      --         0.0%
Caryl G. Marsh                                 (7)                 41,099          *                      --         0.0%
John A. Morelli                                (7)                 50,474          *                      --         0.0%
Lester Pollack                                 (8)                     --          *                      --         0.0%
William J. Bratton                                                 20,767          *                      --         0.0%
Gilbert F. Decker                                                  11,734          *                      --         0.0%
Craig I. Fields                                                    53,534          *                      --         0.0%
Frank S. Jones                                                     11,067          *                      --         0.0%
Jonathan H. Kagan                              (9)                     --          *                      --         0.0%
Scott Perekselis                               (10)                 9,005          *                      --         0.0%
Paul J. Zepf                                   (11)                10,506          *                      --         0.0%
All current directors and executive            (12)               884,862        4.4%                     --         0.0%
officers as a group (13 individuals)
</TABLE>


(1)      The address of Centre Capital Investors II, L.P., Centre Partners
         Coinvestment, L.P., Centre Capital Tax-exempt Investors II, L.P.
         (together with Centre Capital Offshore Investors II, L.P., the "Centre
         Partnerships"), Centre Partners Management LLC ("Centre Management")
         and Centre Partners II, LLC (together with Centre Capital Offshore
         Investors II, L.P., the "Centre Entities") is 30 Rockefeller Plaza, New
         York, New York 10020; the address of Centre Capital Offshore Investors
         II, L.P. is c/o Reid Management, Cedar House, 41 Cedar Avenue, Box HM
         1179, Hamilton, Bermuda; and the address of THIN International N.V.
         ("THIN International") is Landhuis Joonchi, Koya Richard J. Beaujan
         z/n, P.O. Box 837, Curacao, Netherlands.

(2)      Based on 20,052,449 shares of Common Stock outstanding on August 23,
         2000. Calculation of percentage of beneficial ownership assumes the
         exercise of all options exercisable within 60 days of August 23, 2000
         only by the respective named shareholder.

(3)      The Centre Partnerships shown as beneficially owning Class B Stock own
         all outstanding shares of such stock and have entered into a binding
         agreement by which each has agreed not to exercise the right to convert
         Class B Stock for Common Stock provided by the Restated Certificate of
         Incorporation, if as a result of such conversion, the Centre
         Partnerships would hold, of record, or beneficially with power to vote,
         more than 50% of the shares of Common Stock outstanding immediately
         following such conversion unless concurrently with such conversion the
         shares of Common Stock are transferred to an unaffiliated person.
         Included within the shares of Class B Stock are 3,246,164 warrants
         currently exercisable into shares of Class B Stock.


                                    Page 32
<PAGE>   33

(4)      Information regarding ownership of Common Stock by the Centre Entities
         is included herein in reliance on information set forth in a Form 4
         filed by the Centre Entities in December 1998 with the Securities
         Exchange Commission (the "Commission"), reflecting ownership as of
         November 30, 1998 as well as information set forth in Schedule 13G
         filed by the Centre Entities in February, 1999. Pursuant to a
         Management Agreement, Centre Capital Investors II, L.P., Centre
         Partners Offshore Investors II, L.P. and Centre Capital Tax-exempt
         Investors II, L.P. have delegated voting and investment power with
         respect to the Common Stock beneficially owned by them to Centre
         Management and investment power over such shares of nonvoting Class B
         Stock; accordingly, the aggregate security ownership of those Centre
         Entities is reflected for Centre Management as well.

(5)      As general partner of Centre Partners Coinvestment, L.P. and general
         partner of the general partner of Centre Capital Investors II, L.P.,
         Centre Partners Offshore Investors II, L.P. and Centre Capital
         Tax-exempt Investors II, L.P., Centre Partners II LLC ("Centre
         Partners") is reflected as beneficially owning the Common Stock and
         Class B Stock owned by those Centre Entities. In addition, pursuant to
         certain co-investment arrangements, Centre Partners has been delegated
         voting and investment power with respect to an additional 571,181
         shares of Common Stock and 51,746 warrants. In addition, included
         within the shares of Class B Stock are 3,246,164 warrants currently
         exercisable into shares of Class B Stock.

(6)      Information regarding ownership of Common Stock by THIN International
         is included herein in reliance on information set forth in a Form 4
         filed by THIN International in August 1998 with the Commission,
         reflecting ownership as of July 31, 1998. Mr. GH Thyssen-Bornemisza, a
         Swiss national resident in Monaco and chairman of TBG Holdings N.V.,
         may be deemed to have sole voting and dispositive power over the Common
         Stock owned by THIN International.

(7)      Messrs. Marino, de Ledebur, Marsh, Mecredy and Morelli's beneficial
         ownership includes exercisable options for 279,185 shares, 87,367
         shares, 21,099 shares, 77,300 shares and 10,791 shares, respectively.
         In addition, Messrs. , de Ledebur, Mecredy and Morelli's beneficial
         ownership includes 3,571 shares, 4,144 shares and 2,953 shares,
         respectively held in a 401(k) plan for the benefit of each officer,
         over which each officer has been delegated voting and investment power.

(8)      Excludes 8,076,500 shares of Common Stock and 1,522,624 shares of Class
         B Stock and 2,613,341 warrants currently exercisable into Class B Stock
         for which Centre Management has been delegated voting and/or investment
         power and 9,470,672 shares of Common Stock and 1,694,569 shares of
         Class B Stock and 2,940,150 warrants currently exercisable into shares
         of Class B Stock for which Centre Partners is reflected as having
         beneficial ownership. Mr. Pollack is a Managing Director of each of
         Centre Management and Centre Partners and, as such, may be deemed to
         have voting and investment power over such shares of Common Stock and
         investment power over such shares of nonvoting Class B Stock. Mr.
         Pollack disclaims any beneficial ownership of such shares of Common
         Stock and Class B Stock.

(9)      Excludes 8,076,500 shares of Common Stock and 1,522,624 shares of Class
         B Stock and 2,613,341 warrants currently exercisable into Class B Stock
         for which Centre Management has been delegated voting and/or investment
         power and 10,026,224 shares of Common Stock and 1,139,017 shares of
         Class B Stock and 3,246,164 warrants currently exercisable into shares
         of Class B Stock for which Centre Partners is reflected as having
         beneficial ownership. Mr. Kagan is a Managing Director of each of
         Centre Management and Centre Partners and, as such, may be deemed to
         have voting and investment power over such shares of Common Stock and
         investment power over such shares of nonvoting Class B Stock. Mr. Kagan
         disclaims any beneficial ownership of such shares of Common Stock and
         Class B Stock.

(10)     Includes 9,005 shares of Common Stock held in a 401(k) plan for the
         benefit of Mr. Perekslis and 467 shares of Series A Preferred Stock,
         over which Mr. Perekslis has delegated voting and investment authority
         to Centre Partners pursuant to certain co-investment arrangements.

(11)     Excludes 8,076,500 shares of Common Stock and 1,522,624 shares of Class
         B Stock and 2,613,341 warrants currently exercisable into Class B Stock
         for which Centre Management has been delegated voting and/or investment
         power and 10,026,244 shares of Common Stock and 1,139,017 shares of
         Class B Stock and 3,246,164 warrants currently exercisable into shares
         of Class B Stock for which Centre Partners is reflected as having
         beneficial ownership. Mr. Zepf is a Managing Director of each of Centre
         Management and Centre Partners and, as such, may be deemed to have
         voting and investment power over such shares of Common Stock and
         investment power over such shares of nonvoting Class B Stock. Mr. Zepf
         disclaims any beneficial ownership of such shares of Common Stock and
         Class B Stock. Includes 10,506 shares of Common Stock held in a 401(k)
         plan for the benefit of Mr. Zepf and 468 shares of Series A Preferred
         Stock, over which Mr. Zepf has delegated voting and investment
         authority to Centre Partners pursuant to certain co-investment
         arrangements.

(12)     Excludes 8,076,500 shares of Common Stock and 1,522,654 shares of Class
         B Stock and 2,613,341 warrants currently exercisable for Class B Stock
         for which Centre Management has been delegated voting and/or investment
         power and 10,026,244 shares of Common Stock and 1,139,017 shares of
         Class B Stock and 3,246,164 warrants currently exercisable into shares
         of Class B Stock for which Centre Partners is reflected as having
         beneficial ownership, for which Messrs. Pollack, Kagan and Zepf may be
         deemed to have voting and/or investment power based on their serving as
         a Managing Director of such entities. Messrs. Pollack, Kagan and Zepf
         disclaim beneficial ownership of such shares of Common Stock and Class
         B Stock. Includes 19,511 shares of Common Stock held in 401(k) plans
         for the benefit of Messrs. Perekslis and


                                    Page 33
<PAGE>   34

         Zepf, over which each such individual has delegated voting and
         investment authority to Centre Partners pursuant to certain
         co-investment arrangements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

         On June 1, 1999 certain subsidiaries of the Company established a
revolving line of credit in the amount of $3,000,000 with a financial
institution with a maturity date of July 31, 2000. Payment obligations under the
Subsidiary Line were guaranteed by the Centre Partnerships as well as by the
Company and certain of its subsidiaries. In exchange for such guarantees the
Centre Partnerships received a fee of $50,000 in cash and was entitled to be
paid an additional funding fee of $250,000 in the event any payments were made
by any Centre Partnerships to the financial institution. Such obligations to the
Centre Partnerships were satisfied in connection with the Restructure as
described below.

         Effective September 30, 1999, Peter Marino's employment by the Company
was terminated. Under his employment contract dated September 18, 1996, upon
termination other than for cause involving breach of duty, misconduct, or gross
negligence, Mr. Marino remains entitled to receive his base salary of $350,000
per year until the fiscal year ending March 31, 2002. Such amounts would be
offset by the amount of compensation Mr. Marino received from a subsequent
employer. In addition, in connection with his departure, the exercise date of
his vested stock options was extended to December 29, 2001.

         On August 25, 2000, with effect from April 1, 2000, the Centre Entities
and the Company, in connection with the Restructure, completed the following
transactions by which the Company issued certain additional securities to the
Centre Entities in exchange for the $3,250,000 obligation of the Company with
regard to the Centre guarantee described above (the "Centre Guarantee
Obligation"), the Series A Preferred Stock held by the Centre Entities and
certain co-investors and a portion of the senior indebtedness assigned to the
Centre Entities by one of the original Lenders immediately prior to the
Restructure, as follows:

         (1) The Company issued $503,466 principal amount of Centre senior
secured loans which are pari passu with and secured by the same security as the
Lender senior secured loans in exchange for a portion of the Centre Guarantee
Obligation;

         (2) The Company issued $964,939 principal amount of Centre junior
secured loans which are pari passu with and secured by the same security as the
Lender junior secured loans in exchange for a portion of the Centre Guarantee
Obligation;

         (3) The Company issued 897.397 shares of Series B Preferred Stock
having a liquidation value of $897,397 in exchange for a portion of the Centre
Guarantee Obligation;

         (4) The Company issued 1,764,452 shares of Class A Voting Stock in
exchange for a portion of the Centre Guarantee Obligation;

         (5) The Company issued 6,695,212 additional shares of Class A Common
Stock in exchange for the existing Series A Preferred Stock, having a
liquidation value of $3,607.606 held by the Centre Entities and certain
co-investors and amended existing warrants held by the Centre Entities to
purchase 3,246,164 shares of Class A Common Stock at $1.00 per share by
providing for payment of the exercise price in cash rather than the Series A
Preferred Stock, and making a slight adjustment in the original exercise price
of $1.03 per share;

         (6) The Company issued to the Centre Entities Warrants to purchase
2,000,000 shares of Class A Common Stock at $0.25 per share expiring March 31,
2005; and

         (7) The Centre Entities received with respect to their portion of the
secured debt under the senior credit agreement, $3,516,344 principal amount of
senior secured debt, $3,888,309 principal amount of junior secured debt,
3,611.244 shares of Series A Preferred Stock having a liquidation value of
$3,611,244 and 7,100,391 shares of Class A Common Stock which are subject to the
Voting Agreement and letter described under Item 1 Change of Control.


                                    Page 34
<PAGE>   35

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Messrs. Pollack, Fields, Perekslis and Zepf served as members of the
Company's Compensation Committee during the 2000 fiscal year. While Mr. Pollack
is Chairman of the Board and Mr. Perekslis was a Vice President of the Company
through July 18, 1997, none is otherwise an employee, officer or former employee
or officer of the Company or its subsidiaries.

REPORT ON EXECUTIVE COMPENSATION

         The Compensation Committee has provided the following report:

         The compensation policies of the Company have been developed to link
the compensation of executive officers with the development of enhanced value
for the Company's stockholders. Through the establishment of both short-term and
long-term incentive plans and the use of base salary and performance bonus
combinations, the Company seeks to align the financial interests of its
executive officers with those of its stockholders.

PHILOSOPHY AND COMPONENTS

         In designing its compensation programs, the Company follows its belief
that compensation should reflect both the Company's recent performance and the
value created for stockholders, while also supporting the broader business
strategies and long-range plans of the Company. In doing so, the compensation
programs reflect the following general characteristics:

         - The Company's financial performance and, in particular, that of the
individual.

         - An annual incentive arrangement that generates a portion of
compensation based on the achievement of specific performance goals in relation
to the Company's internal budget and strategic initiatives, with superior
performance resulting in enhanced total compensation.

         The Company's executive compensation is based upon the components
listed below, each of which is intended to serve the overall compensation
philosophy:

         Base Salary. Base salary is intended to be set at a level that
approximates the competitive amounts paid to executive officers of similar
businesses in structure, size, and industry orientation. Competitive amounts are
determined informally through a review of published compensation surveys and
proxy statements of other companies, including some, but not all, of the
companies in the peer group selected for purposes of the stock performance graph
set forth elsewhere in this Proxy Statement.

         Incentive Compensation. In accordance with the Company's philosophy of
tying a substantial portion of the overall compensation of its executive
officers to the achievement of specific performance goals, an incentive plan has
been developed for the executive officers. The Company's incentive plan is
designed to reward superior performance with total compensation above
competitive levels. On the other hand, if performance goals are not achieved and
the Company suffers as a result, compensation of affected executive officers may
fall below competitive levels.

         Stock Options. The Company periodically considers awards to its
executive officers of stock options granted under the terms of its Stock Option
Plan. Options are awarded by the Option Subcommittee to selected executive
officers and other persons in recognition of outstanding contributions they may
have made (or are being motivated to make) to the Company's growth, development,
or financial performance. The awarding of options is designed to encourage
ownership of the Company's Common Stock by its executive officers, thereby
aligning their personal interests with those of our shareholders.

         The Compensation Committee reviews and determines the compensation of
the executive officers of the Company with this philosophy on compensation as
its basis. While promoting initiative and providing incentives for superior
performance on behalf of the Company for the benefit of its shareholders, the
Compensation Committee also seeks to assure that the Company is able to compete
for and retain talented personnel who will lead the Company in achieving levels
of growth and financial performance that will enhance shareholder value over the
long-term as well as short-term.


                                    Page 35
<PAGE>   36

CEO COMPENSATION

         Effective October 15, 1996, the Company entered into an employment
agreement with Mr. Marino as Chief Executive Officer and President for a term
that extended to March 31, 2002. Mr. Marino's employment was terminated on
September 30, 1999 but he continues to be entitled to receive the base salary
under the terms of his contract. See "Certain Transactions".

         Effective October 1, 1999, the Company appointed Mr. Robert F. Mecredy
as Chief Executive Officer and President to replace Mr. Marino. The Company and
Mr. Mecredy agreed that he would perform the duties of Chief Executive Officer
and President without adjustment to compensation until conclusion of fiscal
2000. Details regarding Mr. Mecredy's employment agreement are to be concluded
as a result of the Restructure and will be provided in a subsequent filing.

         The Compensation Committee and Mr. Mecredy believe that it is sound
business practice to enter into an employment agreement with Mr. Mecredy
effective April 1, 2000 as a result of the new financial position of the Company
and the opportunity to improve performance of the Company in fiscal 2001. The
Compensation Committee intends to ensure that the terms of Mr. Mecredy's
employment agreement are consistent with and reflect the Company's executive
compensation philosophy. The base salary provided to Mr. Mecredy will be
consistent with what the Compensation Committee believes is competitive in the
Company's industry, opportunities for bonus compensation will be tied to the
Company's performance, and options granted to Mr. Mecredy will be subject to
vesting over a period of time consistent in terms of value to its stockholders.

                                         The Compensation Committee
                                         Lester Pollack
                                         Craig I. Fields
                                         Scott Perekslis
                                         Paul J. Zepf


                                    Page 36
<PAGE>   37

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, 2000 and 1999            F-2


     Consolidated Statements of Operations for the Fiscal Years
       Ended March 31, 2000, 1999 and 1998                                F-3


     Consolidated Statements of Changes in Stockholders' Equity
       for the Fiscal Years Ended March 31, 2000, 1999 and 1998           F-4


     Consolidated Statements of Cash Flows for the Fiscal Years
       Ended March 31, 2000, 1999 and 1998                                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
       -------                  ------------------------
       <S>              <C>     <C>

         3.01           --      By-laws of the Company. (filed as Exhibit 3.06 to the Company's Registration
                                Statement No. 333-13105)
         3.02           --      Restated Certificate of Incorporation of the Company, dated December 23, 1996.
                                (filed as Exhibit 3.03 to the Company's Quarterly Report on Form 10-Q for the
                                Fiscal Quarter ended December 31, 1996)
         3.03           --      Certificate of Designation of Series A Preferred Stock of the Company setting
                                forth the powers, preferences, rights, Qualification, limitations and
                                restrictions of the series dated November 13, 1998. (filed as exhibit 3.03 to
                                the Company's Quarterly Report on Form 10-Q for the Fiscal Quarter ended
                                December 31, 1998).
</TABLE>


                                    Page 37
<PAGE>   38

<TABLE>
       <S>              <C>     <C>
         3.04           --      Certificate of Amendment to the Certificate of Incorporation of the Company
                                dated (and filed with the Office of the Secretary of State of Delaware on)
                                August 25, 2000.
         3.05           --      Certificate of Designations of Series B Preferred Stock of the Company setting
                                forth the powers, preferences, rights, qualifications, limitations and
                                restrictions of the series dated August 24, 2000 (filed with the office of the
                                Secretary of State of Delaware on August 25, 2000).
         9.01           --      Voting and Stock Restriction Agreement dated as of April 1, 2000 among the
                                financial institutions listed on the signature pages thereof and Bank of
                                America, N.A., successor in interest to NationsBank N.A.
         9.02           --      Letter from Bank of America dated August 25, 2000 and signed by the Centre
                                entities named therein and the non-Centre lenders named therein with respect to
                                the Board of Directors of the Company.
       10.01-01         --      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. (Filed as Exhibit 10.01.04 to the Company's Annual Report on Form
                                10-K for the Fiscal Year ended March 31, 1999)
       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. (Filed as Exhibit 10.01.05 to the Company's Annual Report on Form
                                10-K for the Fiscal Year ended March 31, 1999)
       10.01-06         --      Fifth Amendment to the Amended and Restated Credit Agreement, dated as of
                                September 30, 1999, among the Company, FATS, Inc., NationsBank, N.A. and the
                                other Lenders named therein. (Filed as Exhibit 10.28 to the Company's Quarterly
                                Report on Form 10-Q for the Fiscal Quarter ended September 30, 1999)
       10.01-07         --      Sixth Amendment to the Amended and Restated Credit Agreement, dated as of
                                November 15, 1999, among the Company, FATS, Inc., Bank of America, N.A. as
                                successor to NationsBank, N.A. and the other Lenders named therein. (Filed as
                                Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the Fiscal
                                Quarter ended December 31, 1999)
       10.01-08         --      Seventh Amendment to the Amended and Restated Credit Agreement, dated as of
                                December 6, 1999, among the Company, FATS, Inc., Bank of America, N.A. as
                                successor to NationsBank, N.A. and the other Lenders named therein. (Filed as
                                Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the Fiscal
                                Quarter ended December 31, 1999)
       10.01-09         --      Eighth Amendment to the Amended and Restated Credit Agreement, dated as of
                                December 31, 1999, among the Company, FATS, Inc., Bank of America, N.A. as
                                successor to NationsBank, N.A. and the other Lenders named therein. (Filed as
                                Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the Fiscal
                                Quarter ended December 31, 1999)
</TABLE>


                                    Page 38
<PAGE>   39

<TABLE>
       <S>              <C>     <C>
       10.01-10         --      Ninth Amendment to the Amended and Restated Credit Agreement, dated as of March
                                1, 2000, among the Company, FATS, Inc., Bank of America, N.A. as successor to
                                NationsBank, N.A. and the other Lenders named therein.
       10.01-11         --      Tenth Amendment to the Amended and Restated Credit Agreement, dated as of March
                                31, 2000, among the Company, FATS, Inc., Bank of America, N.A. as successor to
                                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           --      Second Amended and Restated Credit Agreement and Partial Exchange Agreement
                                dated as of April 1, 2000, among the Company, FATS, Inc. and Bank of America,
                                N.A., successor in interest to NationsBank, N.A., as Agent and as Issuing Bank,
                                and the Financial institutions parties thereto.
        10.08           --      Loan Agreement and Exchange Agreement dated as of April 1, 2000 among the
                                Company, FATS, Inc., the lenders named therein and Centre Capital Investors II,
                                L.P. as Agent.
        10.09           --      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)
       10.09-01         --      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)
       10.09-02         --      First Amendment to Lease Agreement, dated December 21,1993, between the Company
                                and Technology Park/Atlanta, Inc. (filed as Exhibit 10.09 to the Company's
                                Registration Statement No. 333-13105)
       10.09-03         --      Second Amendment to Lease Agreement, dated December 21,1995, between the Company
                                and Schneider Atlanta, L.P. (filed as Exhibit 10.10 to the Company's
                                Registration Statement No. 333-13105).
        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,
</TABLE>


                                    Page 39
<PAGE>   40

<TABLE>
       <S>              <C>     <C>
                                1996 between the Company and Peter A. Marino. (filed as Exhibit 10.14 to the
                                Company's Registration Statement No. 333-13105)
       10.12-01         --      Schedule identifying Stock Option Agreements Series A substantially identical in
                                all material respects to Exhibit 10.12.
        10.13           --      Stock Option Agreement Series B, dated as of September 18, 1996 between the
                                Company and Peter A. Marino. (filed as Exhibit 10.15 to the Company's
                                Registration Statement No. 333-13105)
       10.13-01         --      Schedule identifying Stock Option Agreements Series B substantially identical in
                                all material respects to Exhibit 10.13.
        10.14           --      Stock Option Agreement Series C, dated as of September 18, 1996 between the
                                Company and William J. Bratton. (filed as Exhibit 10.16 to the Company's
                                Registration Statement No. 333-13105)
       10.14-01         --      Schedule identifying Stock Option Agreements Series C substantially identical in
                                all material respects to Exhibit 10.14. (filed as Exhibit 10.16.01 to the
                                Company's Registration Statement No. 333-13105)
       10.14-02         --      Form of Restricted Stock Award Agreement issued to Messrs. Marsh and Morelli
                                under Item 11, "Executive Compensation," herein
        10.15           --      Registration Rights Agreement, dated as of July 31, 1996, between the Company
                                and the Institutional Holders set forth on Schedule I thereto. (filed as Exhibit
                                10.17 to the Company's Registration Statement No. 333-13105) (filed as Exhibit
                                10.18 to the Company's Registration Statement No. 333-13105)
        10.16           --      Registration Rights Agreement, dated as of April 1, 2000 among the Company and
                                the Institutional Holders set forth on Schedule I thereto.
        10.17           --      Firearms Training Systems, Inc. Executive Severance Benefit Plan. (filed as
                                Exhibit 10.19 to the Company Registration Statement No. 333-13105)
        10.18           --      Employment Agreement, dated as of September 18, 1996, between the Company and
                                Peter A. Marino. (filed as Exhibit 10.20 to the Company's Registration Statement
                                No. 333-13105)
       10.18-01         --      Resignation Agreement, dated as of September 15, 1999, between the Company and
                                Peter A. Marino. (filed as Exhibit 10.29 to the Company's Quarterly Report on
                                Form 10-Q for the Fiscal Quarter ended September 30, 1999)
        10.19           --      Form of Agreement to Limit Future Competition entered into with each member of
                                senior management of the Company. (filed as Exhibit 10.21 to the Company's
                                Registration Statement No. 333-13105)
       10.19-01         --      Schedule listing Agreements to Limit Future Competition Substantially identical
                                in all material respects to Exhibit 10.19. (filed as Exhibit 10.21-01 to the
                                Company's Registration Statement No. 333-13105)
        10.20           --      License Agreement, dated October 31, 1991 by and between Microware Systems
                                Corporation and the Company. (filed as Exhibit 10.23 to the Company's
                                Registration Statement No. 333-13105)
        10.21           --      Warrant to purchase Class B Non Voting Common Stock of the Company dated
                                November 13, 1998. (filed as Exhibit 10.21 to the Company's Quarterly Report on
                                Form 10-Q for the Fiscal Quarter ended Quarter ended December 31, 1998).
        10.22           --      Form of Amended Warrant to Purchase Class A Common Stock of the Company dated
                                August 25, 2000.
        10.23           --      Form of Warrant to Purchase Class A Common Stock of the Company dated
                                August 25, 2000.
        10.24           --      Stock Option Agreement dated as of November 13, 1998 between the Company and
                                Centre Partners Management LLC. (filed as Exhibit 10.22 to the Company's
                                Quarterly Report on Form 10-Q for the Fiscal Quarter ended December 31, 1998).
        10.25           --      Securities Purchase Agreement dated as of November 13, 1998 Between the Company
                                and Centre Entities. (filed as Exhibit
</TABLE>


                                    Page 40
<PAGE>   41

<TABLE>
       <S>              <C>     <C>
                                10.23 to the Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
                                ended December 31, 1998).
        10.26           --      Agreement among Borrowers and other Borrower Guarantors of the Company, Firearms
                                Training Systems Limited and Firearms Training Systems, B.V. and the Centre
                                Entities dated June 1, 1999. (Filed as Exhibit 10.24 to the Company's Annual
                                Report on Form 10-K for the Fiscal Year ended March 31, 1999)
        10.27           --      Securities Exchange and Release Agreement dated as of April 1, 2000 among the
                                investors named therein and the Company.
        10.29           --      Employment Agreement dated as of April 1, 1999, between the Company and John A.
                                Morelli. (Filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for
                                the Fiscal Year ended March 31, 1999)
       10.29-01         --      Amended Employment Agreement dated as of February 18, 2000, between the Company
                                and John A. Morelli.
        10.30           --      Officer Resignation agreement between the Company and Juan C. G. de Ledebur
                                dated March 27, 2000.
        11.01           --      Statement Regarding Computation of Net (Loss) / Income Per Common Share. Common
                                Share.
        21.01           --      Subsidiaries of the Company.
        23.01           --      Consent of Arthur Andersen, LLP
        24.01           --      Power of Attorney (set forth on page V-1).
        27.01           --      Financial Data Schedule. (for SEC use only)
</TABLE>

         (b) Reports on Form 8-K:

                        None

                        (c) Exhibits.

                        See (a) (3) above.

                        (d) Financial Statement Schedule.

                        See (a) (2) above.


                                    Page 41
<PAGE>   42

                    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, 2000 and 1999 and the related consolidated statements of operations,
changes in stockholders' deficit, and cash flows for each of the three years in
the period ended March 31, 2000. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Firearms Training
Systems, Inc. and subsidiaries as of March 31, 2000 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2000 in conformity with accounting principles generally accepted
in the United States.

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


ARTHUR ANDERSEN LLP

Atlanta, Georgia
June 30, 2000 (except with respect to the matters discussed in Note 10 as to
which the date is August 25, 2000.)


                                    Page F-1
<PAGE>   43

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

<TABLE>
<CAPTION>

                                                                                 MARCH 31
                                                                      -----------------------------
                                                                         2000                1999
                                                                      ---------           ---------
<S>                                                                   <C>                 <C>
                                ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................     $   1,886           $   2,805
Restricted ......................................................         1,342                  --
Accounts receivable, net of allowance of $215 and
      $228 in 2000 and 1999, respectively .......................         6,667              19,116
Income taxes receivable .........................................         1,177                  --
Unbilled receivables ............................................         4,386               4,744
Inventories .....................................................        16,369              17,854
Prepaid expenses and other current assets .......................           628                 702
Deferred income taxes ...........................................            --               2,107
                                                                      ---------           ---------
      Total current assets ......................................        32,455              47,328

Property, plant and equipment, net ..............................         4,856               5,306
Deferred financing costs, net ...................................         2,200               2,795
Goodwill, net of accumulated amortization of $3,119 and
   $654 in 2000 and 1999, respectively ..........................         2,064               4,496
Deferred income taxes ...........................................            --                 225
                                                                      ---------           ---------
      Total assets ..............................................     $  41,575           $  60,150
                                                                      =========           =========

              LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ................................................     $   2,413           $   5,384
Accrued liabilities .............................................         8,009               7,500
Income taxes payable ............................................            --                 345
Deferred revenue ................................................         1,013               1,089
Current maturities of long-term .................................            --               6,000
                                                                      ---------           ---------
      Total current liabilities .................................        11,435              20,318

Long-term debt, less current maturities .........................        73,772              66,200
Noncurrent deferred .............................................           319                  --
Other noncurrent liabilities ....................................           903                 172
                                                                      ---------           ---------
      Total liabilities .........................................        86,429              86,690
COMMITMENTS AND CONTINGENCIES (Note 8)
Mandatory redeemable preferred stock (Note 4) ...................         3,347               3,093
Stockholders' Deficit (Notes 3 and 5):
  Preferred stock, $0.10 par value; 200 shares authorized,
     no shares issued in 2000 and 1999 ..........................            --                  --
  Class A common stock, $0.000006 par value; 68,060 shares
     authorized, 19,394 and 19,020 shares issued and
     outstanding in 2000 and 1999, respectively .................            --                  --
  Class B nonvoting common stock, $0.000006 par value; 6,200
     shares authorized, 1,695 shares issued and
     outstanding in 2000 and 1999, respectively .................            --                  --
Additional paid-in capital ......................................       114,592             114,324
Unearned compensation ...........................................          (177)                 --
Accumulated deficit .............................................      (162,578)           (143,676)
Cumulative foreign currency translation adjustment ..............           (38)               (281)
                                                                      ---------           ---------
      Total stockholders' deficit ...............................       (48,201)            (29,633)
                                                                      ---------           ---------
      Total liabilities and stockholders' deficit ...............     $  41,575           $  60,150
                                                                      =========           =========
</TABLE>

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


                                    Page F-2
<PAGE>   44

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          MARCH 31, 2000, 1999 AND 1998
                      (in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                 2000               1999               1998
                                                               --------           --------           --------
<S>                                                            <C>                <C>                <C>
Revenues                                                       $ 38,889           $ 55,514           $ 73,547
Cost of revenues                                                 30,689             35,537             33,867
                                                               --------           --------           --------
Gross margin                                                      8,200             19,977             39,680
Operating expenses:
  Selling, general, and administrative expenses                  10,974             10,204             15,036
  Research and development expenses                               3,992              3,963              6,475
  Depreciation and amortization                                   2,508              1,938              1,042
  Nonrecurring restructuring charge (Note 3)                       (143)               870                 --
  Impairment of goodwill                                          1,944                 --                 --
  Acquired in-process research and development charge                --                 --              4,000
                                                               --------           --------           --------
          Total operating expenses                               19,275             16,975             26,553

Operating Income                                                (11,075)             3,002             13,127
Other expense
  Interest expense, net                                          (8,056)            (7,316)            (5,905)
  Other expense, net                                               (325)              (400)               (97)
                                                               --------           --------           --------
          Total other expense, net                               (8,381)            (7,716)            (6,002)

(Loss) income before provision for income taxes                 (19,456)            (4,714)             7,125
(Benefit) provision for income taxes                               (808)            (1,700)             3,892
                                                               --------           --------           --------
(Loss) income before accretion of preferred stock               (18,648)            (3,014)             3,233
Accretion of preferred stock                                       (254)               (93)                --
                                                               --------           --------           --------
Net (loss) income applicable to common shareholders            $(18,902)          $ (3,107)          $  3,233
                                                               ========           ========           ========
Basic (Loss) earnings per share                                $  (0.91)          $  (0.15)          $   0.16
Diluted (Loss) earnings per share                              $  (0.91)          $  (0.15)          $   0.15
Weighted average common shares outstanding - basic               20,760             20,686             20,408
Weighted average common shares outstanding - diluted             20,760             20,686             21,456
</TABLE>

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


                                    Page F-3
<PAGE>   45

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
               FOR THE YEARS ENDED MARCH 31, 2000, 1999, and 1998

<TABLE>
<CAPTION>

                                                                                                               Class B
                                                             Comprehensive        Class A Common           Nonvoting Common
                                                             Income (Loss)     Shares          Amount     Shares       Amount
                                                             ----------------------------------------------------------------
<S>                                                          <C>              <C>              <C>        <C>          <C>
Balance, March 31, 1997                                        $     --       20,402,404       $   --           --     $   --

Net income                                                        3,233               --           --           --         --

Common stock issued to employees exercising stock options            --            2,679           --           --         --

Common stock issued to Company Employee Stock 401(k) Plan            --           10,239           --           --         --

Foreign currency translation adjustment                            (145)              --           --           --         --
                                                               --------------------------------------------------------------
Balance, March 31, 1998                                           3,088       20,415,322           --           --         --

Net loss                                                         (3,107)              --           --           --         --

Exchange of Class A Voting for Class B Nonvoting                     --       (1,694,569)          --    1,694,569         --
Shares - Centre Entities

Common stock issued in connection with Dart acquisition              --          257,577           --           --         --

Purchase & retirement of stock                                       --          (15,000)          --           --         --

Compensatory stock options issued                                    --               --           --           --         --

Common stock issued to Company Employee Stock 401(k) Plan            --           56,883           --           --         --

Foreign currency translation adjustment                            (229)              --           --           --         --
                                                               --------------------------------------------------------------
Balance, March 31, 1999                                          (3,336)      19,020,213           --    1,694,569         --

Net loss                                                        (18,902)              --           --           --         --

Common stock issued to Company Employee Stock 401(k) Plan            --          101,734           --           --         --

Issuance of restricted stock                                         --          272,500           --           --         --

Amortization of deferred stock-based compensation                    --               --           --           --         --

Foreign currency translation adjustment                             243               --           --           --         --
                                                               --------------------------------------------------------------
Balance, March 31, 2000                                        $(18,659)      19,394,447       $   --    1,694,569     $   --
                                                               ==============================================================
<CAPTION>

                                                                                                     Cumulative
                                                                           Unearned    Retained     Translation
                                                                 APIC    Compensation  Earnings      Adjustment     TOTAL
                                                              -------------------------------------------------------------
<S>                                                           <C>        <C>           <C>          <C>            <C>
Balance, March 31, 1997                                       $ 112,331      $  --     $(143,802)      $  93       $(31,378)

Net income                                                           --         --         3,233          --          3,233

Common stock issued to employees exercising stock options            17         --            --          --             17

Common stock issued to Company Employee Stock 401(k) Plan            42         --            --          --             42

Foreign currency translation adjustment                              --         --            --        (145)          (145)
                                                              -------------------------------------------------------------
Balance, March 31, 1998                                         112,390         --      (140,569)        (52)       (28,231)

Net loss                                                             --         --        (3,107)         --         (3,107)

Exchange of Class A Voting for Class B Nonvoting                     --         --            --          --             --
Shares - Centre Entities

Common stock issued in connection with Dart acquisition           1,829         --            --          --          1,829

Purchase & retirement of stock                                      (75)        --            --          --            (75)

Compensatory stock options issued                                    71         --            --          --             71

Common stock issued to Company Employee Stock 401(k) Plan           109         --            --          --            109

Foreign currency translation adjustment                              --         --            --        (229)          (229)
                                                              -------------------------------------------------------------
Balance, March 31, 1999                                         114,324         --      (143,676)       (281)       (29,633)

Net loss                                                             --         --       (18,902)         --        (18,902)

Common stock issued to Company Employee Stock 401(k) Plan            84         --            --          --             84

Issuance of restricted stock                                        184       (184)           --          --              0

Amortization of deferred stock-based compensation                    --          7            --          --              7

Foreign currency translation adjustment                              --         --            --         243            243
                                                              -------------------------------------------------------------
Balance, March 31, 2000                                       $ 114,592      $(177)    $(162,578)      $ (38)      $(48,201)
                                                              =============================================================
</TABLE>


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


                                    Page F-4
<PAGE>   46

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          MARCH 31, 2000, 1999 AND 1998
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                        2000               1999               1998
                                                                      --------           --------           --------
<S>                                                                   <C>                <C>                <C>
OPERATING ACTIVITIES:
  Net (loss) income                                                   $(18,902)          $ (3,107)          $  3,233
  Adjustments to reconcile net (loss) income to net
     cash provided by (used in) operating activities:
  Depreciation and amortization                                          3,418              2,669              1,679
  Loss on impairment of assets                                           1,944                 --                 --
  Gain on sale of assets                                                    10                 --                 --
  Compensatory stock options issued                                         --                 71                 --
  Amortization of deferred stock-based compensation                          7                 --                 --
  Accretion of mandatory redeemable preferred stock                        254                 93                 --
  Deferred income taxes                                                  2,651               (296)               440
  Employee stock compensation plan-401k                                     84                109                 42
  Acquired in-process research and development charge                       --                 --              4,000
  Changes in assets and liabilities:
  Accounts receivable, net                                              12,594              3,608             (1,298)
  Unbilled receivables                                                     472             (4,744)                --
  Inventories                                                            1,495               (257)            (2,203)
  Prepaid expenses and other current assets                                 79                (90)                 4
  Escrow and other deposits                                                 --                103                 59
  Accounts payable                                                      (3,047)             1,885             (1,476)
  Accrued liabilities                                                      439             (3,752)             1,273
  Income taxes payable                                                  (1,527)               (46)              (255)
  Deferred revenue                                                         338             (5,094)             1,060
  Noncurrent liabilities                                                   316               (195)              (207)
                                                                      --------           --------           --------
  Total adjustments                                                     19,527             (5,936)             3,118
                                                                      --------           --------           --------
  Net cash provided by (used in) operating activities                      625             (9,043)             6,351
                                                                      --------           --------           --------
INVESTING ACTIVITIES:
  Payments for business acquisitions                                        --               (394)            (6,801)
  Sale of business                                                          --                200                 --
  Purchase of performance guarantees                                    (1,342)                --                 --
  Purchase of property and equipment, net                               (1,494)            (2,783)            (1,445)
                                                                      --------           --------           --------
  Net cash used in investing activities                                 (2,836)            (2,977)            (8,246)
                                                                      --------           --------           --------
FINANCING ACTIVITIES:
  Proceeds from borrowings of long-term debt                            43,372             24,700              6,000
  Repayments of long-term debt                                         (41,800)           (15,599)            (1,600)
  Proceeds from mandatory redeemable preferred stock                        --              3,000                 --
  Deferred financing costs                                                (315)              (520)              (640)
  Repurchase and sale of common stock                                       --                (75)                 9
                                                                      --------           --------           --------
  Net cash provided by financing activities                              1,257             11,506              3,769
                                                                      --------           --------           --------
EFFECT OF CHANGE IN FOREIGN EXCHANGE RATES                                  35                (76)              (142)
  Net (decrease) increase  in cash and cash equivalents                   (919)              (590)             1,732
  Cash and cash equivalents, beginning of year                           2,805              3,395              1,663
                                                                      --------           --------           --------
  Cash and cash equivalents, end of year                              $  1,886           $  2,805           $  3,395
                                                                      --------           --------           --------
Supplemental disclosure of cash paid for:
  Interest                                                            $  4,695           $  6,265           $  5,244
  Income taxes                                                             433                241              3,856
</TABLE>

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


                                    Page F-5
<PAGE>   47

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         MARCH 31, 2000, 1999, AND 1998

1. ORGANIZATION AND NATURE OF BUSINESS

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

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

         The Company has one wholly owned subsidiary, FATS, Inc., which is the
operating subsidiary (the "Operating Subsidiary"). As of March 31, 2000, FATS,
Inc. had eight wholly owned subsidiaries (collectively, the "Subsidiaries"):
Firearms Training Systems Limited, the Operating Subsidiary's U.K. subsidiary,
F.A.T.S. Singapore Pte, Ltd., Firearms Training Systems Netherlands, B.V.,
F.A.T.S. Foreign Sales Corporation, Simtran Technologies, Inc. ("Simtran"),
based in Montreal, Canada, FATS Canada Holdings, Dart International, Inc.
(Dart), and Firearms Training Systems Australia Pty Ltd..

         The Company is subject to several business and market risks. The risks
are (1) the Company did not during the year ended March 31, 2000 generate
sufficient revenue or cash flow from its current operations to pay in a timely
manner its outstanding senior indebtedness, necessitating the debt restructuring
(See Note 10); (2) while the Company's financial position has significantly
improved as a result of the debt restructuring both in terms of a reduction in
total amount and a deferral of maturity dates of its debt, it must continue to
achieve its current business revenue targets in the current fiscal year in order
to discharge its interest obligations in a timely manner and expand its business
opportunities; and (3) the Company must receive new contracts for production to
be delivered in the current fiscal year in order to achieve its revenue
projections. Thus, the Company's continuation as a going concern is dependent
upon its ability to (a) continue production work on existing contracts; (b)
obtain new contracts for future delivery; and (c) generate sufficient cash flow
to meet working capital obligations on a timely basis. Management's plans in
response to the above objectives are (1) continue to reinforce cost control
measures to assure operations are conducted at the lowest cost possible at all
locations; (2) remain focused on revenue maximization of standard products with
higher margin potentials within the domestic and international law enforcement
business segment; (3) minimize capital expenditures in non-strategic areas; (4)
improve inventory turns and lower inventory investment and; (5) negotiate more
favorable terms and conditions to reduce extended or prolonged payment cycles.

         The Company believes that this business strategy may achieve positive
operating results provided that the Company collects on past due receivables
outstanding, and achieves the new business revenue targets necessary to finance
working capital needs. There can be no assurances that this strategy, and the
objectives cited above, will be successful or that the new contracts will be
awarded to the Company.

2. 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. On October 1, 1998, FSS, including
all assets, was sold for approximately $200,000 in cash and other receivables.
The results of FSS operations have been included in the Company's consolidated
statements of operations through the effective date of the sale.

         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,


                                    Page F-6
<PAGE>   48

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

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' deficit. 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.

         RESTRICTED CASH


                                    Page F-7
<PAGE>   49

         Restricted cash represents an escrow account which has been established
to ensure contract performance by the Company under certain contracts.

         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,
                                                 -------------------------
                                                   2000             1999
                                                 -------------------------
                  <S>                            <C>              <C>
                  Raw materials ...........      $  8,507         $  8,810
                  Work in process .........         6,134            7,226
                  Finished goods ..........         1,728            1,818
                                                 -------------------------
                      Total inventories ...      $ 16,369         $ 17,854
                                                 =========================
</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, 2000, 1999, and
1998 was $1,991,000, $1,419,000, and $897,000, respectively.

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

<TABLE>
<CAPTION>
                                                                                  MARCH 31,
                                                                          --------------------------
                                                                             2000            1999
                                                                          --------------------------
                  <S>                                                     <C>               <C>
                  Machinery and equipment ..........................      $  6,119          $  5,870
                  Demonstration equipment ..........................         2,895             1,704
                  Furniture and fixtures ...........................           418               405
                  Vehicles .........................................           333               340
                  Leasehold Improvements ...........................           187               182
                                                                          --------------------------
                     Subtotal ......................................      $  9,952          $  8,501
                  Less accumulated depreciation and amortization ...        (5,096)           (3,195)
                                                                          --------------------------
                     Net ...........................................      $  4,856          $  5,306
                                                                          ==========================
</TABLE>

         LONG-LIVED ASSETS

         SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When events or changes in
circumstances occur related to long-lived assets, the Company estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. During fiscal year 2000, the Company performed this analysis due to
changes in circumstances at its Dart subsidiary and recorded an impairment loss
of $1,944,000 (Note 2). Having found no other instances whereby the sum of
expected future cash flows (undiscounted and without interest charges) was less
than the carrying value of the asset, thus requiring the recognition of an
impairment loss, management believes that the other long-lived assets in the
accompanying balance sheets are appropriately valued.


                                    Page F-8
<PAGE>   50

         ACCRUED LIABILITIES

         Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                    MARCH 31,
                                                                             ------------------------
                                                                               2000            1999
                                                                             ------------------------
                  <S>                                                        <C>             <C>
                  Sales commissions, bonuses and agents commissions ...      $    640        $  1,659
                  Accrued salaries and related expenses ...............           968           1,259
                  Professional fees ...................................           120             101
                  Accrued interest ....................................         3,273             759
                  Accrued warranty costs ..............................           538             499
                  Accrued severance costs .............................           431              --
                  Other ...............................................         2,039           3,223
                                                                             ------------------------
                                                                             $  8,009        $  7,500
                                                                             ========================
</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, 2000 and 1999. 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,
2000 and 1999. 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, 2000.

         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 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 years ended March 31, 2000 and
1999 as all were anti-dilutive. Total CESs included in the computation of
diluted net income per share for the year ended March 31, 1998 was 1,048,000.


                                    Page F-9
<PAGE>   51

         CLASS B TO CLASS A COMMON SHARES EXCHANGE

         On April 24, 1998, 1,694,569 shares of the Company's voting Class A
Common Stock were exchanged by the a group of major shareholders managed by
Centre Partners Management, LLC (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. As discussed in Note 10,
the Company entered into a Securities Exchange and Release Agreement with Centre
Entities which resulted in the release of the restrictions on the conversion of
the Class B to Class A common stock. Centre Entities has since converted a
portion of its shares of Class B Common stock to Class A common stock.

         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, 2002.
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.

         In 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues. The
Company is currently reviewing its revenue recognition policy and does not
expect the adoption of SAB No. 101 to have a material impact on its consolidated
results of operations, financial position, or cash flows.

         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, 2000 no
balance remains in the restructuring accrual. The Company recorded a $143,000
decrease in operating expenses in Fiscal Year 2000 as a result of the unused
portion of this accrual.

         EMPLOYEE BENEFIT PLAN

         The Company has a defined contribution profit sharing plan (the "Plan")
for substantially all Company employees 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 $200,000, $266,000, and $226,000 for the
years ended March 31, 2000, 1999, and 1998, respectively.


                                   Page F-10
<PAGE>   52

4. LONG-TERM DEBT

         At March 31, 2000 and 1999, long-term debt consisted of the following
(in thousands):

<TABLE>
<CAPTION>

                                                       2000             1999
                                                     -------------------------
                  <S>                                <C>              <C>
                  Tranche A Loan ..............      $ 17,300         $ 18,700
                  Tranche B Loan ..............        32,600           33,000
                  Revolving Credit Facility ...        20,872           20,500
                  Revolving Promissory Note ...         3,000               --
                                                     -------------------------
                     Subtotal .................      $ 73,772         $ 72,200
                  Current Portion .............            --           (6,000)
                                                     -------------------------
                     Long-Term Portion ........      $ 73,772         $ 66,200
                                                     =========================
</TABLE>

         BANK OF AMERICA, N.A. CREDIT AGREEMENT (THE "CREDIT AGREEMENT")

         The three components of the Credit Agreement are as follows:

         -        Revolving credit facility, as amended, with an aggregate
                  principal amount of up to $22 million (which includes a $7.5
                  million letter-of-credit subfacility and a $2 million swing
                  line subfacility) (the "Revolving Credit Facility") In
                  addition to its outstanding borrowings under the Revolving
                  Credit Facility as of March 31, 2000, the Company had
                  outstanding irrevocable standby letters of credit in the
                  principal amount of approximately $880,000 in connection with
                  the performance of certain sales contracts.

         -        A term loan with an initial principal amount of $30 million
                  (the "Tranche A Loan"), with quarterly principal payments
                  ranging from $1,400,000 to $1,600,000.

         -        A term loan with an initial principal amount of $40 million
                  (the "Tranche B Loan"), with quarterly principal payments
                  ranging from $100,000 to $8,000,000.

         The Tranche A Loan and the 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 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 Credit Agreement) or

         -        The Eurodollar rate plus 2.25% to 3.75% (based on the
                  Company's leverage ratio and certain other factors defined in
                  the 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 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 Credit Agreement) or

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

         At March 31, 2000, the interest rates in effect were 11.25% for the
Revolving Credit Facility, 11.25% for the Tranche A Loan, and 11.50% for the
Tranche B Loan.


                                   Page F-11
<PAGE>   53

         On December 5, 1997, the Company entered into an interest rate swap
agreement that expired on December 5, 2002 (the "swap period"), unless Bank of
America, N.A. elected to terminate the swap agreement on December 5, 2000. The
agreement protected outstanding floating rate debt of $10,000,000 over the swap
period. The Company cancelled the interest rate swap agreement during fiscal
year 2000 in exchange for approximately $17,000.

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

         The borrowings under the Credit Agreement are secured by substantially
all of the Company's assets, a pledge of all of the common shares of the
Operating Subsidiary and a pledge of 65% of the capital stock of the Company's
foreign subsidiaries. The 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.

         During the year ended March 31, 2000, the Company was unable to service
the required payments of principal and interest under the Credit Agreement and
entered into several amendments to the Credit Agreement, which provided the
Company with, among other things, a forbearance of both interest and principal
payments. The Company did not make three scheduled quarterly payments on the
Tranche A loan totaling $4,200,000 as well as several months of scheduled
interest payments under the Credit Agreement totaling approximately $3,339,000.
As discussed in Note 10, the Company entered into the Second Amended and
Restated Credit Agreement and Partial Exchange Agreement which resulted in the
conversion of the outstanding debt under the Credit Facility to new senior and
junior secured debt, common stock, and preferred stock. The maturity date of the
senior and junior secured debt is March 31, 2003 and is extendable at the
Company's option to March 31, 2004 for a fee equal to 1% of the outstanding
balance. As a result of this transaction, the entire balance due under the
Credit Agreement has been classified as long-term debt in the accompanying
balance sheet as of March 31, 2000.

         REVOLVING PROMISSORY NOTE

         On June 1, 1999, the Company entered into a $3,000,000 revolving
promissory note (the "Revolving Promissory Note") with a financial institution
with a maturity date of July 31, 2000, as amended. Borrowings under the note
bear interest at either the LIBOR rate plus 2.5% or prime plus 1.0%. The payment
of obligations under this note was guaranteed by Centre Entities. The guarantee
included a $250,000 funding fee in the event that Centre Entities funded the
obligation. Subsequent to March 31, 2000, Centre Entities repaid the note on
behalf of the Company. As discussed in Note 10, Centre Entities then entered
into a Loan Agreement and Exchange Agreement with the Company which resulted in
the conversion of the $3,000,000 note as well as the $250,000 funding fee to new
senior and junior secured debt, common and preferred stock. The maturity date of
the senior and junior secured debt is March 31, 2003 and is extendable at the
Company's option to March 31, 2004 for a fee equal to 1% of the outstanding
balance. As a result of this transaction, the entire balance due under the
revolving promissory note has been classified as long-term debt in the
accompanying balance sheet as of March 31, 2000.

         MANDATORY REDEEMABLE PREFERRED STOCK

         On November 13, 1998, the Credit Agreement was amended to provide,
among other things, for an immediate capital investment of $3,000,030 by Centre
Entities. 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 nondetachable 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, 2000,
20,289 shares of Series A Preferred Stock and 3,246,164 warrants were
outstanding. The Company recorded an accretion of the preferred stock dividend
of approximately $254,000 in the fiscal year ended March 31, 2000. As discussed
in Note 10, the Company entered into a Securities Exchange and Release Agreement
with Centre Entities which resulted in the exchange of the mandatory redeemable
preferred stock and warrants for shares of Class A common stock and amended
warrants.

         FEES AND EXPENSES


                                   Page F-12
<PAGE>   54

         The Company capitalized approximately $294,000 and $520,000 in 2000 and
1999, respectively, of fees and expenses incurred in connection with the 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. 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 $2,624,000 and $1,735,000 in 2000 and 1999, respectively.

5. STOCK-BASED COMPENSATION PLANS

         STOCK OPTION 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 five
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.

         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 AND SERIES E 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.


                                   Page F-13
<PAGE>   55

A summary of changes in outstanding options during the years ended March 31,
1998, 1999 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                                                                   Weighted Average
                                                            OPTIONS                 EXERCISE PRICE                  Exercise Price
                                                           -------------------------------------------             ----------------
             <S>                                           <C>                 <C>       <C>   <C>                 <C>
             March 31, 1997 ........................       1,758,296            3.25     -      14.00                         3.44
             Granted ...............................         400,100            5.19     -      14.25                         9.28
             Cancelled .............................         (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            0.69     -      12.00                         3.58
             Cancelled .............................        (697,898)           1.25     -      14.25                         6.08
                                                           -------------------------           ------                       ------
             March 31, 1999 ........................       2,221,152           $0.69     -     $14.00                       $ 3.65
             Granted ...............................         673,400            0.50     -       1.00                         0.69
             Cancelled .............................        (679,698)           0.56     -      14.00                         3.86
                                                           -------------------------           ------                       ------
             March 31, 2000 ........................       2,214,854           $0.50     -     $12.00                       $ 2.82
                                                           =========
             Shares exercisable @ March 31, 2000 ...         810,288           $0.69     -     $12.00                       $ 3.59
                                                           ---------
             Shares available for future grants ....         272,467
                                                           =========
</TABLE>

         Grants and cancellations for fiscal year 1999 include 189,950 shares
reissued at a price of $3.253 on December 11, 1998. The options were cancelled
and reissued to certain employees. The Company has elected to account for its
stock-based compensation plans under APB No. 25; however, the Company has
computed for pro forma disclosure purposes the value of all options granted at
March 31, 2000 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>
                                                                   2000               1999               1998
                                                                 --------------------------------------------
         <S>                                                     <C>           <C>                  <C>
         Risk-free interest rate..............................        5%       5.75 - 5.80%         5.7 - 5.9%
         Expected dividend yield..............................        0                  0                  0
         Expected lives (in years)............................      4.0          4.0 - 5.0          4.0 - 9.0
         Expected volatility..................................   153.20%            104.30%             78.84%
</TABLE>

         The total value of options granted during the years ended March 31,
2000, 1999 and 1998 was computed as approximately $340,000, $1,039,000, and
$1,355,000, 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 net (loss)
income per diluted share for the years ended March 31, 2000, 1999, and 1998
would have been as follows:

<TABLE>
<CAPTION>
                                                                   Fiscal year ended March 31,
                                                              2000               1999            1998
                                                            ------------------------------------------
                                                               (In thousands, except for share data)

             <S>                                            <C>                <C>              <C>
             Net (loss)  income ......................      $(20,254)          $(5,287)         $1,310

             Net (loss) income per share - diluted ...      $  (0.98)          $  0.26          $ 0.06
</TABLE>


                                   Page F-14
<PAGE>   56

         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, 2000:

<TABLE>
<CAPTION>
       OPTIONS OUTSTANDING                                                                              OPTIONS EXERCISABLE
     ------------------------                                 Weighted                             -------------------------------
                                      Outstanding              Average            Weighted         Exercisable        Weighted
                                         as of                Remaining           Average             as of            Average
     Range of Exercise Prices          03/31/2000         Contractual Life     Exercise Price       03/31/2000      Exercise Price
     ------------------------         -----------         ----------------     --------------      -----------      --------------
     <S>                              <C>                 <C>                  <C>                 <C>              <C>
      $ 0.50   -   $  1.43                781,034                9.8              $  0.74              107,142         $  1.03
        1.44   -      2.85                 58,184                8.2                 1.79               19,634            1.79
        2.86   -      4.28              1,188,369                4.7                 3.25              594,234            3.25
        4.29   -      5.70                 16,600                4.8                 5.19               11,067            5.19
        5.71   -      7.13                  3,000                4.4                 7.13                2,000            7.13
        7.14   -      8.55                 91,733                5.9                 7.62               34,140            7.63
        8.56   -      9.98                    100                5.0                 9.00                   67            9.00
        9.99   -     12.00                 75,834                5.5                11.80               42,004           11.79
                                        ---------               ----              -------              -------         -------
                                        2,214,854                6.7              $  2.82              810,288         $  3.59
</TABLE>

STOCK COMPENSATION PLAN

         The Company adopted the Firearms Training Systems, Inc. Employee Stock
Compensation Plan ("the Stock Plan") on July 1, 1997. The Company has reserved a
total of 500,000 shares of Class A common stock for issuance under the Plan. As
of March 31, 2000, 58,644 shares were available for future grant under the Stock
Plan. The Stock Plan provides for antidilution in the event of certain defined
circumstances. Under the Plan, the Company may issue shares of Class A common
stock for compensation, including issuances to make Company matching
contributions under the Company's 401(k) Profit Sharing Plan. During the years
ended March 31, 2000, 1999, and 1998, the Company issued 10,239, 56,883, and
101,734 shares of Class A common stock to the 401(k) Profit Sharing Plan as
matching contributions (Note 3).

         During the year ended March 31, 2000, the Company also granted 272,500
shares of restricted stock with a fair value at the date of grant of $.69 per
share to various employees under the Stock Plan. The shares vest and become
unrestricted 50% on September 30, 2000 and 50% on March 31, 2000. The Company
has recorded deferred compensation equal to the fair value of these shares on
the date of grant.

MANAGEMENT SHARES AGREEMENT

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


                                   Page F-15
<PAGE>   57

6. INCOME TAXES

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

<TABLE>
<CAPTION>

                                                                     FOR THE YEAR ENDED MARCH 31,
                                                                 2000              1999             1998
                                                              ------------------------------------------
         <S>                                                  <C>               <C>               <C>
         Current:
             Federal income tax (benefit)/expense ......      $(3,751)          $(2,001)          $3,046
             Foreign income tax expense ................          292               868              172
             State income tax (benefit)/expense ........           --              (271)             234
             Deferred income tax expense/(benefit) .....        2,651              (296)             440
                                                              ------------------------------------------
                                                              $  (808)          $(1,700)          $3,892
                                                              ------------------------------------------
</TABLE>


                                   Page F-16
<PAGE>   58

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

<TABLE>
<CAPTION>
                                                                      FOR THE YEAR ENDED MARCH 31,
                                                                  2000              1999              1998
                                                              --------------------------------------------
         <S>                                                  <C>               <C>               <C>
         Tax at statutory rate ............................   $ (6,631)         $ (1,603)         $  2,422
         State taxes, net of federal income tax benefit ...         --                --               128
         Nondeductible goodwill ...........................         83                83                --
         Research and development tax credit ..............       (679)               --                --
         Foreign sales corporation benefit ................       (188)             (201)             (294)
         Acquired research and development charge .........         --                --             1,360
         Goodwill impairment ..............................        661                --                --
         Increase in valuation allowance ..................      6,207                --                --
         Other ............................................       (261)               21               276
                                                              --------------------------------------------
             Total ........................................   $   (808)         $ (1,700)         $  3,892
                                                              ============================================
</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,
                                                                                    -------------------------
                                                                                       2000              1999
                                                                                    -------------------------
                  <S>                                                               <C>               <C>
                  Deferred Tax Assets:
                  Inventory reserves .....................................          $   358           $   358
                  Accrued Liabilities ....................................              368               183
                  Warranty reserve .......................................              140               140
                  Deferred revenue .......................................              295               245
                  Net Domestic operating loss carryforwards ..............            5,121             1,319
                  Net Foreign operating loss carryforwards ...............              181               445
                  Other ..................................................              144               134
                  Valuation allowance ....................................           (6,207)               --
                                                                                    -------------------------
                       Total Gross Deferred Tax Assets ...................          $   400           $ 2,824
                                                                                    =========================
                  Deferred Tax Liabilities
                  Accelerated Depreciation ...............................              144               217
                  Other ..................................................              575               275
                                                                                    -------------------------
                       Total Gross Deferred Tax Liabilities ..............              719               492
                                                                                    -------------------------
                  Net Deferred Tax Assets/(Liabilities) ..................             (319)            2,332
                     Less: Non-current Deferred Tax Assets ...............               --            (2,107)
                                                                                    -------------------------
                       Non-current Net Deferred Tax Assets/(Liabilities)..          $  (319)          $   225
                                                                                    =========================
</TABLE>

         As of March 31, 2000, the Company has available domestic operating loss
carryforwards of approximately $15 million and Canadian operating loss
carryforwards of approximately $580,000. A valuation allowance is provided when
it is determined that some portion or all of the deferred tax assets may not be
realized. Due to uncertainty of future income, the Company has recorded a
valuation allowance for the entire amount of deferred tax assets attributable to
the operating loss carryforwards as well as for the amount of deferred tax
assets created as a result of temporary differences between book and tax. The
Domestic and Canadian operating losses expire in 2020 and 2007, respectively.


                                   Page F-17
<PAGE>   59

7. CONCENTRATION OF REVENUES

         For the year ended March 31, 2000, the Company's five largest customers
accounted for approximately 58.2% 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, 2000, 1999, and 1998:

<TABLE>
<CAPTION>

                                                                Aggregate    Percent
                                                                 Revenues    of Total
YEAR                     MAJOR CUSTOMERS                          (000s)     Revenues
-------------------------------------------------------------------------------------
<S>                                                             <C>          <C>
2000       Canadian Department of National Defence               10,791        27.7%
           The Australian Army                                    5,295        13.6%

1999       Canadian Department of National Defence               20,247        36.5%

1998       United States Marine Corps                            20,994        28.5%
           The Italian Air Force                                  8,926        12.1%
</TABLE>

         As of March 31, 2000, the Company had three customers which comprised
approximately 25%, 18%, and 15%, respectively, of total accounts receivable.

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

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

         A significant portion of the Company's sales is made to customers
located outside the U.S., primarily in Europe and Asia. In fiscal 2000, 1999,
and 1998, 70.5%, 64.2%, and 46.0% of the Company's revenues, respectively, were
derived from sales to customers located outside the United States. The Company
expects that its international customers will continue to account for a
substantial portion of its revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations and changes in
import/export regulations and tariff rates. In addition, various forms of
protectionist trade legislation have been, and in the future may be, proposed in
the U.S. and certain other countries. Any resulting changes in current tariff
structures or other trade and monetary policies could adversely affect the
Company's sales to international customers. 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.


                                   Page F-18
<PAGE>   60

8. COMMITMENTS AND CONTINGENCIES

         OPERATING LEASES

         The Company leases its manufacturing and operating facilities and
office equipment under operating leases with terms in excess of one year. Rental
expense under noncancellable operating leases was approximately $942,000,
$925,000, $755,000 for the years ended March 31, 2000, 1999, and 1998,
respectively.

         At March 31, 2000, future minimum payments under noncancellable
operating leases were as follows (in thousands):

<TABLE>
                  <S>                    <C>
                  2001 .........         $  986
                  2002 .........            842
                  2003 .........            712
                  2004 .........            638
                  2005 .........            612
                  Thereafter ...          1,836
                                         ------
                                         $5,626
                                         ======
</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.

         EMPLOYMENT AGREEMENT

         In September 1996, the Company entered into an employment agreement
with Mr. Peter A. Marino its President, Chief Executive Officer (CEO) and
Director. As noted in the Company's Form 8-K dated September 15,1999, in
agreement with the Board of Directors, Mr. Marino retired from his position as
President and CEO effective September 30, 1999 and will receive severance
payments totalling approximately $900,000 through March, 2002. The amount has
been accrued and is included in the accrued liabilities and other noncurrent
liabilities on the accompanying balance sheet. Also, the terms of all vested
options held by the officer as of his termination date were amended to extend
the exercise period until December 29, 2001. However, due to the fact that the
market value of the Company's stock was below the exercise prices of the options
as of the amendment date, no compensation expense has been recognized.

         Mr. Robert F. Mecredy, the Company's Executive Vice President, assumed
responsibilities as President and CEO as of October 1, 1999.

         In March 1999, the Company entered into an employment agreement with
its Chief Financial Officer; this contract was amended on February 18, 2000 to
extend the agreement by a period of one year. All other terms and conditions of
the agreement remain in effect. The amount of these contracts is not material to
the Company's financial position.

LEGAL

         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. On
October 28, 1998, DART and AIS entered in to an agreement whereby AIS dismissed
the lawsuit against DART entitling DART to continue to sell its products without
liability within the claims of the 706 Patent.


                                   Page F-19
<PAGE>   61

         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. On June 6, 2000, the Company and AIS
agreed to dismiss the lawsuits.

         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.

9. 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,
                                                --------------------------------------
                                                  2000            1999            1998
                                                --------------------------------------
                  <S>                           <C>             <C>             <C>
                  International sales:
                  Europe ................        8,044           9,480          25,404
                  Asia ..................        3,007           5,109           5,719
                  Canada ................       10,790          20,259           1,574
                  Australia .............        5,296              --              --
                  Other .................          282             767           1,135
                                                --------------------------------------
                            Total .......       27,419          35,615          33,832
                                                ======================================
</TABLE>

10. SUBSEQUENT EVENTS

CHANGES TO AUTHORIZED PREFERRED AND COMMON STOCK

         During August 2000, the board of directors approved an amendment to the
articles of incorporation to increase the number of authorized shares of Class A
voting common stock to 100,000,000 and to increase the number of authorized
shares of preferred stock to 100,000. The board of directors then created a new
class of Series B preferred stock with 50,000 authorized shares. Holders of the
Series B preferred stock are entitled to receive cumulative dividends equal to
10% of the liquidation preference payable quarterly in additional shares of
Series B preferred stock. The preferred stock is subject to mandatory redemption
on the later of March 31, 2003 or the latest maturity date of the senior secured
debt (discussed below) at the liquidation value thereof.

RESTRUCTURING OF LONG-TERM DEBT

         In August 2000, the Company entered into a Second Amended and Restated
Credit Agreement (the "New Credit Agreement") and Partial Exchange Agreement
with Bank of America, N.A. and other lenders which replaced the Company's Credit
Agreement. In accordance with the New Credit Agreement, the unpaid principal and
accrued interest on the Revolving Credit Facility, the accrued interest on the
Tranche B loan, and a portion of the unpaid principal on the Tranche B loan was
converted to 40,235,548 shares of Class A common stock and 20,463.716 shares of
Series B preferred stock. A portion of the unpaid principal on the Tranche A
loan was converted to approximately $11,496,000 in Senior secured loans (the
"Senior Bank Loans"). The remaining portions of the Tranche A and Tranche B
loans were converted to approximately $22,034,000 of Junior secured loans (the
"Junior Bank Loans"). The New Credit Agreement also includes a revolving credit
facility (the "New Facility") of approximately $882,000 which may be used for
letters of credit or advances.


                                   Page F-20
<PAGE>   62

         Subsequent to March 31, 2000, Centre Entities paid the Revolving
Promissory Note on behalf of the Company. In August 2000, the Company entered
into a Loan Agreement and Exchange Agreement with Centre Entities (the "Centre
Loan Agreement"). Under the Centre Loan Agreement, the $3,000,000 balance paid
by Centre Entities on the Revolving Promissory Note, as well as a $250,000
funding fee, was converted to 1,764,452 shares of Class A common stock, 897,397
shares of Series B preferred stock, approximately $504,000 in Senior secured
loans (the "Senior Centre Loans"), and approximately $966,000 in Junior secured
loans (the "Junior Centre Loans").

         All borrowings under the New Credit Agreement and the Centre Loan
Agreement mature on March 31, 2003. However, the Company may extend the maturity
date on all junior and senior loans to March 31, 2004 for a fee equal to 1% of
the outstanding balance. The Senior Bank Loans and Senior Centre Loans bear
interest at prime plus 1%, payable quarterly in cash. The Junior Bank Loans and
Junior Centre Loans bear interest at 10%, payable quarterly in cash or in notes
with the same terms, depending on ratio of EBITDA to interest due on the senior
loans. The Senior Bank Loans, Senior Centre Loans, and New Facility are secured
by a first lien on all assets of the Company. The Junior Bank Loans and Junior
Centre Loans have a second lien on all of the assets. The New Credit Agreement
and the Centre Loan Agreement include certain financial and other covenants,
including a minimum EBITDA interest coverage covenant and a limitation on
capital expenditures.

SECURITIES EXCHANGE AND RELEASE AGREEMENT

         In August 2000, the Company entered into a Securities Exchange and
Release Agreement with Centre Entities (the "Centre Securities Agreement"). In
accordance with the agreement, all shares of Series A mandatory redeemable
preferred stock and related non-detachable warrants were exchanged for 6,695,212
shares of Class A common stock and amended warrants to purchase 3,246,164 shares
of Class A common stock at $1.00 per share, subject to adjustment for stock
dividends and certain other stock distributions and issuances. The Centre
Securities Agreement also includes new warrants to purchase 2,000,000 shares of
Class A common stock at an exercise price of $0.25 per share, subject to
adjustment for stock dividends and certain other stock distributions and
issuances.  The warrants expire March 31, 2005.


                                   Page F-21
<PAGE>   63


                                                                      SCHEDULE I

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                         MARCH 31, 2000, 1999, AND 1998

<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, 2000:

     Allowance for doubtful accounts          $ 228         $  15           $  28            $ 215

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, 2000:

     Restructuring reserve .........            318          (143)(2)         175(1)            --

Fiscal year ended March 31, 1999:

     Restructuring reserve .........             --           870             552(1)           318
</TABLE>

         (1)      Represents amounts charged against the restructuring reserve.

         (2)      Represents removal of remaining reserve not considered
                  necessary as of March 31, 2000


                                    Page S-1

<PAGE>   64

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/ Robert F. Mecredy
                                 -----------------------------------------------
                                                Robert F. Mecredy
                                 President, Chief Executive Officer and Director
                                          (Principal Executive Officer)

                        POWER OF ATTORNEY AND SIGNATURES

         Each person whose signature appears below constitutes and appoints
Robert F. Mecredy 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
--------------------------------------------------------------------------------------------------------------------
   <S>                              <C>                                                            <C>
              *
   -------------------------        President, Chief Executive Officer                             September 1, 2000
       Robert F. Mecredy            and Director (Principal Executive Officer)


              *
   -------------------------        Chief Financial Officer                                        September 1, 2000
       John A. Morelli              and Treasurer (Principal Financial and Accounting Officer)


              *
   -------------------------        Chairman of the Board and Director                             September 1, 2000
       Lester Pollack

              *
   -------------------------        Director                                                       September 1, 2000
       William J. Bratton

              *
   -------------------------        Director                                                       September 1, 2000
       Gilbert F. Decker

              *
   -------------------------        Director                                                       September 1, 2000
       Craig I. Fields

              *
   -------------------------        Director                                                       September 1, 2000
       Frank S. Jones

              *
   -------------------------        Director                                                       September 1, 2000
       Jonathan H. Kagan

              *
   -------------------------        Director                                                       September 1, 2000
       Scott Perekslis

              *
   -------------------------        Director                                                       September 1, 2000
       Paul J. Zepf
</TABLE>


                                    Page V-1