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                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
 
                          ---------------------------
 
                                   FORM 10-K
                          ---------------------------
 
<TABLE>
<C>               <S>
      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                            FOR THE FISCAL YEAR ENDED MARCH 31, 1998
 
                                 COMMISSION FILE NUMBER 0-21773
      [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
 
                        FIREARMS TRAINING SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)
 
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<S>                                                    <C>
                      DELAWARE                                              57-0777018
           (State or other jurisdiction of                               (I.R.S. Employer
           incorporation or organization)                               Identification No.)
</TABLE>
 
                7340 MCGINNIS FERRY ROAD, SUWANEE, GEORGIA 30024
              (Address of principal executive offices) (Zip Code)
 
       Registrant's telephone number, including area code: (770) 813-0180
 
                   Name of exchange on which registered: NONE
 
Securities pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $0.000006
                              PAR VALUE PER SHARE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K  ____________.
 
     Aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 22, 1998: $27,442,496 (based on 9,243,788 shares of
non-affiliates Class A Common Stock outstanding at $2.96875 per share; the last
sale price on The Nasdaq National Market on June 22, 1998).
 
     At June 22, 1998, there were issued and outstanding 18,970,970 shares of
Class A Common Stock, par value $0.000006 per share, and there were issued and
outstanding 1,694,569 shares of Class B nonvoting Common Stock, par value
$0.000006 per share.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders, to be filed with the Commission, are incorporated by
reference into Part III hereof.
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                                     PART I
 
     Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). Such forward-looking statements made by or on behalf of Firearms
Training Systems, Inc. (the "Company") from time to time, including statements
contained in the Company's filings with the Commission and its reports to
stockholders, involve known and unknown risks and other factors which may cause
the Company's actual results in future periods to differ materially from those
expressed in any forward-looking statements. Any such statement is qualified by
reference to the risks and factors discussed below under the headings
"Business -- Customers," "-- Research and Development," "-- Proprietary
Operating System; Raw Materials and Suppliers," "-- Government Contracts and
Regulations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- General," and "-- Liquidity and Capital Resources"
and in the Company's filings with the Commission, which are available from the
Commission or which may be obtained upon request from the Company. The Company
cautions that the factors and risks discussed herein and therein are not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
 
ITEM 1.  BUSINESS
 
  GENERAL
 
     The Company is the leading worldwide producer of interactive simulation
systems designed to provide training in the handling and use of small and
supporting arms. The Company offers a broad array of cost-effective training
systems ranging from individual marksmanship trainers to instructional systems
for multiple users. Unlike traditional live firing ranges, the Company's
simulation systems enable users to train in highly realistic situations through
the integration of video and digitized projected imagery and modified, laser-
emitting firearms that retain the fit, function and feel of the original weapon.
Utilizing internally developed proprietary software and sensors incorporated
into the simulated weapons, the Company's systems offer real-time feedback and
evaluation with respect to a number of performance measures such as accuracy,
reaction time, situational judgment and other important elements of weapons
handling. In addition, the Company's simulation systems offer significant
improvements in safety as well as many other benefits to customers that cannot
be attained in live weapons practice, including reductions in ammunition
consumption, weaponry wear, trainee transport and range maintenance costs and
environmental remediation expenses.
 
     The Company has focused its sales efforts primarily in the U.S. and
international military and law enforcement market through its principal
facilities near Atlanta, Georgia and its other facilities in the U.K. and the
Netherlands. By offering products that enhance training effectiveness while
reducing costs, FATS has sold systems to numerous customers in the U.S. and
abroad, including the U.S. Marine Corps, the U.S. Army, the U.S. Air Force, the
Los Angeles and New York Police Departments, the Federal Bureau of
Investigation, the Internal Revenue Service, the Singapore Army and Police Coast
Guard, the British Ministry of Defence and the Royal Netherlands Army. In April
1998, the Company acquired all of the outstanding stock of Dart International,
Inc. ("Dart"), a Colorado-based hunter/sports simulation company. The Company's
hunter and sports business will be consolidated with and managed by Dart. In
March 1998, the Company purchased all of the outstanding stock of Simtran
Technologies, Inc. ("Simtran"), a Canadian-based simulation company. Simtran has
contracts with the Canadian Department of National Defence 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.
 
     To date the Company combined with Dart has sold more than 3,000 simulation
systems in the U.S. and over 30 other countries. Although the Company is unaware
of any independent third party industry statistics, the Company believes, based
on its monitoring of the market, that its systems sold to date represent a
substantial majority of the worldwide installed base of interactive small and
supporting arms simulation systems purchased by military and law enforcement
agencies. Management believes that the Company's success to date has been due
primarily to the proven quality and cost-effectiveness of the Company's
products, its premier FATS(R) brand name, its strong long-term relationships
with its customers, its ability to provide
 
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innovative customized training solutions on a timely basis, its extensive
inventory of proven weapons and scenarios, its ability to integrate advanced
technologies and its team of recognized subject matter experts. As of March 31,
1998, the Company had a backlog of approximately $49.4 million from all
customers.
 
HISTORY
 
     The Company was incorporated in 1984 and was a wholly owned subsidiary of
THIN International N.V. ("THIN International"), a Netherlands Antilles
corporation, until July 31, 1996. At that time, the Company consummated a set of
transactions (the "Recapitalization") pursuant to a Recapitalization and Stock
Purchase and Sale Agreement among the Company, THIN International, Centre
Partners Management LLC ("Centre Management"), and a group of entities managed
by Centre Management (the "Centre Entities"). As part of the Recapitalization,
the Company (i) effected a 100,000-for-one stock split with respect to its
common stock, (ii) issued common stock to the Centre Entities for cash, (iii)
issued certain senior subordinated bridge notes (the "Bridge Notes") and agreed
to deliver under certain circumstances warrants to purchase common stock of the
Company (the "Warrants"), (iv) entered into a new credit agreement (the
"NationsBank Credit Agreement") with NationsBank, N.A. (South) ("NationsBank")
and certain other lenders providing for certain credit facilities (the "Senior
Bank Debt"), pursuant to which it borrowed $76 million, and (v) repurchased
certain shares of common stock owned by THIN International and agreed to make an
additional contingent payment (the "Contingent Payment") upon the occurrence of
certain events. Also in connection with the Recapitalization, the Company sold
certain shares of common stock and granted certain options to members of the
Company's management. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General -- Recapitalization."
 
     In November 1996, the Company completed an initial public offering,
pursuant to which it offered and sold 6,000,000 shares of its common stock (the
"Offering"). The Company used approximately $75.3 million in net proceeds from
the Offering (i) to repay the Bridge Notes, (ii) to make the Contingent Payment,
(iii) to reacquire the Warrants, and (iv) to reduce the amount then outstanding
under the Senior Bank Debt. Following consummation of the Offering, the Centre
Entities owned or had control over approximately 54.7% and THIN International
owned approximately 14.5% of the outstanding shares of Class A Common Stock (the
"Common Stock").
 
     In fiscal 1997, the Company completed a reorganization into a holding
company structure (the "Drop Down Transaction"), with the Company owning 100% of
the outstanding capital stock of a newly-formed subsidiary, FATS, Inc., a
Delaware corporation (the "Drop Down Subsidiary" or "FATS") which is now the
primary operating company. The Company has pledged all of the shares of capital
stock of the Drop Down Subsidiary as security for the repayment of the
obligations under the NationsBank Credit Agreement. The financial statements of
the Company are prepared and presented on a consolidated basis and the
discussions in this report reflect the operations of the Company and its
subsidiaries.
 
     On April 24, 1998, 1,694,569 shares of the Company's voting Class A Common
Stock were exchanged by the Centre Entities for an equal amount of non-voting
Class B Common Stock. In connection with the exchange, the Centre Entities
agreed not to convert the shares of Class B Common Stock to shares of Class A
Common Stock if, as a result of such conversion, the Centre Entities would hold,
of record or beneficially with power to vote, more than 50% of the shares of
Class A Common Stock outstanding immediately following such conversion, unless
concurrently with such conversion the shares of Class A Common Stock are
transferred to an unaffiliated person.
 
INDUSTRY OVERVIEW
 
     The Company has helped to revolutionize small and supporting arms training
through the introduction of cost-effective and realistic interactive simulation.
For decades, military and law enforcement organizations have trained personnel
on firing ranges with targets that are static or have limited motion
capabilities. This approach neither accurately replicates the hostile situations
armed personnel are likely to face nor fully develops tactical skills and
individual judgment. Despite efforts by law enforcement agencies to add
"aggressor" and "friendly" targets to evaluate the judgment of their trainees,
live fire training remains limited
 
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in its ability to replicate real-life situations. Simulation systems not only
provide solutions to these issues but also offer significant improvements in
safety and many other benefits that cannot be attained in live weapons practice,
including reductions in ammunition consumption, weaponry wear, trainee transport
and range maintenance costs. Furthermore, many law enforcement agencies have
begun to adopt simulation systems based in part on their concern over the
increasing number of liability lawsuits relating to alleged uses of excessive
force. As a result, military and law enforcement organizations are allocating
greater portions of their training budgets to small and supporting arms
simulation training.
 
     In addition to the increased demand for more realistic training, management
believes the development of the small arms simulation industry has benefited
from two trends: (i) increasing pressure on budgets, and (ii) rapidly advancing
computer and imaging technology. Faced with declining budgets, many military and
law enforcement agencies are adopting interactive small and supporting arms
simulation as a means of reducing costs while maintaining training
effectiveness. In addition, firearms simulators help customers reduce costs
associated with environmental compliance requirements such as the removal from
target ranges of lead deposits caused by the use of live ammunition. At the same
time, advances in computing power and speed coupled with advances in high
resolution graphics and video technology have made it possible to create highly
realistic and cost-effective simulators. The improved fidelity and diagnostic
capability of current simulators permit military and law enforcement agencies to
improve the quality of firearms training at a substantially lower cost than live
fire training.
 
     The interactive small and supporting arms simulation industry is relatively
new and developing, and the Company believes that the global business
opportunities remain due to the benefits of and demand for simulation products.
Moreover, management believes the trends favoring increased reliance upon
simulation in the U.S. can also be identified abroad in military and law
enforcement agencies in other countries, generally centralized to a greater
extent than in the U.S., and facing increasingly restrictive budgets.
 
     Sales to U.S. and international governmental agencies are subject to
numerous and changing regulations and budgetary processes that could have a
material adverse effect on the Company's future results of operations and
financial condition. See "-- Customers" and "-- Government Contracts and
Regulation."
 
PRODUCTS
 
     The Company offers a variety of innovative products to meet the specific
firearms training needs of its customers. Customers typically purchase a system
comprised of a simulator, simulated firearms, scenarios and software. The
Company's systems sell for prices from approximately $30,000 for low-end systems
with a basic complement of simulated firearms and scenarios to over $500,000 for
high-end systems with an extensive set of simulated firearms and scenarios and
auxiliary equipment. The Company also sells additional simulated firearms and
laser discs to customers as add-ons to basic systems at prices ranging from
approximately $1,000 to $60,000.
 
     Simulators.  The Company's training simulators combine a primary simulation
computer, a laser hit location detection system, a video projector, and a
variety of visual image storage and delivery media. The user of the simulator
practices with a modified firearm and fires a laser beam at targets within a
highly realistic training scenario appearing on a 10- to 30-foot video screen.
The simulator processes data provided by the laser hit location detection system
and sensors integrated into the simulated weapon to provide the instructor and
trainee real-time performance feedback. In addition, the instructor can replay
various parts of the training exercise with the trainee for detailed analysis of
the trainee's performance, including the trainee's accuracy, reaction time,
judgment and other aspects of weapons handling. Certain of the Company's
simulators can accurately measure weapons fire at simulated distances of up to
2,800 meters and be linked to other simulators so that as many as 15 individuals
can train at the same time. In addition, the simulators can be programmed to
replicate a wide variety of real-life situations, including situations in which
outcomes depend upon the user's reactions as well as situations in which the
user faces unexpected events such as the malfunction of the firearm.
 
     Simulated Firearms.  The Company works closely with its customers to offer
a diverse range of specially modified or custom fabricated simulated firearms
which accurately replicate the fit, function and feel of the
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original firearm in all material respects. The Company believes it is critical
that its simulated weapons have the same physical functions and operational
characteristics as the actual firearm such as weight, timing of fire, recoil,
potential for weapon malfunction and loading and reloading procedures. A typical
simulated firearm will include an infra-red laser, gas piston actuators, valves,
several types of electronic sensors, a localized computer controller,
specialized recoil buffers, gas lines, ports and wiring. Based on customer
requirements, the Company can modify actual weapons into simulated firearms or
can manufacture simulated firearms from raw materials. The majority of simulated
firearms sold to U.S. military and law enforcement customers are modified from
actual firearms or assembled from weapon kits purchased from third party
suppliers, while many international military customers provide their own
firearms for the Company to convert into training devices. The Company's
simulated firearms are designed for an extended life-cycle with maximum
reliability and realism. Currently available weapon types include revolvers,
semi-automatic pistols, shotguns, semi-automatic and burst/automatic rifles,
submachine guns, machine guns, anti-armor rocket launchers, grenade launchers,
cannons, mortars and archery bows.
 
     Scenarios and Software.  The Company offers a library of more than 1,000
scenarios and marksmanship courses, as well as an extensive library of digital
scenes and targets designed for various markets. The Company's software programs
combine video, graphics and computer generated imagery into a versatile
simulation package. The instructor can use the program to employ existing, new
or modified training materials to monitor performance of the user in a broad
range of training situations. The existing library of materials provides a wide
array of situations to be presented for training or mission rehearsal. The
Company has collected and offers training materials which can exercise the total
spectrum of infantry and indirect fire weapons. Additionally, training materials
are available to support the entire range of the law enforcement force continuum
including physical presence, verbal commands, chemical suppressants, impact
weapons and deadly force. The Company often works with customers to develop
custom materials that meet unique requirements and to provide them with the
ability to develop their own materials. The software program and built in tools
provide the customer with the ability to capture real world environments in
video or computer generated imagery, convert that material into a training or
testing medium, present the material with the simulator, and evaluate the
performance of trainees during the conduct of selected exercises.
 
     Auxiliary Equipment.  The Company manufactures a wide range of optional
auxiliary equipment which enhances the realism of the training scenarios.
Options include: (i) enemy shootback, which simulates return fire from the
target and has the ability to disable a trainee's training weapon; (ii) night
vision adapter, which can simulate night training using day video scenarios and
standard night vision goggles; (iii) less-than-lethal law enforcement options
such as baton simulation, pepper spray training devices and blank firing
weapons; and (iv) classroom trainers, in which a personal computer and software
are added to the system so that as many as 40 students, each with a personal
keypad, can participate in interactive training.
 
     Simtran.  Simtran is working closely with its customers to develop three
unique products: an air defense missile trainer; an appended armored vehicle
crew trainer; and a stand-alone armored vehicle crew trainer. Also, Simtran
manufactures gunnery trainers for both hand held and tripod mounted anti-armor
missile systems. The company manufactures cost effective, high quality training
simulation systems for the defense industry in military weapons systems.
Simtran's systems provide for the "look and feel" of the actual system along
with training for the individual operator or for the crew as a tactical unit.
The simulators are portable or transportable and provide for fixed or on-site
training wherever they are required.
 
     Simtran's training systems combine operating units such as actual or
replicated driver stations or missile launchers with electronic simulation
devices. Various scenarios can be custom arranged by the user to meet specific
training requirements using interactive video, computer generated imagery and
dynamic computer generated imagery as needed. Research and development into new
technologies and simulation applications are performed by Simtran's Advanced
Technologies group. Simtran's Repair and Overhaul Division provide warranty
support, bench service and on-site support.
 
     Dart.  The Company believes that Dart is the pioneer and market leader of
video simulation technology in the shooting sports industry. Dart has an
installed base of more than 250 systems nationwide. Current products include
both portable and fixed location systems for archery and firearms applications.
 
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     Dart products provide the commercial or retail firearms and archery dealer
with revenue generating opportunity by incorporating interactive features such
as: over 1,000 video scenarios complete with appropriate audio cues; instant
feedback to the shooter after every shot; an automated scoring system; computer
generated targets; league and competition format; a complete database function;
marketing support for advertising and promotion and a communications network
capable of linking all systems to a central computer at the company's
headquarters for service support or data management.
 
     Current Dart customers include archery pro-shops, shooting sports
retailers, full-line sporting goods retailers and federal and state wildlife
agencies.
 
TARGETED MARKET
 
     The Company currently targets four principal market components: (i)
international (including military and law enforcement authorities); (ii) U.S.
military; (iii) U.S. law enforcement; and (iv) hunter and sports training.
 
     International.  The Company believes that many international military and
law enforcement agencies have begun to recognize the benefits of cost-effective
and realistic small arms simulation training. The Company has sold FATS(R)
systems to customers in more than 30 countries, including Canada, Great Britain,
the Netherlands, Italy and Singapore. Interest in the Company's products may be
greatest in countries in which limited land is available for live fire training
or in which budgetary constraints or interest in technological upgrades may
support a decision to purchase the Company's systems. See "-- Customers."
 
     Unlike the U.S., most other countries have centralized law enforcement
organizations. As a result, procurement and purchasing decisions for both
military and law enforcement are typically centralized and in some instances
both functions are managed through the same command structure. The procurement
processes vary substantially depending upon the requirements of the particular
jurisdiction.
 
     For fiscal 1998, 46.0% of the Company's total revenues were attributable to
sales to military and law enforcement authorities outside the U.S. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 8 of Notes to Consolidated Financial Statements.
 
     U.S. Military.  The desire to provide realistic training while
significantly reducing costs has been the primary reason for the adoption of
simulated arms training by U.S. military authorities. The relatively high costs
of live fire training considering the use of ammunition, wear and tear on
weapons, the need to transport soldiers and equipment to the firing range and
legal requirements for remediation of environmental damage to the firing range
encourages military forces to use simulation to ensure proper readiness.
Moreover, according to budget estimates of the U.S. Department of Defense
("DOD") for the government's fiscal 1997, 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. See, however, the recent developments with regard to the U.S.
Army Engagement Skills Trainer ("EST") procurement as discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process" and "-- Results of
Operations."
 
     A critical feature of the U.S. military component of the market is the
procurement, budgeting and appropriations process. There are two principal
methods by which military organizations in the U.S. acquire
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training equipment. For purchasing programs that will be defined in the U.S.
government's budget, the military organizations generally follow the DOD's
multi-phase Planning, Programming, Budgeting and Execution System ("PPBES"). In
the planning phase, the DOD makes a proposal based on its examination of the
specific requirements and requests of each service branch given available
existing products and products under development. The Company's simulation
products have been formally reviewed and tested in the planning phase by all
branches of the U.S. military. In the programming phase, a Program Objective
Memorandum is drafted to identify to the U.S. Congress, which is responsible for
the budgeting and appropriation of funds, the specific purchases requested by
the military and the desired time period for the purchases. In the budgeting
phase, each military branch and command within each branch compete with the
other branches or commands for funds. After funds are included in the federal
budget, they must be appropriated by Congress in order to be released to the
military to be spent. Typically, once funds are appropriated for simulators and
other similar types of equipment for which FATS seeks contracts, the military
organization has three years to enter into a contractual obligation relating to
such appropriation. When a contractual obligation is incurred, funds ordinarily
are expended within a five-year period beginning on the date of appropriation.
Appropriated funds must be spent on the appropriated item unless the U.S.
Congress otherwise agrees to a change. U.S. military authorities can also make
smaller purchases from discretionary funds available to commanders for use in
accordance with their service priorities. These purchases can be made through
various purchasing procedures including the contracting procedures of the GSA.
The Company has a standing contract with the GSA that defines the prices the
Company may charge government entities for certain of its goods and services.
The majority of sales to the U.S. Air Force and federal law enforcement agencies
as well as sales to local law enforcement agencies financed with federal funds
have been made through the GSA procedures. See "-- Government Contracts and
Regulations."
 
     For fiscal 1998, 40.8% of the Company's total revenues and 75.5% of the
Company's U.S. revenues were attributable to sales to U.S. military authorities.
As of March 31, 1998, the Company had a backlog of $2.2 million for contracts or
purchase orders awarded to the Company by U.S. military authorities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
     U.S. Law Enforcement.  The U.S. law enforcement component of the market is
highly fragmented and can be divided into three principal groups: (i) U.S.
government entities (including the U.S. Department of Justice, 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); and (ii) state and local law enforcement departments such
as the Los Angeles and New York City Police Departments, and smaller rural
counterparts, and (iii) colleges and universities teaching criminal justice. The
federal agencies, whose procurement process generally follows the PPBES method,
are typically headquartered in or near Washington, D.C. By contrast, the state
and local law enforcement agencies are widely dispersed, with more than 17,000
different law enforcement departments in the U.S. Given this diversity, the
procurement processes vary substantially depending upon the requirements of the
particular jurisdiction. The Company believes that its most likely potential
local law enforcement customers may be found among the approximately 3,600 law
enforcement agencies and departments with more than 25 officers. With only
approximately 875 systems sold to U.S. federal and local law enforcement
authorities to date (of which approximately 775 are FATS(R) systems), the
Company believes that this market can provide additional opportunities to the
Company in the future. Law enforcement authorities face increasing budgetary
constraints as well as increasing threats of litigation and damage awards
relating to claims concerning the excessive or improper use of force, lethal or
otherwise, by law enforcement personnel. Accordingly, the Company believes that
there may be opportunities for increased sales to U.S. law enforcement
authorities of cost-effective simulation products designed to enhance tactical
skills and judgment and lower liability costs.
 
     For fiscal 1998, 11.7% of the Company's total revenues and 21.7% 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."
 
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     Hunter and Sports Training.  The Company has through its Dart subsidiary
continued to penetrate the U.S. hunter and sports training component of the
market. The customers for firearms training in this emerging market component
include state and federal hunting agencies such as the U.S. Fish and Wildlife
Service, the U.S. Department of Natural Resources, various state agencies, as
well as conservation associations such as Ducks Unlimited, Inc. and the National
Wild Turkey Federation, Inc. These organizations have recognized the use of
firearms simulation as a means of promoting hunter safety and conservation.
Moreover, the firearms dealer market offers the potential to use simulators for
competitive shooting exercises, hunter training and home security programs.
Simulators are currently being used at some shooting competitions as a
supplement to live fire matches. The Company believes that as some states
already require the successful completion of a formal firearms training course
as a prerequisite to owning a hunting license or a gun, in the future, training
on simulators may become an integral part of such courses in many jurisdictions.
Given the existence of more than 16,000 firearms dealers in the U.S., the
widespread interest in the ownership and use of firearms and the growing desire
to find ways of better assuring the safe use of firearms, the Company believes
that business opportunities may exist in the hunter and sports training
component of the market.
 
     For fiscal 1998, 1.5% of the Company's total revenues were attributable to
sales in the hunter and sports training component of the market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
SALES AND MARKETING
 
     The Company's marketing and sales efforts are organized to service its
principal customers, with separate sales operations for FATS, Simtran and Dart.
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 personnel and decision makers to identify and develop solutions
for each customer's specific training needs.
 
     By becoming involved with customers at an early stage in their analysis of
potential training solutions, the Company can often sell its training systems
without any significant competition from other providers. In addition, the
Company often has an advantage in competitive situations because the Company's
systems provide standard specifications that are frequently incorporated into
the request for proposal used by the customer in soliciting bids from suppliers
of small and supporting arms simulators. The Company's consultative approach
with customers has often helped it achieve favorable results in competitive
bidding situations.
 
     The acquisition of Simtran and Dart will allow the Company to focus
marketing and sales staff, engineering, and operations on particular markets to
support various customer needs. FATS is responsible for small arms trainers and
gunnery related simulators to support military and law enforcement simulation
needs. Simtran compliments these efforts by offering training products used by
military elements worldwide which meet the supporting combat mission of air
defense or anti-armor areas. Dart focuses on the retail or commercial market.
 
     Marketing staffs for each company, FATS, Simtran and DART, develop business
opportunities, capture plans and provide appropriate collateral material. FATS
international sales staff will be responsible for both FATS' products as well as
Simtran as both companies serve the same customer base. FATS will 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.
 
                                        8
<PAGE>   9
 
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 40.8% of the Company's
revenues for fiscal 1998 were attributable to sales to military authorities in
the U.S., 11.7% were attributable to sales to law enforcement authorities in the
U.S. and 46.0% were attributable to sales to military and law enforcement
authorities internationally. Sales to public sector customers are subject to a
multiplicity of detailed regulatory requirements and public policies. Such
contracts may be conditioned upon the continuing availability of public funds,
which in turn depends upon lengthy and complex budgetary procedures, and may be
subject to certain pricing constraints. Moreover, U.S. government contracts and
those of many international government customers may generally be terminated for
a variety of factors when it is in the best interests of the government. There
can be no assurance that these factors or others unique to government contracts
will not have a material adverse effect on the Company's future results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General -- U.S. Army EST
Procurement Process".
 
     The following table lists certain of the Company's customers in fiscal 1998
in each of its principal target market components:
 
<TABLE>
<CAPTION>
U.S. MILITARY               U.S. LAW ENFORCEMENT              INTERNATIONAL
-------------       -------------------------------------   -----------------
<S>                 <C>                                     <C>
U.S. Air Force      Bureau of Alcohol, Tobacco & Firearms   Italian Air Force
U.S. Army           Federal Bureau of Investigation         Italian Army
U.S. Marine Corps   Los Angeles Police Department           Singapore Army
</TABLE>
 
     In fiscal 1998, the Company's five largest customers accounted for
approximately 60.7% of the Company's revenues, with the U.S. Marine Corps and
the Italian Air Force accounting for approximately 28.5% and 12.1%,
respectively. In fiscal 1997, the Company's five largest customers accounted for
approximately 76.3% of the Company's revenues, with the U.S. Marine Corps
accounting for approximately 49.3%. 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.
The Company's R&D efforts are divided into four separate disciplines:
electronic, 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.
 
     Electronic R&D combines software and hardware engineering as well as other
electro-optical fields to produce programs and equipment responsive to specific
training needs. The Company's electronic R&D capabilities include
object-oriented software design, video and audio, interactive computer generated
graphics, Distributed Interactive Simulation, video special effects, lasers,
weapon ballistics, optics, image processing, target modeling and motion
platforms.
 
     Mechanical R&D combines mechanical engineering with the development of
highly specialized sensing mechanisms, incorporating sophisticated programmable
micro controllers for the execution of control
 
                                        9
<PAGE>   10
 
firmware and weapons technology. Mechanical R&D focuses on the refinement of
cost-effective products with enhanced realism and reliability. This process
includes conceptualization and prototype development, testing and documentation
of the finished trainer. The Company has the technology and resources to execute
the entire development process in-house by means of design teams that generally
include a project engineer, a model maker, a draftsman or designer, a weapons
software engineer, an electronics technician and a weapons training expert.
While each system varies according to the original weapon type, the Company uses
common components wherever possible to reduce costs and make service more
feasible.
 
     Training R&D focuses on the interpretation and translation of customer
training requirements into quantifiable objectives and the development of
simulation programs to meet those objectives. The Company's training R&D
department is staffed with world-class competitive shooters, each of whom has
extensive military or law enforcement experience. Specialized experience on the
part of the Company's employees in such areas as the U.S. military, law
enforcement, hunting and competitive shooting helps ensure an understanding of
customer requirements.
 
     Audio-visual R&D focuses on the production of specialized audio-visual
programs and a range of media support activities, from full production of
training programs to customer assistance in user-produced programs. The
Company's audio-visual technology is very important for creating a life-like
training environment. The Company has assembled a team of experienced
audio-visual engineers, cinematographers and specialists and pioneered the use
of multi-screen projection in small arms simulation.
 
MANUFACTURING OPERATIONS
 
     The Company's manufacturing operations are conducted primarily at its
headquarters near Atlanta, Georgia, and to a limited extent at the facility of
its U.K. subsidiary, Firearms Training Systems Ltd. Simtran's products will be
manufactured at its facility in Montreal, and Dart's products are manufactured
at its facility in Denver, Colorado. Atlanta manufacturing operations are
divided into two departments, systems manufacturing and weapons manufacturing.
The systems manufacturing department assembles the simulator components of the
FATS(R) systems. As the components are completed, they are tested for both
function and durability and are subjected to a comprehensive quality assurance
program. Systems manufacturing occurs at the Company's headquarters where
electrical assemblers and technicians can assemble approximately 40 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
100 simulation computers per month by adding additional personnel, using a
second shift or to even greater capacity by acquisition of the requisite
workstations and floor space for manufacturing and warehouse operations.
 
     Weapons manufacturing involves the production of simulated firearms and
non-lethal simulators by either modifying actual firearms and other devices into
simulators or assembling simulators from kits manufactured to the Company's
specifications by a variety of outside sources. The assembly process encompasses
the fitting of modified weapons or kits with the Company's pneumatic and
electrical components, followed by the functional testing of the completed
assembly. The combined weapons manufacturing activities in the U.S. and the U.K.
have a capacity of 450 simulated firearms per month on a single-shift basis. As
with systems manufacturing, this capacity can readily be expanded to 750 by
adding additional personnel, using additional shifts and/or by acquiring
additional facilities and workstations.
 
CUSTOMER SERVICE
 
     The Company has established a worldwide customer service network consisting
of personnel at its headquarters near Atlanta, an area service representative,
the Company's foreign subsidiaries, sub-contractors and agents. The Company
maintains an inventory of repair parts to support the service operations. The
Company maintains a 24-hour customer service hotline and seeks to remedy
customer service needs as quickly as possible after notification by the
customer. In addition to its traditional service role, the Company's service
department administers a U.S. government-owned inventory of spare parts and
assemblies to support the U.S. Marine Corps and the U.S. Army with readily
available serviceable parts and assemblies. The Company's
 
                                       10
<PAGE>   11
 
U.K., Netherlands and Singapore subsidiaries as well as Simtran and Dart perform
the same support functions for respective customers.
 
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 newest generation
products use a Windows(R)-based operating system; however, some of the Company's
current products, as well as earlier model simulators, use a software operating
system known as OS-9 which is a proprietary system owned by Microware
Corporation. The Company has licensed the OS-9 system from Microware on a
non-exclusive, royalty-paying basis for a term currently expiring October 31,
2001 (unless sooner terminated for breach by the Company of the license terms).
Although loss of its OS-9 license could have a material adverse effect on the
future conduct of its business operations and financial condition, the Company
is in compliance with the terms of such license and believes its relationship
with Microware Corporation to be satisfactory. The Company believes that there
are viable alternative sources for all of its raw materials. In addition, the
Company has a sophisticated machine shop in which it can convert actual weapons
into simulated weapons and produce certain weapon and simulator parts. This
ability provides the Company with the flexibility to produce a large portion of
its principal components if they become unavailable or it becomes economically
advantageous to do so.
 
COMPETITION
 
     The recent increase in sales and acceptance of small arms simulation
products and the addition of a broader range of products through Simtran 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 (which has recently teamed with a U.S.
Company, ECC International Corp.), Simtech, a subsidiary of TADIRAN and
Solatron, a subsidiary of Lockheed Martin. In the U.S. law enforcement component
of the market, the Company's principal competitors include, among others,
Advanced Interactive Systems, Inc. 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, has contributed to the
formation of teaming arrangements by competitors that present potential
competitive challenges, for example, with respect to the yet to be awarded 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, 1998, the Company and its subsidiaries, including Simtran,
employed 464 persons. As a result of the restructuring measures discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process", as of June 22,
1998, the Company employed 362 persons, including 14 persons at Dart. As of such
date, the Company employed a total of 234 persons domestically, including 101 in
manufacturing, assembly and customer service, 74 in R&D, 31 in sales and
marketing, 24 in administration and finance and 4 in program management; the
Company's U.K. subsidiary employed a total of 19 persons, including 14 in
manufacturing, assembly and customer service, one in R&D, three in sales and
marketing and one in administration and finance; the Company's Netherlands
subsidiary employed a total of six persons, including four in manufacturing,
assembly and customer service and two in administration and finance; the
Company's Dart subsidiary employed a total of 14 persons, including 5 in
manufacturing, assembly and customer service, 1 in R&D, 5 in sales and marketing
and 3 in administration and finance; the Company's Canadian subsidiaries
employed a total of 88 persons, including 41 in manufacturing, assembly and
customer service, 33 in R&D, 3 in sales and marketing and 11 in administration
and finance; and the Company's Singapore subsidiary contracted with one person
in program management. The majority of the Company's employees are located at
its headquarters, with
 
                                       11
<PAGE>   12
 
salespersons in California, Florida, Georgia, Illinois, Kansas, New Jersey, New
Mexico, Texas, Virginia and Wyoming. None of the employees is unionized.
 
GOVERNMENT CONTRACTS AND REGULATION
 
     Sales to public sector customers are subject to a multiplicity of detailed
regulatory requirements and public policies that may affect the ability of the
Company to increase or even maintain such sales. In particular, the choice of a
contractor by a customer may be affected by the size of the contractor, the
place of manufacture of the contractor's products or whether the contractor is
given preferential consideration based upon socio-economic factors. Furthermore,
contracts with government agencies are conditioned upon the continuing
availability of public funds, which in turn depends upon lengthy and complex
public budgetary procedures whose outcome is difficult to predict. In
particular, contracts with the U.S. government are conditioned upon the
continuing availability of Congressional appropriations.
 
     Government contracts may generally be terminated by the U.S. government or
the relevant agency in whole or in part for its convenience if such termination
would be in the best interest of the U.S. government. Furthermore, any
contractor who is suspected of, or found to have engaged in, commission of fraud
or a criminal offense in connection with a government contract or subcontract, a
serious violation of the terms of a government contract or subcontract, unfair
trade practices, or any other offense indicating moral turpitude or a lack of
business integrity or business honesty faces the possibility of being suspended
or debarred from all further government contracting. The decision to suspend or
debar a contractor is generally at the discretion of the government. Any such
suspension or debarment could have a material adverse effect on the Company's
future results of operations and financial condition.
 
     The type of government contracts awarded to the Company in the future may
affect its financial performance. A number of the Company's contracts have been
obtained on a sole source basis while others, including its largest current
contract (Contract 2014 with the U.S. Marine Corps), were obtained through a
competitive bidding process. The extent to which the Company's contracts and
orders are obtained through a competitive bidding process rather than as sole
source contracts may affect the Company's profit margins. The contracts obtained
by the Company in the future may also be cost-reimbursement type contracts
rather than fixed-price contracts and in any such case may not take into account
certain costs of the Company such as interest on indebtedness. There can be no
assurance that changes in the type of government contracts and other contracts
entered into by the Company in the future will not have a material adverse
effect on future results of operations or financial condition of the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
     The Company is subject to the export licensing jurisdiction of the U.S.
Department of State (the "State Department") and the U.S. Department of Commerce
(the "Commerce Department") with respect to the temporary or permanent export of
certain of its products and the import of certain other products based on,
respectively, the Arms Export Control Act and the Export Administration Act
(which, though expired, is carried out by Presidential Executive Order issued
under the auspices of the International Emergency Economic Powers Act). In
addition to application to transfer of information and products to customers,
such regulations also may from time to time require a license for the transfer
of technical information from the Company to its foreign subsidiaries, such as
information necessary to enable a subsidiary to modify simulated weapons for use
in systems being supplied by the subsidiary to customers. The respective
jurisdictional statutes provide the State Department and the Commerce Department
with the discretion to change their policies with respect to whether particular
products can be licensed for export to particular countries. In addition, in
certain circumstances, export licenses and other authorizations may be revoked,
suspended or amended without notice. Each of the State Department and the
Commerce Department has the authority in certain circumstances to debar persons
or deny them export privileges. Such action may be taken for, among other
reasons, commission of civil violations and criminal offenses in connection with
exports. Any loss, suspension or revocation of the Company's export licenses
could have a material adverse effect on the Company's future results of
operations and financial condition.
 
                                       12
<PAGE>   13
 
     The Company has a license from the U.S. Treasury Department's Bureau of
Alcohol, Tobacco and Firearms ("ATF") to import destructive devices and certain
other materials. This license also authorizes the Company to be a dealer in
regulated firearms and other destructive devices. The Company also has a license
from ATF that authorizes it to be a manufacturer of destructive devices and
certain other materials. The Company is registered with the Director of ATF as a
person engaged in the business of importing articles enumerated on the U.S.
Munitions Import List. ATF may revoke licenses or deny their renewal for failure
to follow the prescribed regulations or as a result of the commission of
criminal offenses. Certain of the Company's subsidiaries also have similar
licenses in their jurisdictions of incorporation. Any revocation of or refusal
to renew the Company's ATF license or any such foreign license could have a
material adverse effect on the conduct of the Company's operations and financial
condition since it must possess such licenses and comply with ATF regulations in
order to import, possess and modify the authentic firearms used in its FATS(R)
systems.
 
     Certain FATS(R) simulation systems use laser-emitting devices to locate the
user's aiming point in relation to the target. Such products must be
manufactured and operated in accordance with safety standards adopted to protect
human eyesight. In the United States, such standards are included as part of
Food and Drug Administration regulations currently administered by the Center
for Devices and Radiological Health. Systems sold to many international
customers, including those in Europe and Canada, however, must comply with
international standard IEC 825-1, as recently revised, which contains more
rigorous criteria than the present U.S. standards. Depending on the amount of
laser energy emitted, room safety precautions, warning signs and labels, special
shut-off devices, special training for personnel and related safety measures may
be required, which increase costs and can create administrative concerns for the
Company's customers.
 
EXECUTIVE OFFICERS
 
     Executive officers of the Company are elected by the Board of Directors
annually and hold office until the next annual meeting of stockholders or until
they sooner resign or are removed from office by the Board of Directors.
 
     The executive officers of the Company and their ages and positions with the
Company as of June 26, 1998 are as follows:
 
<TABLE>
<CAPTION>
NAME                  AGE                            POSITION
----                  ---                            --------
<S>                   <C>   <C>
Peter A. Marino.....  56    President, Chief Executive Officer and Director
Robert F. Mecredy...  51    Executive Vice President
Emory O. Berry......  32    Chief Financial Officer and Treasurer
Juan C.G. de            
  Ledebur...........  43    Vice President, Sales and Marketing
Charles N. Bowen....  35    Secretary
</TABLE>
 
     Peter A. Marino has served as a Director of the Company since September 17,
1996 and became President and Chief Executive Officer on October 15, 1996. Prior
to joining the Company, Mr. Marino served as Senior Vice President of Raytheon
E-Systems, Inc. from 1991 to 1996. Mr. Marino previously served as President and
Chief Operating Officer of Fairchild Industries and prior to such service was
President and Chief Operating Officer of Lockheed Electronics Co., Inc. Prior to
such service, Mr. Marino held various positions at the Central Intelligence
Agency, including Director of the Office of Technical Services. Mr. Marino
serves as a director of Space Imaging, Inc. and is a member of the Defense
Science Board.
 
     Robert F. Mecredy has served as Executive Vice President since July 18,
1997. Prior thereto, Mr. Mecredy served as Vice President, Domestic from 1996 to
1997, Director of the Company from 1993 to 1996, as Director of Domestic Sales
and Marketing from 1994 to 1996 and as Director of U.S. Military Marketing from
1990 to 1994. Before joining the Company, Mr. Mecredy served as Director of Army
and Marine Corps Marketing -- Washington Operations at Raytheon Corporation from
1988 to 1990. Mr. Mecredy served as an infantry and aviation non-commissioned
and commissioned officer in the U.S. Army for 20 years, retiring in 1986 with
the rank of lieutenant colonel.
 
                                       13
<PAGE>   14
 
     Emory O. Berry has served as Chief Financial Officer and Treasurer since
June 25, 1998. Mr. Berry served as Director of Corporate Accounting since March
1997. Prior to joining the Company, Mr. Berry served as a financial consultant
from December 1996 to February 1997 with Physicians Resource Group, a physician
practices management company. From May 1996 to December 1996, Mr. Berry served
as Corporate Controller of Housecall Medical Resources, Inc., a home health care
company. From 1993 to 1996, Mr. Berry served as Corporate Controller of EquiMed,
Inc., a physician practices management company. From 1990 to 1993, Mr. Berry
served as Financial Reporting Manager of American Security Group, a group of
insurance companies
 
     Juan C. G. de Ledebur has served as Vice President, Sales and Marketing
since July 18, 1997. Mr. De Ledebur previously served as Vice President,
International from 1996 to 1997 and Director of International Sales & Marketing
from 1987 to 1996. Prior to joining the Company in 1987, Mr. De Ledebur served
as manager of European sales for Information Handling Services, a provider of
technical and regulatory information.
 
     Charles N. Bowen has served as Secretary since July 18, 1997. Mr. Bowen has
served as General Counsel to the Company since December 23, 1996. Prior to
joining the Company, Mr. Bowen was an attorney with the Atlanta law firm of
Gambrell & Stolz from 1992 to 1996. Mr. Bowen served as a commissioned officer
with the U.S. Army's 101st Airborne Division (Air Assault) from 1988 to 1992.
 
     David A. Apseloff resigned as Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary as of June 25, 1998. Mr. Apseloff served as
Treasurer and Chief Financial Officer since April 1995, Assistant Secretary
since July 31, 1996 and Vice President since April 1997. Prior to joining the
Company in April 1995, Mr. Apseloff served as a Vice President of a real estate
development company and worked as a financial consultant from June 1994 to April
1995. From 1986 to 1994, Mr. Apseloff served as Chief Financial Officer of
Sensor Technology, Inc., a manufacturer's representative for medical devices.
 
     Robert B. Terry, Jr. resigned as Vice President, Operations as of June 19,
1998. Mr. Terry served as Vice President, Operations from July 18, 1997, as
Chief Operating Officer and Vice President from 1996 to 1997 and interim
President from July 31, 1996 until October 15, 1996. Mr. Terry previously served
as Director of Operations from 1995 to 1996, Director of Programs from 1992 to
1995.
 
     Gregory Echols resigned as Vice President, Engineering as of June 19, 1998.
Mr. Echols served as Vice President, Engineering from September 17, 1996 and
previously served as Director of Research and Development from 1990 to 1996.
 
ITEM 2.  PROPERTIES
 
     The Company's headquarters and primary facility, at which it performs
manufacturing, assembly, R&D, sales, marketing, financial and administrative
functions, is a leased property of approximately 98,100 square feet located near
Atlanta. The lease expires in 2008 with three five-year options to extend the
lease beyond such date. The Company also leases a 12,900 square foot facility
located close to its primary facility, at which it bases its U.S. customer
service operations. The lease expires in 2002, however, the Company intends to
negotiate a termination of this lease as of August 1, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process." A Company
subsidiary occupies a leased facility in Melbourne, Florida of approximately
3,750 square feet. The lease expires in 1999. The Company's U.K. subsidiary
occupies a leased facility in Lincolnshire, England, of approximately 12,000
square feet, at which the U.K. subsidiary performs manufacturing, assembly,
service, training and administrative functions. The lease on the U.K. facility
expires in 2003. The Company's Netherlands subsidiary occupies a leased facility
of approximately 4,800 square feet in Waardenburg, the Netherlands, at which the
Netherlands subsidiary performs service and administrative functions. The lease
expires in 1998 with an option to extend to 2000. Simtran, one of the Company's
Canadian subsidiaries, performs its operations in Quebec in leased facilities
containing approximately 38,800 square feet. The lease expires in 2001.
 
                                       14
<PAGE>   15
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company has been actively participating in a competitive bidding
process for the proposed U.S. Army Engagement Skills Trainer ("EST") program, a
U.S. military procurement award anticipated to be at least as large as the
Company's current U.S. Marine Corps Contract 2014. On May 14, 1998, the Company
received notification on behalf of the U.S. Army that its proposal in response
to the ongoing competition had been excluded from further consideration. On June
2, 1998, the Company filed an action in the United States Court of Federal
Claims to protest this decision, and to obtain an injunction against any award
of the EST contract until the Court can rule on the Company's protest. As part
of this action, the Company has requested that the Court order the procurement
authority to continue its consideration of the Company's proposal and to engage
in meaningful discussions with the Company. Although the Company intends to
pursue this matter vigorously, there can be no assurance that the Court will
grant the relief requested. Furthermore, even if the Company is successful in
securing the right to continue in the competitive bidding process, there can be
no assurance that the Company would ultimately be successful in securing the EST
contract award. In view of the Company's substantial completion of Marine Corps
Contract 2014 and the more limited scope of other U.S. military opportunities,
the failure to secure an award of the U.S. Army EST contract could have a
material adverse effect on the Company's future revenues from the U.S. military,
particularly as compared with the U.S. military revenues during fiscal 1997, and
on the Company's financial condition, liquidity or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process."
 
     On October 3, 1997, Dart, a Company subsidiary, was sued by Advance
Interactive Systems, Inc. ("AIS") for alleged infringement of a patent owned by
AIS, U.S. Patent No. 5,649,706 (the "706 Patent"). Dart filed its answer on
December 2, 1997, denying all material allegations, asserting numerous
affirmative defenses, and counterclaiming for a judicial declaration of
noninfringement, patent invalidity, patent unenforceability, and for damages for
unjust enrichment. Discovery is ongoing at this time, and no dispositive motions
have been filed or heard. In the opinion of the Company's management, this
proceeding will not have a material adverse effect on the Company's financial
position, liquidity, or results of operations.
 
     The Company is involved in additional legal proceedings from time to time
in the ordinary course of its business which, in the opinion of management, will
not have a materially adverse effect on the Company's financial position,
liquidity, or results of operation.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year.
 
ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock has been traded on The Nasdaq National Market
since November 27, 1996. Prior to such date, there was no public trading market
for the Common Stock. As of June 22, 1998, there were 124 holders of record of
the Company's Common Stock. The high and low sales prices of the Common Stock
during the period from November 27, 1996 through the year ended March 31, 1998
were as follows:
 
                          QUARTERLY STOCK PRICE RANGE
 
<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
Third Quarter 1997 (from November 27, 1996).................  $14.13   $10.50
Fourth Quarter 1997.........................................   16.25    11.38
First Quarter 1998..........................................   15.50     9.13
Second Quarter 1998.........................................   14.25     5.75
Third Quarter 1998..........................................    7.50     5.00
Fourth Quarter 1998.........................................   10.44     5.34
</TABLE>
 
                                       15
<PAGE>   16
 
     The Company currently intends to retain any earnings to finance operations
and expansion and, therefore, does not anticipate paying any dividends on the
Common Stock in the foreseeable future. Future dividends, if any, will be
determined by the Board of Directors of the Company and will depend upon the
Company's earnings, capital requirements, financial condition, level of
indebtedness and other factors deemed relevant by the Board of Directors. The
NationsBank Credit Agreement prohibits the payment of any dividends in respect
of the Common Stock.
 
RECENT SALES OF UNREGISTERED SECURITIES
 
     The following, which gave effect to the 100,000-for-one stock split
effected by the Company on July 30, 1996 and the 1.66-for-one stock split
effected by the Company on November 1, 1996, sets forth certain information with
respect to all securities of the Company sold by the Company within the past
three years:
 
          On July 31, 1996, in connection with the Recapitalization, the Company
     sold to the Centre Entities 11,165,241 shares, consisting of 3,898,430
     shares of Common Stock and 7,266,811 shares of Class B non-voting Common
     Stock, for aggregate consideration of $36.0 million in cash. Exemption for
     such transaction from registration under the Securities Act is claimed in
     reliance on the exemption provided under Section 4(2) of the Securities Act
     on the basis that the sales were transactions not involving any public
     offering.
 
          On July 31, 1996, in connection with the Recapitalization, the Company
     sold to NationsBridge, L.L.C. the Bridge Notes due July 31, 2004 in an
     aggregate principal amount equal to $40.0 million and, in connection with
     such sale, entered into arrangements for the issuance of warrants to
     purchase shares of Common Stock at a nominal price. NationsBridge paid
     aggregate consideration of $40 million in cash (less certain fees) for the
     sale. Exemption for such transaction from registration under the Securities
     Act is claimed in reliance on the exemption provided under Section 4(2) of
     the Securities Act.
 
          On September 17, 1996, the Company issued 7,266,811 shares of its
     Common Stock to Centre Capital Investors II, L.P., in exchange for
     7,266,811 shares of the Company's Class B non-voting Common Stock at the
     election of the stockholder for no additional consideration. Exemption for
     such transaction from registration under the Securities Act is claimed in
     reliance on the exemption provided under Section 3(a)(9) of the Securities
     Act.
 
          On September 18, 1996, the Company issued to Peter A. Marino, its
     President and Chief Executive Officer, the following securities pursuant to
     an employment agreement dated September 18, 1996: (i) 36,852 shares of
     Common Stock as a signing bonus, and (ii) options to purchase 707,160
     shares of Common Stock at an exercise price of approximately $3.25 per
     share. Mr. Marino also purchased 61,420 shares of Common Stock for
     aggregate consideration of $199,800 in cash. Exemption for such
     transactions from registration under the Securities Act is claimed in
     reliance on the exemption provided under Section 4(2) of the Securities
     Act.
 
          On September 18, 1996, the Company sold an aggregate of 170,913 shares
     of Common Stock to five officers of the Company other than Mr. Marino for
     aggregate consideration of approximately $555,984 in cash. Exemption for
     such transactions from registration under the Securities Act is claimed in
     reliance on the exemption from registration under Section 4(2) of the
     Securities Act.
 
          On April 24, 1998, 1,694,569 shares of the Company's voting Class A
     Common Stock were exchanged by the Centre Entities for an equal amount of
     non-voting Class B Common Stock. In connection with the exchange, the
     Centre Entities agreed not to convert the shares of Class B Common Stock to
     shares of Class A Common Stock if, as a result of such conversion, the
     Centre Entities would hold, of record or beneficially with power to vote,
     more than 50% of the shares of Class A Common Stock outstanding immediately
     following such conversion, unless concurrently with such conversion the
     shares of Class A Common Stock are transferred to an unaffiliated person.
 
                                       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, 1998, which
financial statements have been audited by Arthur Andersen LLP in the case of the
fiscal years ended March 31, 1998, 1997, 1996 and 1995. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth below and the financial statements of the Company included
elsewhere in this Report and referred to in the "Index to Financial Statements"
(together with the notes and other reports relating to such financial
statements).
 
<TABLE>
<CAPTION>
                                                             FISCAL YEAR ENDED MARCH 31,
                                                             ---------------------------
                                                    1998      1997      1996      1995      1994
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues.........................................  $73,547   $90,806   $65,439   $29,164   $20,534
Cost of revenues.................................   33,867    44,214    30,902    14,230     9,651
                                                   -------   -------   -------   -------   -------
Gross profit.....................................   39,680    46,592    34,537    14,934    10,883
                                                   -------   -------   -------   -------   -------
Operating expenses:
     Selling, general and administrative
       expenses..................................   15,036    15,016    12,087     8,169     6,066
     Research and development expenses...........    6,475     4,224     2,781     2,296     2,048
     Depreciation and amortization...............    1,042       473       386       330       297
     Acquired in-process research and development
       charge....................................    4,000        --        --        --        --
                                                   -------   -------   -------   -------   -------
          Total operating expenses...............   26,553    19,713    15,254    10,795     8,411
                                                   -------   -------   -------   -------   -------
Operating income.................................   13,127    26,879    19,283     4,139     2,472
Interest income (expense), net...................   (5,905)   (6,069)      165        12       (98)
Nonrecurring recapitalization expenses...........       --    (1,181)       --        --        --
Other income (expense), net......................      (97)       71       (93)       66      (126)
                                                   -------   -------   -------   -------   -------
Income before income taxes and extraordinary
  item...........................................    7,125    19,700    19,355     4,217     2,248
Provision for income taxes(1)....................    3,892     7,359     6,565     1,387       730
                                                   -------   -------   -------   -------   -------
Income before extraordinary item.................    3,233    12,341    12,790     2,830     1,518
Extraordinary item, net of income tax............       --    (3,327)       --        --        --
                                                   -------   -------   -------   -------   -------
Net income.......................................  $ 3,233   $ 9,014   $12,790   $ 2,830   $ 1,518
                                                   =======   =======   =======   =======   =======
Basic earnings per share(2)......................  $  0.16   $  0.55   $  0.89   $  0.20   $  0.11
Diluted earnings per share(2)....................  $  0.15   $  0.50   $  0.80   $  0.18   $  0.09
                                                   =======   =======   =======   =======   =======
Weighted average common shares -- basic(2).......   20,408    16,489    14,402    14,402    14,402
                                                   =======   =======   =======   =======   =======
Weighted average common shares -- diluted(2).....   21,456    18,009    16,029    16,029    16,029
                                                   =======   =======   =======   =======   =======
</TABLE>
 
                                       17
<PAGE>   18
 
<TABLE>
<CAPTION>
                                                                        FISCAL YEAR
                                                                           ENDED
                                                                         MARCH 31,
                                                                        -----------
                                                               1998        1997        1996
                                                              -------   -----------   -------
<S>                                                           <C>       <C>           <C>
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
  Operating income..........................................  $13,127     $26,879     $19,283
  Income before income taxes................................    7,125      21,408      13,664
  Net income................................................  $ 3,233     $13,560     $ 9,026
                                                              =======     =======     =======
  Basic earnings per share..................................  $  0.16     $  0.66     $  0.44
                                                              =======     =======     =======
  Diluted earnings per share................................  $  0.15     $  0.62     $  0.42
                                                              =======     =======     =======
  Shares used in computation -- basic(4)....................   20,408      20,402      20,402
  Shares used in computation -- diluted(4)..................   21,456      21,741      21,741
</TABLE>
 
<TABLE>
<CAPTION>
                                                                     MARCH 31,
                                                            ----------------------------
                                                   1998       1997      1996      1995      1994
                                                  -------   --------   -------   -------   -------
<S>                                               <C>       <C>        <C>       <C>       <C>
BALANCE SHEET DATA:
  Working capital...............................  $18,907   $ 20,350   $20,216   $ 7,657   $ 4,784
  Total assets..................................   56,380     42,121    33,820    16,817    12,108
  Total debt, including current maturities......   63,000     58,600        --        --       876
  Stockholders' equity (deficit)................  (28,231)   (31,378)   21,262     8,484     5,524
</TABLE>
 
---------------
 
(1) Provision for income taxes for fiscal 1993 was calculated in accordance with
    Accounting Principles Board Opinion No. 11. Subsequent to fiscal 1993 the
    Company adopted Statement of Financial Accounting Standards No. 109.
(2) Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
    No. 83, common stock and common stock equivalents issued at prices below the
    public offering price during the 12-month period prior to the Company's
    initial public offering, (the "Offering") that was consummated on November
    26, 1996 have been included in the calculation of weighted average common
    shares as if they were outstanding for all periods prior to the Offering,
    regardless of whether they are dilutive. Accordingly, the weighted average
    common shares for all periods presented reflects: (i) the issuance of shares
    to the Centre Entities and the repurchase of shares from THIN International
    pursuant to the Recapitalization; (ii) all shares issuable upon exercise of
    stock options granted (using the treasury stock method); (iii) 288,434
    shares issuable upon exercise of the NationsBridge Warrants; (iv) all shares
    granted to management within 12 months of the Offering; and (v) all shares
    purchased by management within 12 months of the Offering.
(3) Pro forma statement of operations data give effect to the Recapitalization,
    the consummation of the Offering and the application of the net proceeds
    from the Offering after deducting the underwriting discount and offering
    expenses as if they occurred at the beginning of the respective period.
    Adjustments to the historical statement of operations data represent the net
    effect of: (i) interest on borrowings under the Senior Bank Debt at
    effective interest rates of 8.4% to 9.1% representing interest rates in
    effect at the time of the Recapitalization and the Bridge Notes at an
    average effective interest rate of 13.3% and amortization of related
    deferred financing costs; (ii) elimination of interest and amortization of
    deferred financing costs due to repayment of the Bridge Notes and repayment
    of a portion of the Senior Bank Debt; and (iii) the effect of the pro forma
    adjustments on the provision for income taxes. The effect of the
    nonrecurring recapitalization expenses and the extraordinary loss on the
    early extinguishment of debt as a result of the repayment of the Bridge
    Notes and repayment of a portion of the Senior Bank Debt have not been
    included in the pro forma statement of operations data as the nonrecurring
    recapitalization expenses and the extraordinary loss are assumed to occur
    immediately prior to the period presented. See "Management's Discussion and
    Analysis of Financial Condition and Results of Operations -- General --
    Extraordinary Loss," "-- Recapitalization" and Notes 4 and 10 of Notes to
    Consolidated Financial Statements.
 
                                       18
<PAGE>   19
 
(4) Shares used in computation include the effect of 6,000,000 shares of Common
    Stock issued and sold by the Company as part of the Offering and 1,338,248
    shares of Common Stock issuable upon the exercise of outstanding options
    (net of 404,586 shares assumed to be repurchased by the Company using the
    treasury stock method). See "Business--History", "Management's Discussion
    and Analysis of Financial Condition and Results of
    Operations--Recapitalization" and Note 5 of Notes to Consolidated Financial
    Statements.
 
                              RECENT DEVELOPMENTS
 
     To support the Company's objectives of increasing revenues, the Company had
developed its infrastructure during the last several years in expectation that
the resulting increase in expense would be offset by additional revenues. In
response to developments concerning the Army EST procurement process including
its possible related impact on other new business opportunities, the Company
announced on June 24, 1998 that it would take a restructuring charge of
approximately $900,000 for costs incurred in the first quarter fiscal 1999
related to a workforce reduction and other measures. In addition, the Company
has agreed to a revision of certain financial covenants under its senior credit
facility which will result in incurrence of certain additional interest costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process and -- Liquidity and
Capital Resources.
 
                                       19
<PAGE>   20
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
GENERAL
 
     The Company is the leading worldwide producer of interactive simulation
systems designed to provide training in the handling and use of small and
supporting arms. As a result of the Simtran acquisition, the Company also has a
contract to develop air defense and armored vehicle products. The Company has
focused its sales efforts primarily in the U.S. and international military and
law enforcement market and more recently has begun to sell simulation training
systems in the hunter and sports training component of the market.
 
     The Company derives most of its revenues from the sale of its products,
which include simulators, simulated firearms, scenarios, software and auxiliary
equipment, and certain additional revenues from service operations. The Company
receives purchase commitments for its products and services from its customers
largely through purchase orders and short- and long-term contracts principally
with governmental entities. Sales revenues are recognized primarily upon
shipment with advanced billings related to contracts recorded as deferred
revenue and recognized primarily as units are delivered or on a percentage of
completion method for a contract in which completion and delivery exceeds one
year. Service revenues are comprised of revenues from individual purchase
orders, which are recognized as services are provided, and revenues from
extended service contracts, which are recognized over the life of the service
contracts.
 
     Although the Company sells its products and services to a large number of
military and law enforcement agencies in the U.S. and internationally, the top
five customers accounted for approximately 60.7%, 76.3% and 67.4% of the
Company's revenues in fiscal 1998, 1997 and 1996, respectively. A significant
increase or decrease in demand by a large customer can have a substantial effect
on the Company's revenues, and revenues from any one customer can vary
materially from period to period. In addition, although the Company has
experienced an increased demand for its products in recent years despite
decreases in general levels of defense spending, a significant decrease in the
overall level or allocation of defense spending in the U.S. or other countries
could have a material adverse effect on the Company's future results of
operations and financial condition. A significant portion of the Company's sales
are also made to customers located outside the U.S., primarily in Europe and
Asia. During fiscal 1998, 1997 and 1996, approximately 46.0%, 31.3% and 43.3%,
respectively, of the Company's revenues were derived from sales to international
customers. The Company expects that sales to international customers will
continue to account for a significant percentage of future revenues, as the
worldwide acceptance for simulation-based training systems continues to grow and
U.S. military opportunities are reduced. 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 or imposition of economic sanctions such as those
recently applied to India and Pakistan. 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. Certain of the Company's
international sales are denominated in foreign currencies. The Company does not
currently hedge these foreign currency transactions, since it believes its
exposure to foreign exchange rate fluctuations has not been material.
 
     Cost of revenues generally includes materials, direct labor, overhead and
other direct costs. Operating expenses include selling, general and
administrative expenses, R&D expenses and depreciation and 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 14 years
primarily through internally generated funds.
 
  U.S. Marine Corps Contract
 
     In August 1994, through competitive bidding, the Company was awarded a
fixed-price contract ("Contract 2014") with the U.S. Marine Corps for the supply
of small and supporting arms simulators. This contract also contains provisions
which have enabled purchases under the contract of firearms simulators by
 
                                       20
<PAGE>   21
 
the U.S. Army. The total initial contract amount was $16.1 million, and options
exercised and contract modifications made have increased that amount by a total
of $79.1 million through March 31, 1998. Deliveries under Contract 2014
commenced in the fourth quarter of fiscal 1995 and totaled $94.6 million through
March 31, 1998.
 
  U.S. Army EST Procurement Process
 
     The Company has been actively participating in a competitive bidding
process for the proposed U.S. Army Engagement Skills Trainer ("EST") program, a
U.S. military procurement award anticipated to be at least as large as the
Company's current U.S. Marine Corps Contract 2014. On May 14, 1998, the Company
received notification on behalf of the U.S. Army that its proposal in response
to the ongoing competition had been excluded from further consideration. On June
2, 1998, the Company filed an action in the United States Court of Federal
Claims to protest this decision, and to obtain an injunction against any award
of the EST contract until the Court can rule on the Company's protest. As part
of this action, the Company has requested that the Court order the procurement
authority to continue its consideration of the Company's proposal and to engage
in meaningful discussions with the Company. Although the Company intends to
pursue this matter vigorously, there can be no assurance that the Court will
grant the relief requested. Furthermore, even if the Company is successful in
securing the right to continue in the competitive bidding process, there can be
no assurance that the Company would ultimately be successful in securing the EST
contract award. In view of the Company's substantial completion of Marine Corps
Contract 2014 and the more limited scope of other U.S. military opportunities,
the failure to secure an award of the U.S. Army EST contract could have a
material adverse effect on the Company's future revenues from the U.S. military,
particularly as compared with the U.S. military revenues in fiscal 1997, and the
Company's financial position, liquidity and results of operations. To support
the Company's objectives of increasing revenues, the Company had developed its
infrastructure during the last several years in expectation that the resulting
increase in expense would be offset by additional revenues. In response to
developments concerning the Army EST procurement process and possible related
impact on related business opportunities, the Company announced on June 24, 1998
that it would take a restructuring charge of approximately $900,000 for costs
incurred in the first quarter fiscal 1999 related to a workforce reduction and
other measures. In addition, the Company has agreed to a revision of certain
financial covenants under its senior credit facility which will result in
incurrence of certain additional interest costs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.
 
  Backlog
 
     Backlog represents customer orders that have been contracted for future
delivery. Accordingly, these orders have not yet been recognized as revenue, but
represent potential revenue. As of March 31, 1998, the Company had a backlog of
approximately $49.4 million, comprised of $27.4 million from FATS international
customers, $18.9 from Simtran's Canadian customers and $2.2 million from FATS
U.S. military customers. Recognition of Simtran's backlog will be dependent upon
delivery and acceptance of its products currently under development.
Approximately $35.6 million of the contracted orders are scheduled for delivery
during fiscal year 1999. Contracts with U.S. and other governments may generally
be terminated by the customer, in whole or in part, for default or its
convenience if such termination would be in the best interest of the customer.
Accordingly, there can be no assurance that the Company's backlog will result in
future revenues. However, these contracts generally provide for reimbursement of
costs incurred through the date of termination.
 
  Recapitalization
 
     In connection with the Recapitalization on July 31, 1996, the Company: (i)
issued shares of its Common Stock to the Centre Entities for $36 million in
cash; (ii) issued $40 million in Bridge Notes to NationsBridge and agreed to
issue to NationsBridge warrants for shares of Common Stock as described herein;
(iii) borrowed a total of $76 million under the NationsBank Credit Agreement;
(iv) repurchased certain shares of its Common Stock from THIN International for
$151.9 million in cash; and (v) agreed to make the Contingent
 
                                       21
<PAGE>   22
 
Payment in cash or shares of Common Stock to THIN International if certain
trigger events occurred. In connection with the Recapitalization, the Company
also sold certain shares and granted certain options to members of management on
September 18, 1996. In addition, the Company's Common Stock was split
100,000-for-one on July 30, 1996 and was split 1.66-for-one on November 1, 1996.
All references to Common Stock data in this report have been restated to reflect
both stock splits.
 
  Extraordinary Loss
 
     A portion of the proceeds from the Offering was used to repay the $40
million Bridge Notes and reduce the Senior Bank Debt by $11.2 million. As a
result, an extraordinary loss occurred on the early extinguishment of debt. This
extraordinary item includes legal fees, unamortized deferred financing costs,
unamortized basis of the NationsBridge Warrants and a fee paid in connection
with the repayment of the Bridge Notes.
 
  Acquired In-Process Research and Development Charge
 
     The Company recognized a non-recurring acquired in-process research and
development charge in connection with the acquisition of Simtran completed on
March 5, 1998. Based on an assessment by the Company, in conjunction with an
independent valuation firm, it was determined that $4.0 million (or $0.19 per
diluted share) 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.
 
  Growth Strategy
 
     The Company has experienced significant growth in its sales during recent
years, primarily, due to sales to the U.S. Marine Corps, and intends to seek
further growth through expanded sales of its existing products in its target
markets as well as the development of new products and markets and through
strategic acquisitions. See "U.S. Army EST Procurement Process" above. The
Company's growth strategy includes the following core elements:
 
          Increase Market Penetration.  The Company is seeking to broaden
     acceptance of its products and increase sales to military and law
     enforcement agencies internationally and in the U.S. While continuing to
     acquire new customers by demonstrating the cost-effectiveness and training
     benefits of its products, the Company also focuses on generating repeat
     orders from existing customers. The Company has found that its customers
     often order additional simulation systems after an initial purchase once
     they experience the advantages of the FATS(R) systems. In addition, in
     recent years, the Company has begun to focus on generating follow-on orders
     through systems upgrades, software and other auxiliary products.
 
          Continue New Product Development.  A key element of the Company's
     growth strategy is new product development. The Company believes that it
     can continue to develop new products as a result of its R&D efforts and its
     understanding of the needs of its customers. Addition of an indirect fire
     simulator for artillery and naval gunfire has resulted in the award of an
     additional contract with the Canadian Armed Forces beyond small arms
     simulators and may assist the Company in gaining additional new contracts.
     The Company is also developing simulators for newly emerging weaponry and
     products integrating FATS(R) systems with larger weapons system simulators,
     such as those currently being developed by Simtran. In addition, the
     Company is currently developing simulation products for training law
     enforcement personnel in the use of less-than-lethal force (e.g., tear gas,
     batons, sticky foam and bean bag shotguns).
 
          Expand into New Markets.  Management believes that opportunities exist
     for sales beyond the Company's traditional military and law enforcement
     customers. The Company had already begun to focus on the hunter and sports
     training component of the market, and with the acquisition of Dart seeks to
     increase the penetration in this business. The Company believes that
     potential customers for products related to hunter education include both
     state and federal agencies which have shown interest in simulation as a
     means of promoting hunter safety and conservation as well as firearms
     dealers interested in the use of simulators for competitive shooting
     exercises, hunter training and home security programs.
                                       22
<PAGE>   23
 
          Pursue Selected Strategic Acquisitions.  As an alternative or a
     supplement to the internal development of additional product lines, new
     products could be developed or added to the FATS(R) line by means of
     strategic acquisitions, joint ventures or partnerships. In particular, an
     acquisition of a company with a strong brand name in lower price point or
     different products could permit the Company to expand its product line,
     while maintaining the premium position of the FATS(R) brand name such as
     the recent acquisitions of ICAT, Simtran and Dart completed within the last
     twelve months.
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain operating data as a percentage of
gross revenues for the periods indicated:
 
<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED MARCH 31,
                                                              -----------------------------
                                                               1998       1997       1996
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Revenues....................................................   100.0%     100.0%     100.0%
Cost of revenues............................................    46.1       48.7       47.2
                                                               -----      -----      -----
Gross profit................................................    53.9       51.3       52.8
                                                               -----      -----      -----
Operating expenses:
  Selling, general and administrative expenses..............    20.5       16.5       18.5
  Research and development expenses.........................     8.8        4.7        4.2
  Depreciation and amortization.............................     1.4        0.5        0.6
  Acquired in-process research and development charge.......     5.4         --         --
                                                               -----      -----      -----
          Total operating expenses..........................    36.1       21.7       23.3
                                                               -----      -----      -----
Operating income............................................    17.8       29.6       29.5
Interest income (expense), net..............................    (8.0)      (6.7)       0.2
Nonrecurring recapitalization expenses......................      --       (1.3)        --
Other income (expense), net.................................    (0.1)       0.1       (0.1)
                                                               -----      -----      -----
Income before income taxes and extraordinary item...........     9.7       21.7       29.6
Provision for income taxes..................................     5.3        8.1       10.1
                                                               -----      -----      -----
Income before extraordinary item............................     4.4       13.6       19.5
Extraordinary item, net of income tax.......................      --       (3.7)        --
                                                               -----      -----      -----
Net income..................................................     4.4%       9.9%      19.5%
                                                               =====      =====      =====
</TABLE>
 
  Fiscal Year Ended March 31, 1998 Compared to the Fiscal Year Ended March 31,
1997
 
     Revenues.  Revenues decreased $17.3 million, or 19.0%, to $73.5 million for
fiscal 1998 as compared to $90.8 million for fiscal 1997. This decrease was
attributable to a $23.8 million decrease, or 44.2%, to $30.0 million in sales to
the U.S. military due primarily to a decrease in sales to the U.S. Marine Corps
as significant portions of Contract 2014 were completed. This decrease was
partially offset by an increase of $5.4 million, or 18.9%, to $33.8 million, in
international sales. Sales to U.S. law enforcement customers for fiscal 1998
increased by $1.5 million, or 21.8%, to $8.6 million. Sales to U.S.
Hunter/Sports customers decreased by $0.4 million, or 25.9%, to $1.1 million.
 
     Cost of Revenues.  Cost of revenues decreased $10.3 million, or 23.4%, to
$33.9 million for fiscal year 1998 as compared to $44.2 million for fiscal 1997.
As a percentage of revenues, cost of revenues decreased to 46.1% for fiscal 1998
as compared to 48.7% for fiscal 1997. This decrease was due to customer and
product mix changes primarily due to a decrease in sales to U.S. military
customers which traditionally have higher cost of revenues.
 
     Gross Profit.  As a result of the foregoing, gross profit decreased $6.9
million, or 14.8% to $39.7 million, or 53.9% of revenues, for fiscal 1998 as
compared to $46.6 million, or 51.3% of revenues, for fiscal 1997.
 
     Total Operating Expenses.  Total operating expenses increased $6.8 million,
or 34.7% to $26.6 million for fiscal 1998 as compared to $19.7 million for
fiscal 1997. Total operating expenses as a percentage of
 
                                       23
<PAGE>   24
 
revenues increased to 36.1% for fiscal 1998 from 21.7% for fiscal 1997. This
increase was primarily a result of the $4.0 million acquired in-process research
and development charge related to the Simtran acquisition. Selling, general and
administrative expenses increased as a percentage of revenue to 20.5% for fiscal
1998 from 16.5% for fiscal 1997 as a result of the decrease in revenues.
Research and development costs increased $2.3 million, or 53.3%, from fiscal
1997 to fiscal 1998 due to continued efforts in developing new and improving
existing products.
 
     Operating Income.  As a result of the foregoing, operating income decreased
$13.8 million, or 51.2%, to $13.1 million, or 17.8% of revenues, for fiscal 1998
as compared to $26.9 million, or 29.6% of revenues, for fiscal 1997.
 
     Other Income (Expense), net.  Net interest expense totaled $5.9 million, or
8.0% of revenues for fiscal 1998 as compared to net interest expense of $6.1
million, or 6.7% for fiscal 1997. Other income (expense), net for fiscal 1997
includes a nonrecurring charge of $1.2 million for expenses incurred in
connection with the Recapitalization.
 
     Provision for Income Taxes.  The effective tax rate increased to 54.6% of
income before income taxes for fiscal 1998 compared to 37.4% of income before
taxes for fiscal 1997. This increase was primarily attributable to the acquired
in-process research and development charge related to the Simtran acquisition,
which is not deductible for income tax purposes.
 
     Income Before Extraordinary Item.  As a result of the foregoing, income
before extraordinary item decreased $9.1 million, or 73.8%, to $3.2 million, or
4.4% of revenues for fiscal 1998 as compared to $12.3 million, or 13.6% of
revenues for fiscal 1997.
 
     Extraordinary Item.  A portion of the proceeds from the Offering was used
to repay the $40 million Bridge Notes and reduce the Senior Bank Debt by $11.2
million. As a result, an extraordinary loss occurred on the early extinguishment
of debt in fiscal 1997. This extraordinary item includes legal fees, unamortized
deferred financing costs, unamortized basis of the NationsBridge Warrants and a
fee paid in connection with the repayment of the Bridge Notes.
 
     Net Income.  As a result of the foregoing, net income as reported decreased
$5.8 million, or 64.1%, to $3.2 million ($0.15 per diluted share), or 4.4% of
revenues for fiscal 1998 as compared to $9.0 million ($0.50 per diluted share),
or 9.9% of revenues for fiscal 1997.
 
     Pro Forma Results.  The pro forma results give effect to the
Recapitalization and the Offering as if it occurred at the beginning of the
period. The pro forma results exclude the nonrecurring expenses incurred in
connection with the Recapitalization and the extraordinary loss related to the
early extinguishment of debt and also reflect interest expense for all periods
presented, based on the Senior Bank Debt of $58.6 million outstanding after the
Offering. The net income for fiscal 1998 was $3.2 million ($0.15 per diluted
share), or 4.4% of revenues, a decrease of $10.3 million, or 76.2%, over the
$13.6 million ($0.62 per diluted share) pro forma net income for fiscal 1997.
 
  Fiscal Year Ended March 31, 1997 Compared to the Fiscal Year Ended March 31,
1996
 
     Revenues.  Revenues increased $25.4 million, or 38.8%, to $90.8 million for
fiscal 1997 as compared to $65.4 million for fiscal 1996. Approximately 97.7% of
such increase was attributable to a $24.8 million increase in sales to the U.S.
military. Deliveries to the U. S. Marine Corps accounted for the majority of the
increase in sales to the U.S. military. Fiscal 1997 also included approximately
$1.5 million in sales to hunter and sports customers as compared to $573,000 for
fiscal 1996.
 
     Cost of Revenues.  Cost of revenues increased $13.3 million, or 43.1%, to
$44.2 million for fiscal year 1997 as compared to $30.9 million for fiscal 1996.
As a percentage of revenues, cost of revenues increased to 48.7% for fiscal 1997
as compared to 47.2% for fiscal 1996. This increase was due to an increase in
materials as a percentage of revenues due to customer and product mix changes
and due to lower gross margins from the U.S. military contracts. This increase
was partially offset by a decrease in labor and overhead costs as a
 
                                       24
<PAGE>   25
 
percent of revenue. This decrease was primarily the result of spreading labor
and overhead costs over a substantially higher revenue base.
 
     Gross Profit.  As a result of the foregoing, gross profit increased $12.1
million, or 34.9% to $46.6 million, or 51.3% of revenues, for fiscal 1997 as
compared to $34.5 million, or 52.8% of revenues, for fiscal 1996.
 
     Total Operating Expenses.  Total operating expenses increased $4.5 million,
or 29.2% to $19.7 million for fiscal 1997 as compared to $15.3 million for
fiscal 1996. Total operating expenses as a percentage of revenues decreased to
21.7% for fiscal 1997 from 23.3% for fiscal 1996 which resulted from operating
leverage that enabled the Company to spread its fixed cost over a larger revenue
base. Accordingly, selling, general and administrative expenses declined as a
percentage of revenue to 16.5% for fiscal 1997 from 18.5% for fiscal 1996. R&D
costs, however, increased $1.4 million, or 51.9%, from fiscal 1996 to fiscal
1997 due to continued efforts in developing new and improving existing products.
 
     Operating Income.  As a result of the foregoing, operating income increased
$7.6 million, or 39.4%, to $26.9 million, or 29.6% of revenues, for fiscal 1997
as compared to $19.3 million, or 29.5% of revenues, for fiscal 1996.
 
     Other Income (Expense), net.  Net interest expense totaled $6.1 million, or
6.7% of revenues for fiscal 1997 as compared to net interest income of $165,000
for fiscal 1996. The increase in net interest expense is a result of interest
expense and amortization of deferred financing costs related to debt incurred in
connection with the Recapitalization. Other income (expense), net also includes
a nonrecurring charge of $1.2 million for expenses incurred in connection with
the Recapitalization.
 
     Provision for Income Taxes.  The effective tax rate increased to 37.4% of
income before income taxes for fiscal 1997 compared to 33.9% of income before
taxes for fiscal 1996. This increase was primarily attributable to certain of
the nonrecurring expenses incurred in connection with the Recapitalization which
are not deductible for income tax purposes.
 
     Income Before Extraordinary Item.  As a result of the foregoing, income
before extraordinary item decreased $.5 million, or 3.5%, to $12.3 million, or
13.6% of revenues for fiscal 1997 as compared to $12.8 million, or 19.5% of
revenues for fiscal 1996.
 
     Extraordinary Item.  A portion of the proceeds from the Offering was used
to repay the $40 million Bridge Notes and reduce the Senior Bank Debt by $11.2
million. As a result, an extraordinary loss occurred on the early extinguishment
of debt in fiscal 1997. This extraordinary item includes legal fees, unamortized
deferred financing costs, unamortized basis of the NationsBridge Warrants and a
fee paid in connection with the repayment of the Bridge Notes.
 
     Net Income.  As a result of the foregoing, net income as reported decreased
$3.8 million, or 29.5%, to $9.0 million ($0.50 per diluted share), or 9.9% of
revenues for fiscal 1997 as compared to $12.8 million ($0.80 per diluted share),
or 19.5% of revenues for fiscal 1996.
 
     Pro Forma Results.  The pro forma results give effect to the
Recapitalization and the Offering as if each occurred at the beginning of the
respective periods. The pro forma results exclude the nonrecurring expenses
incurred in connection with the Recapitalization and the extraordinary loss
related to the early extinguishment of debt and also reflect interest expense
for all periods presented, based on the Senior Bank Debt of $58.6 million
outstanding after the Offering. The pro forma net income for fiscal 1997 was
$13.6 million ($0.62 per diluted share), or 14.9% of revenues, an increase of
$4.5 million, or 50.4%, over the $9.0 million ($0.42 per diluted share) pro
forma net income for fiscal 1996.
 
                                       25
<PAGE>   26
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning April 1, 1996 and
ending March 31, 1998. Such information, in the opinion of management, includes
all adjustments consisting only of normal recurring adjustments necessary for a
fair presentation of that information. The results of operations for any quarter
are not necessarily indicative of the results to be expected for any future
quarter.
 
<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
                                        -----------------------------------------------------------------------------------------
                                                     FISCAL YEAR 1998                              FISCAL YEAR 1997
                                        -------------------------------------------   -------------------------------------------
                                        MARCH 31    DEC. 31    SEPT. 30    JUNE 30    MARCH 31    DEC. 31    SEPT. 30    JUNE 30
                                        ---------   --------   ---------   --------   ---------   --------   ---------   --------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Revenues..............................   $17,421    $ 18,102    $19,415    $ 18,609    $26,001    $ 25,667    $25,404    $ 13,734
Gross profit..........................     9,979       9,023     10,310      10,368     12,324      13,110     13,985       7,173
Operating income (loss)...............      (514)      4,034      4,710       4,897      7,068       8,200      8,288       3,323
Income (loss) before income taxes and
  extraordinary item..................    (2,020)      2,465      3,264       3,416      5,545       5,536      5,131       3,488
Net income (loss) before extraordinary
  item................................    (2,693)      1,651      2,089       2,186      3,490       3,513      3,123       2,215
Net income............................    (2,693)      1,651      2,089       2,186      3,490         186      3,123       2,215
Basic earnings (loss) per share before
  extraordinary item..................   $ (0.13)   $   0.08    $  0.10    $   0.11    $  0.17    $   0.21    $  0.22    $   0.15
Diluted earnings (loss) per share
  before extraordinary item...........     (0.13)       0.08       0.10        0.10       0.16        0.19       0.19        0.14
Basic earnings (loss) per share.......     (0.13)       0.08       0.10        0.11       0.17        0.01       0.22        0.15
Diluted earnings (loss) per share.....     (0.13)       0.08       0.10        0.10       0.16        0.01       0.19        0.14
</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 resources needs currently and
for the near future are to fund working capital, debt service and capital
expenditures necessary to support its business. Prior to the Recapitalization,
the Company's principal liquidity and capital resource needs were to fund
working capital and capital expenditures related to growth. The Company's
primary sources of liquidity and capital resources are cash generated from
operating activities and the Senior Bank Debt.
 
     As of June 26, 1998 the Company amended the NationsBank Credit Agreement to
provide for an increase in interest rates and for a temporary relaxation of
certain restrictive financial covenants. These covenant changes were based on
the Company's current business outlook which assumes receipt and delivery of
orders from new and existing customers and delivery of the $35.6 million of the
$49.4 million in backlog as of March 31, 1998. However, there can be no
assurance that the Company will meet these covenants and that further Senior
Bank Debt borrowings will be available should it fail to do so. The Company
currently has borrowings of $12 million and has outstanding letters of credit of
approximately $1.7 million under the $25 million revolving credit facility. The
Company believes that the cash flow from operations combined with borrowings
under the Senior Bank Debt, will be sufficient to meet the Company's presently
anticipated working capital, capital expenditure and debt service needs for at
least the next 12 months.
 
     The Company entered into the Senior Bank Debt and borrowed an aggregate of
$76 million in connection with the Recapitalization. See "Business - History."
The Senior Bank Debt provided for credit facilities in an
 
                                       26
<PAGE>   27
 
aggregate amount of $85 million, consisting of (i) a $15 million revolving
credit line, (ii) a Tranche A Term Loan Facility with an initial amount of $30
million, and (iii) a Tranche B Term Loan Facility with an initial amount of $40
million. The Company used approximately $11.2 million of the net proceeds from
the Offering to reduce the borrowings under the Senior Bank Debt and as of
October 15, 1997 amended the credit facility to provide an additional $10
million under the revolving credit line. See Notes 5 and 11 of Notes to
Consolidated Financial Statements. As a result of and after giving effect to the
application of the net proceeds of the Offering to reduce the borrowed amount,
the quarterly principal payments in respect to Tranche A Term Loan Facility and
the Tranche B Term Loan Facility commenced on December 31, 1997; from December
31, 1997 through June 30, 1998, the aggregate amount of such scheduled principal
payments is approximately $0.8 million per quarter and from September 30, 1998
through March 31, 2001, the aggregate amount of such scheduled principal
payments will be approximately $1.5 million per quarter. In addition, the
Company will be required to make quarterly interest payments on such
indebtedness. The revolving credit line, the Tranche A Term Loan Facility and
the Tranche B Term Loan Facility bear interest at variable rates, which were
approximately 7.94%, 7.94% and 8.69%, respectively, at March 31, 1998. The
amendment entered into as of June 26, 1998 provides for an additional increase
to the interest rates to the revolving credit line, the Tranche A Term Loan
Facility and the Tranche B Term Loan Facility of 1.0%, 1.0% and 0.5%,
respectively. The Senior Bank Debt is guaranteed by the Company and is secured
by a pledge of all of the stock of the Drop Down Subsidiary and a security
interest in the assets of the Drop Down Subsidiary.
 
     The Company's indebtedness and the related covenants will have several
important effects on the future operations, including but not limited to, the
following: (i) a portion of the Company's cash flow from operations must be
dedicated to the payment of interest on and principal of its indebtedness and
will not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
R&D, acquisitions, general corporate purposes or other purposes may be limited;
and (iii) the Company's level of indebtedness could limit its flexibility in
reacting to business developments and changes in its industry and economic
conditions generally.
 
     The Company's operating activities generated cash of approximately $6.4
million, $6.1 million and $6.6 million in fiscal 1998, 1997 and 1996,
respectively, due to net income in those periods. The cash generated from
operations was partially offset by increases in accounts receivable and
inventories in fiscal 1998 and 1997. The Company's investing activities used
cash of approximately $8.2 million, $2.0 million and $0.8 million in fiscal
1998, 1997 and 1996, respectively. The Company's use of cash for investing
activities in 1998 was due to payments for acquisitions and capital
expenditures. The Company's use of cash for investing activities in 1997 and
1996 was due to capital expenditures. In fiscal 1998, the Company generated cash
of $3.8 million in financing activities, primarily in connection with the
borrowings of long-term debt to finance its acquisitions.
 
RECENT ACCOUNTING PRONOUNCEMENTS/YEAR 2000
 
     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS 130 is effective for
the Company's fiscal year ending March 31, 1999. Management does not expect SFAS
130 to have a significant impact on the Company's consolidated financial
statements.
 
     Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires companies to determine reporting
segments based on the manner in which management makes decisions about
allocating resources to segments and measuring their performance. Disclosures
for each segment are similar to those required under current standards, with the
addition of certain quarterly disclosure requirements. SFAS 131 also requires
entity-wide disclosure about the products and services an entity provides, the
countries in which it holds material assets and reports material revenues, and
its significant customers. SFAS is effective for financial statements for the
Company's fiscal year ending March 31, 1999. The Company does not expect that
SFAS 131 will require significant revision of prior disclosures.
 
                                       27
<PAGE>   28
 
     The Company expects to incur certain costs during the next two years to
address the impact of the Year 2000 problem on its information systems. The Year
2000 problem, which is common to most businesses, concerns the inability of
information systems, primarily computer software programs, to properly recognize
and process date-sensitive information on and beyond January 1, 2000. The
Company currently believes that it will be able to modify or replace its
affected systems in time to minimize any detrimental effects on operations. The
Company's products currently delivered to customers are designed to be Year 2000
compliant. Previously delivered customer products have minor issues relating to
computer printouts. These issues are corrected in all new releases of software
that are purchased by customers. The incremental costs of the Year 2000 project
are estimated between $50,000 and $100,000. These costs will be expensed as
incurred, unless new software is purchased that will be capitalized in
accordance with the Company's policy. The Company does not expect that the Year
2000 problem will have a material impact on the results of operations, liquidity
or consolidated financial position of the Company.
 
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-4 through F-25 and S-1 of this Annual Report
on Form 10-K are incorporated herein by reference.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
     The information contained under the heading "Nominees for Election to the
Board of Directors" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for the Company's 1998 Annual Meeting of
Stockholders, to be filed with the Commission, including any information with
respect to compliance by directors, officers and beneficial owners of more than
10% of the Class A Common Stock with respect to Section 16(a) of the Securities
Exchange Act of 1934, is incorporated herein by reference. Pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K, information
relating to the executive officers of the Company is included in Item 1 of this
report.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information contained under the headings "Summary Compensation Table"
"Option Grants in the Last Fiscal Year", "Fiscal Year-End Option Values", and
"Directors' Compensation" in the definitive Proxy Statement to be used in
connection with solicitation of proxies for the Company's 1998 Annual Meeting of
Shareholders, to be filed with the Commission, is incorporated herein by
reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information contained under the headings "Ownership of Stock by
Directors, Executive Officers and Principal Stockholders" in the definitive
Proxy Statement to be used in connection with the solicitation of proxies for
the Company's 1998 Annual Meeting of Stockholders, to be filed with the
Commission, including any information with respect to compliance by directors,
officers and beneficial owners of more than 10% of the Class A Common Stock with
respect to Section 16(a) of the Securities Exchange Act of 1934, is incorporated
herein by reference. For purposes of determining the aggregate market value of
the Company's voting stock held by nonaffiliates, shares held by all directors
and executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.
 
                                       28
<PAGE>   29
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.
 
                                       29
<PAGE>   30
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) 1. Financial Statements
 
     The following financial statements and notes thereto of the Company are
incorporated by reference in Item 8 of this report:
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                           <C>
Report of Independent Public Accountants....................   F-4
Consolidated Balance Sheets as of March 31, 1998 and 1997...   F-5
Consolidated Statements of Income for the Years Ended March
  31, 1998, 1997 and 1996...................................   F-6
Consolidated Statements of Changes in Stockholders' Equity
  for the Years Ended March 31, 1998, 1997 and 1996.........   F-7
Consolidated Statements of Cash Flows for the Years Ended
  March 31, 1998, 1997 and 1996.............................   F-8
Notes to Consolidated Financial Statements..................   F-9
</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 EXHIBIT
-------                            ----------------------
<C>        <S>  <C>
 2.01      --   Recapitalization and Stock Purchase and Sale Agreement,
                dated as of June 5, 1996, among THIN International N.V.
                (formerly known as Firearms Training Systems International
                N.V.), the Company, Centre Capital Investors II, L.P.,
                Centre Partners Coinvestment L.P., Centre Parallel
                Management Partners, L.P., Centre Capital Offshore
                Investors, II, L.P., Centre Capital Tax-exempt Investors II,
                L.P., State Board of Administration of Florida and Centre
                Partners Management LLC. (filed as Exhibit 2.01 to the
                Company's Registration Statement No. 333-13105)
 2.01-01   --   Letter Agreement, dated July 9, 1996, amending the
                Recapitalization and Stock Purchase and Sale Agreement.
                (filed as Exhibit 2.02 to the Company's Registration
                Statement No. 333-13105)
 2.01-02   --   First Amendment, dated as of July 31, 1996, to the
                Recapitalization and Stock Purchase and Sale Agreement.
                (filed as Exhibit 2.03 to the Company's Registration
                Statement No. 333-13105).
 2.02      --   Letter Agreement, dated November 1, 1996, from the Company
                to THIN International N.V. regarding payment of the
                Contingent Payment pursuant to the Recapitalization and
                Stock Purchase and Sale Agreement. (filed as Exhibit 2.04 to
                the Company's Registration Statement No. 333-13105)
 3.01      --   By-laws of the Company. (filed as Exhibit 3.06 to the
                Company's Registration Statement No. 333-13105)
 3.02      --   Restated Certificate of Incorporation of the Company, dated
                December 23, 1996. (filed as Exhibit 3.03 to the Company's
                Quarterly Report on Form 10-Q for the Fiscal Quarter ended
                December 31, 1996)
</TABLE>
 
                                       F-1
<PAGE>   31
 
<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                            DESCRIPTION OF EXHIBIT
-------                            ----------------------
<C>        <S>  <C>
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. (South) 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).
10.04      --   Borrower's Consent and Agreement dated as of October 15,
                1997 between FATS, Inc. and NationsBank N.A. (South).
10.05      --   Pledge Agreement dated as of January 1, 1997 between the
                Company and NationsBank N.A. (South).
10.06      --   Parent's Consent dated as of October 15, 1997 between the
                Company and NationsBank N.A. (South).
10.07      --   Option to Lease, dated May 4, 1993, between the Company and
                Technology Park/Atlanta, Inc. (filed as Exhibit 10.07 to the
                Company's Registration Statement No. 333-13105)
10.08      --   Lease, dated May 4, 1993, between the Company and Technology
                Park/Atlanta, Inc. (filed as Exhibit 10.08 to the Company's
                Registration Statement No. 333-13105)
10.08-01   --   First Amendment to Lease Agreement, dated December 21,1993,
                between the Company and Technology Park/Atlanta, Inc. (filed
                as Exhibit 10.09 to the Company's Registration Statement No.
                333-13105)
10.08-02   --   Second Amendment to Lease Agreement, dated December 21,1995,
                between the Company and Schneider Atlanta, L.P. (filed as
                Exhibit 10.10 to the Company's Registration Statement No.
                333-13105).
10.09      --   United States Government Contract M67854-94-C-2014, awarded
                August 4, 1994, between the Company and the U.S. Marine
                Corps. (filed as Exhibit 10.11 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 B. Terry,
                Robert F. Mecredy, David A. Apseloff, Greg Echols and Juan
                de Ledebur. (filed as Exhibit 10.12 to the Company's
                Registration Statement No. 333-13105)
10.11      --   Firearms Training Systems, Inc. Stock Option Plan. (filed as
                Exhibit 10.13 to the Company's Registration Statement No.
                333-13105)
10.12      --   Stock Option Agreement Series A, dated as of September 18,
                1996 between the Company and Peter A. Marino. (filed as
                Exhibit 10.14 to the Company's Registration Statement No.
                333-13105)
10.12-01   --   Schedule identifying Stock Option Agreements Series A
                substantially identical in all material respects to Exhibit
                10.12.
10.13      --   Stock Option Agreement Series B, dated as of September 18,
                1996 between the Company and Peter A. Marino. (filed as
                Exhibit 10.15 to the Company's Registration Statement No.
                333-13105)
</TABLE>
 
                                       F-2
<PAGE>   32
 
<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                            DESCRIPTION OF EXHIBIT
-------                            ----------------------
<C>        <S>  <C>
10.13-01   --   Schedule identifying Stock Option Agreements Series B
                substantially identical in all material respects to Exhibit
                10.13.
10.14      --   Stock Option Agreement Series C, dated as of September 18,
                1996 between the Company and William J. Bratton. (filed as
                Exhibit 10.16 to the Company's Registration Statement No.
                333-13105)
10.14-01   --   Schedule identifying Stock Option Agreements Series C
                substantially identical in all material respects to Exhibit
                10.14. (filed as Exhibit 10.16.01 to the Company's
                Registration Statement No. 333 -13105)
10.15      --   Registration Rights Agreement, dated as of July 31, 1996,
                between the Company and the Institutional Holders set forth
                on Schedule I thereto. (filed as Exhibit 10.17 to the
                Company's Registration Statement No. 333-13105)
10.16      --   Registration Rights Agreement, dated as of July 31, 1996,
                among the Company, THIN International N.V. (formerly known
                as Firearms Training Systems International N.V.) and the
                Institutional Holders set forth on Schedule I thereto.
                (filed as Exhibit 10.18 to the Company's Registration
                Statement No. 333-13105)
10.17      --   Firearms Training Systems, Inc. Executive Severance Benefit
                Plan. (filed as Exhibit 10.19 to the Company's Registration
                Statement No. 333-13105)
10.18      --   Employment Agreement, dated as of September 18, 1996,
                between the Company and Peter A. Marino. (filed as Exhibit
                10.20 to the Company's Registration Statement No. 333-13105)
10.19      --   Form of Agreement to Limit Future Competition entered into
                with each member of senior management of the Company. (filed
                as Exhibit 10.21 to the Company's Registration Statement No.
                333-13105)
10.19-01   --   Schedule identifying Agreements to Limit Future Competition
                substantially identical in all material respects to Exhibit
                10.19. (filed as Exhibit 10.21-01 to the Company's
                Registration Statement No. 333-13105)
10.20      --   License Agreement, dated October 31, 1991 by and between
                Microware Systems Corporation and the Company. (filed as
                Exhibit 10.23 to the Company's Registration Statement No.
                333-13105)
11.01      --   Statement Regarding Computation of Pro Forma Net Income Per
                Common Share.
21.01      --   Subsidiaries of the Company.
23.01      --   Consent of Arthur Andersen LLP, dated June 26, 1998.
24.01      --   Power of Attorney (set forth on page V-1).
27.01      --   Financial Data Schedule.
</TABLE>
 
(b) Reports on Form 8-K:
 
     Form 8-K filed March 17, 1998
 
(c) Exhibits
 
     See (a)(3) above.
 
(d) Financial Statement Schedule.
 
     See (a)(2) above.
 
                                       F-3
<PAGE>   33
 
                    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,
1998 and 1997 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Firearms Training Systems,
Inc. and subsidiaries as of March 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
 
     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
 
                                          ARTHUR ANDERSEN LLP
 
Atlanta, Georgia
May 8, 1998 (Except with respect to the matters discussed in the third and
fourth paragraphs of Note 12 to which the date is June 26, 1998)
 
                                       F-4
<PAGE>   34
 
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                            MARCH 31, 1998 AND 1997
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              ---------   ---------
<S>                                                           <C>         <C>
                                      ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   3,395   $   1,663
  Accounts receivable, net of allowance for doubtful
     accounts of $100 at March 31, 1998 and 1997............     22,710      20,690
  Inventories...............................................     17,725      11,965
  Prepaid expenses and other current assets.................        594         477
  Deferred income taxes.....................................      1,050       1,491
                                                              ---------   ---------
          Total current assets..............................     45,474      36,286
PROPERTY AND EQUIPMENT, net.................................      3,971       2,660
DEFERRED FINANCING COSTS, net...............................      3,007       3,004
GOODWILL, net of accumulated amortization of $145 at March
  31, 1998..................................................      2,751          --
DEFERRED INCOME TAXES.......................................      1,065          --
OTHER ASSETS................................................        112         171
                                                              ---------   ---------
                                                              $  56,380   $  42,121
                                                              =========   =========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $   3,389   $   4,538
  Accrued liabilities.......................................     11,060       8,300
  Income taxes payable......................................        390         653
  Deferred revenue..........................................      6,428         857
  Current maturities of long-term debt......................      5,300       1,588
                                                              ---------   ---------
          Total current liabilities.........................     26,567      15,936
                                                              ---------   ---------
LONG-TERM DEBT, less current maturities.....................     57,700      57,012
                                                              ---------   ---------
OTHER NONCURRENT LIABILITIES................................        344         551
                                                              ---------   ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 11)
STOCKHOLDERS' EQUITY (Notes 3, 6 and 12):
  Preferred stock, $0.10 par value; 200 shares authorized,
     no shares issued at March 31, 1998 and 1997............         --          --
  Class A common stock, $0.000006 par value; 68,060 shares
     authorized; 20,415 and 20,402 shares issued and
     outstanding at March 31, 1998 and 1997, respectively...         --          --
  Class B nonvoting common stock, $0.000006 par value; 2,200
     shares authorized, no shares issued at March 31, 1998
     and 1997...............................................         --          --
  Additional paid-in capital................................    112,390     112,331
  Accumulated (deficit) earnings............................   (140,569)   (143,802)
  Cumulative foreign currency translation adjustment........        (52)         93
                                                              ---------   ---------
          Total stockholders' (deficit) equity..............    (28,231)    (31,378)
                                                              ---------   ---------
                                                              $  56,380   $  42,121
                                                              =========   =========
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                       F-5
<PAGE>   35
 
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
               FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               1998      1997      1996
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
REVENUES....................................................  $73,547   $90,806   $65,439
COST OF REVENUES............................................   33,867    44,214    30,902
                                                              -------   -------   -------
GROSS PROFIT................................................   39,680    46,592    34,537
                                                              -------   -------   -------
OPERATING EXPENSES:
  Selling, general, and administrative expenses.............   15,036    15,016    12,087
  Research and development expenses.........................    6,475     4,224     2,781
  Depreciation and amortization.............................    1,042       473       386
  Acquired in-process research and development charge.......    4,000        --        --
                                                              -------   -------   -------
          Total operating expenses..........................   26,553    19,713    15,254
                                                              -------   -------   -------
OPERATING INCOME............................................   13,127    26,879    19,283
                                                              -------   -------   -------
OTHER (EXPENSE) INCOME, net:
  Interest (expense) income, net............................   (5,905)   (6,069)      165
  Nonrecurring recapitalization expenses (Note 11)..........       --    (1,181)       --
  Other income (expense), net...............................      (97)       71       (93)
                                                              -------   -------   -------
          Total other (expense) income, net.................   (6,002)   (7,179)       72
                                                              -------   -------   -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...........    7,125    19,700    19,355
PROVISION FOR INCOME TAXES..................................    3,892     7,359     6,565
                                                              -------   -------   -------
INCOME BEFORE EXTRAORDINARY ITEM............................    3,233    12,341    12,790
EXTRAORDINARY ITEM, net of income tax benefit of $1,913
  (NOTE 5)..................................................       --    (3,327)       --
                                                              -------   -------   -------
NET INCOME..................................................  $ 3,233   $ 9,014   $12,790
                                                              =======   =======   =======
BASIC EARNINGS PER SHARE BEFORE THE EXTRAORDINARY ITEM......  $  0.16   $  0.75   $  0.89
                                                              =======   =======   =======
DILUTED EARNINGS PER SHARE BEFORE THE EXTRAORDINARY ITEM....  $  0.15   $  0.69   $  0.80
                                                              =======   =======   =======
BASIC EARNINGS PER SHARE....................................  $  0.16   $  0.55   $  0.89
                                                              =======   =======   =======
DILUTED EARNINGS PER SHARE..................................  $  0.15   $  0.50   $  0.80
                                                              =======   =======   =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC (NOTE
  3)........................................................   20,408    16,489    14,402
                                                              =======   =======   =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
  OUTSTANDING -- DILUTED (NOTE 3)...........................   21,456    18,009    16,029
                                                              =======   =======   =======
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       F-6
<PAGE>   36
 
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                        CLASS B
                                                   CLASS A             NONVOTING
                         PREFERRED STOCK        COMMON STOCK         COMMON STOCK     ADDITIONAL              ACCUMULATED
                        -----------------   ---------------------   ---------------    PAID-IN                 EARNINGS
                         SHARES    AMOUNT      SHARES      AMOUNT   SHARES   AMOUNT    CAPITAL     WARRANTS    (DEFICIT)
                        --------   ------   ------------   ------   ------   ------   ----------   --------   -----------
<S>                     <C>        <C>      <C>            <C>      <C>      <C>      <C>          <C>        <C>
Balance, March 31,
  1995................      --      $ --      49,800,000    $ --       --     $ --     $  1,931        --      $   6,553
Net income............      --        --              --      --       --       --           --        --         12,790
Foreign currency
  translation
  adjustment..........      --        --              --      --       --       --           --        --             --
                          ----      ----    ------------    ----     ----     ----     --------     -----      ---------
Balance, March 31,
  1996................      --        --      49,800,000      --       --       --        1,931        --         19,343
Net income............      --        --              --      --       --       --           --        --          9,014
Common stock issued in
  connection with the
  Recapitalization
  (Note 11)...........      --        --      11,165,241      --       --       --       36,000        --             --
Common stock retired
  in connection with
  the Recapitalization
  (Note 11)...........      --        --     (46,832,022)     --       --       --       (1,816)       --       (150,034)
Common stock issued to
  management in
  connection with the
  Recapitalization
  (Note 11)...........      --        --         269,185      --       --       --          876        --             --
Warrants issued in
  connection with the
  Recapitalization
  (Note 11)...........      --        --              --      --       --       --           --       930             --
Common stock issued in
  connection with the
  initial public
  offering, net of
  issuance costs......      --        --       6,000,000      --       --       --       75,340        --             --
Contingent payment to
  THIN International
  (Note 11)...........      --        --              --      --       --       --           --        --        (19,300)
Warrants repurchased
  in connection with
  the retirement of
  the Bridge Notes
  (Note 5)............      --        --              --      --       --       --           --      (930)        (2,825)
Foreign currency
  translation
  adjustment..........      --        --              --      --       --       --           --        --             --
                          ----      ----    ------------    ----     ----     ----     --------     -----      ---------
Balance, March 31,
  1997................      --        --      20,402,404      --       --       --      112,331        --       (143,802)
Net income............      --        --              --      --       --       --           --        --          3,233
Common Stock issued to
  employees exercising
  stock options,
  including tax
  benefit.............      --        --           2,679      --       --       --           17        --             --
Common Stock issued to
  the Company's
  Employee Stock
  Compensation Plan...      --        --          10,239      --       --       --           42        --             --
Foreign currency
  translation
  adjustment..........      --        --              --      --       --       --           --        --             --
                          ----      ----    ------------    ----     ----     ----     --------     -----      ---------
Balance, March 31,
  1998................      --      $ --      20,415,322    $ --       --     $ --     $112,390     $  --      $(140,569)
                          ====      ====    ============    ====     ====     ====     ========     =====      =========
 
<CAPTION>
                         CUMULATIVE
                          FOREIGN
                          CURRENCY
                        TRANSLATION
                         ADJUSTMENT     TOTAL
                        ------------   --------
<S>                     <C>            <C>
Balance, March 31,
  1995................     $  --       $  8,484
Net income............        --         12,790
Foreign currency
  translation
  adjustment..........       (12)           (12)
                           -----       --------
Balance, March 31,
  1996................       (12)        21,262
Net income............        --          9,014
Common stock issued in
  connection with the
  Recapitalization
  (Note 11)...........        --         36,000
Common stock retired
  in connection with
  the Recapitalization
  (Note 11)...........        --       (151,850)
Common stock issued to
  management in
  connection with the
  Recapitalization
  (Note 11)...........        --            876
Warrants issued in
  connection with the
  Recapitalization
  (Note 11)...........        --            930
Common stock issued in
  connection with the
  initial public
  offering, net of
  issuance costs......        --         75,340
Contingent payment to
  THIN International
  (Note 11)...........        --        (19,300)
Warrants repurchased
  in connection with
  the retirement of
  the Bridge Notes
  (Note 5)............        --         (3,755)
Foreign currency
  translation
  adjustment..........       105            105
                           -----       --------
Balance, March 31,
  1997................        93        (31,378)
Net income............        --          3,233
Common Stock issued to
  employees exercising
  stock options,
  including tax
  benefit.............        --             17
Common Stock issued to
  the Company's
  Employee Stock
  Compensation Plan...        --             42
Foreign currency
  translation
  adjustment..........      (145)          (145)
                           -----       --------
Balance, March 31,
  1998................     $ (52)      $(28,231)
                           =====       ========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       F-7
<PAGE>   37
 
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998       1997      1996
                                                              -------   --------   -------
<S>                                                           <C>       <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $ 3,233   $  9,014   $12,790
                                                              -------   --------   -------
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................    1,679        987       386
     Noncash portion of extraordinary item..................       --      3,871        --
     Stock grant............................................       --        120        --
     Deferred income taxes..................................      440       (625)       52
     Employee stock compensation plan.......................       42         --        --
     Acquired in-process research and development charge....    4,000         --        --
     Changes in assets and liabilities (excluding effects of
       businesses acquired):
       Accounts receivable, net.............................   (1,298)   (10,598)   (6,307)
       Inventories..........................................   (2,203)       871    (5,017)
       Prepaid expenses and other current assets............        4        178       273
       Escrow and other deposits............................       59        (65)      164
       Accounts payable.....................................   (1,476)       919     1,777
       Accrued liabilities..................................    1,273      2,593     3,029
       Income taxes payable.................................     (255)      (652)    1,305
       Deferred revenue.....................................    1,060       (866)   (1,878)
       Noncurrent liabilities...............................     (207)       347        (8)
                                                              -------   --------   -------
          Total adjustments.................................    3,118     (2,920)   (6,224)
                                                              -------   --------   -------
          Net cash provided by operating activities.........    6,351      6,094     6,566
                                                              -------   --------   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments for business acquisitions........................   (6,801)        --        --
  Additions to property and equipment, net..................   (1,445)    (1,989)     (761)
                                                              -------   --------   -------
          Net cash used in investing activities.............   (8,246)    (1,989)     (761)
                                                              -------   --------   -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings of long-term debt................    6,000    110,000        --
  Repayments of long-term debt..............................   (1,600)   (51,400)       --
  Proceeds from sale of common stock........................        9    112,096        --
  Deferred financing costs..................................     (640)    (6,459)       --
  Repurchase of warrants....................................       --     (3,755)       --
  Repurchase of common stock................................       --   (171,150)       --
                                                              -------   --------   -------
          Net cash provided by (used in) financing
            activities......................................    3,769    (10,668)       --
                                                              -------   --------   -------
EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES.................     (142)       105       (12)
                                                              -------   --------   -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........    1,732     (6,458)    5,793
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................    1,663      8,121     2,328
                                                              -------   --------   -------
CASH AND CASH EQUIVALENTS, END OF YEAR......................  $ 3,395   $  1,663   $ 8,121
                                                              =======   ========   =======
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
  Interest..................................................  $ 5,244   $  5,278   $    11
                                                              =======   ========   =======
  Income taxes..............................................  $ 3,856   $  6,723   $ 4,809
                                                              =======   ========   =======
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       F-8
<PAGE>   38
 
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         MARCH 31, 1998, 1997, AND 1996
 
1. ORGANIZATION AND NATURE OF BUSINESS
 
     Firearms Training Systems, Inc. ("FATS" or the "Company"), a Delaware
corporation, was incorporated in 1984. The Company was a wholly owned subsidiary
of THIN International N.V. (previously Firearms Training Systems International
N.V.) ("THIN International"), a Netherlands Antilles corporation, until July 31,
1996, at which time approximately 79% of the outstanding stock of the Company
was sold to a group of entities (the "Centre Entities") managed by Centre
Partners Management LLC, in connection with a recapitalization and stock
purchase and sale agreement (the "Recapitalization") (Note 11).
 
     FATS is engaged in the development, manufacture, sale and servicing of
small and supporting arms training simulators and simulated firearms. The
Company's products include simulators for the military, law enforcement, sport
shooting and hunter education. The Company's customers include military and law
enforcement agencies primarily throughout the United States ("U.S."), Europe and
Asia.
 
     The Company, Firearms Training Systems, Inc., has one wholly-owned
subsidiary, FATS, Inc., which is the operating subsidiary (the "Operating
Subsidiary"). As of March 31, 1998, FATS, Inc. had eight wholly owned
subsidiaries (collectively, the "Subsidiaries"). Firearms Training Systems
Limited, the Operating Subsidiary's U.K. subsidiary established in 1992 ("FATS
U.K."), has been subcontracted by the Operating Subsidiary to perform
manufacturing and maintenance work with respect to certain of the Operating
Subsidiary's contracts. F.A.T.S. Singapore Pte, Ltd., the Operating Subsidiary's
Singapore subsidiary established in 1994, conducts certain activities of the
Company in Asia. Firearms Training Systems Netherlands, B.V., the Operating
Subsidiary's Netherlands subsidiary established in 1995, was organized to
perform certain contractual obligations of the Company with respect to the
Company's contract with the Royal Netherlands Army and to provide services to
other customers in the region. F.A.T.S. Foreign Sales Corporation was organized
in April 1995 to act as an agent with respect to export sales of products and
services outside the U.S. On October 1, 1997, the Operating Subsidiary
incorporated FSS, Inc. ("FSS"), which acquired all the assets of a Florida-based
weapons simulation company. FATS Canada, Inc., the Operating Subsidiary's
Canadian subsidiary established in 1996, was organized to support the
performance of servicing obligations to Canadian customers. On March 1, 1998,
FATS Canada, Inc. acquired all of the outstanding stock of Simtran, a
Canadian-based simulation company. Effective April 1, 1998, FATS Canada, Inc.
and Simtran were amalgamated. The amalgamated company became Simtran. In
conjunction with the acquisition of Simtran, FATS Canada Holdings, a Canadian
corporation was formed. FATS Canada Holdings primary activity is the holding of
investments.
 
     In fiscal 1997, THIN International contributed FATS U.K. to the Company and
FATS U.K., subsequently, became a wholly owned subsidiary of the Operating
Subsidiary. The accompanying financial statements have been retroactively
restated at historical cost to reflect the consolidation of FATS U.K. into the
Company. A significant majority of FATS U.K.'s operations involve intercompany
sales to the Operating Subsidiary, and such sales have been eliminated in these
consolidated statements. Remaining operations of FATS U.K. are not material.
 
2. ACQUISITIONS
 
     On June 26, 1997, FATS, Inc. acquired certain operating assets of the ICAT
Judgmental Use of Force Business from SBS Technologies, 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.
 
                                       F-9
<PAGE>   39
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On October 1, 1997, FSS, Inc. ("FSS") acquired all of the operating assets
of a Florida-based simulation company for approximately $250,000 in cash and
acquisition costs. In connection with the purchase of the Florida-based
simulation company, the Company could potentially issue up to an additional
150,000 contingent shares of common stock upon FSS meeting certain earnings
targets. The Company recorded the acquisition using the purchase method of
accounting with approximately $100,000 of the purchase price allocated to
goodwill. The results of operations of FSS have been included in the Company's
consolidated statements of operations since the effective date of the
acquisition.
 
     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 in excess of assets 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.
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.
 
     The unaudited pro forma consolidated results of operations of the Company
for the years ended March 31, 1998 and 1997 are summarized below as if the
acquisitions described above had occurred on April 1, 1997 and 1996,
respectively (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                              -----------------
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Revenues....................................................  $75,651   $93,478
Net income before extraordinary item........................    4,895    11,193
Net income..................................................    4,895     7,866
Basic earnings per share....................................     0.24      0.48
Diluted earnings per share..................................     0.23      0.44
</TABLE>
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of the Company,
the Operating Subsidiary and the Subsidiaries. All significant intercompany
transactions and balances have been eliminated.
 
FOREIGN CURRENCY TRANSLATION
 
     The assets and liabilities of the Operating Subsidiary's foreign
subsidiaries are translated into U.S. dollars using current exchange rates in
effect at the balance sheet date, and revenues and expenses are translated at
average monthly exchange rates. The resulting translation adjustments are
recorded as a separate component of stockholders' equity. Gains and losses which
result from foreign currency transactions are included in the accompanying
consolidated statements of income.
 
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
 
                                      F-10
<PAGE>   40
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
RESTRICTED CASH
 
     In accordance with the terms of an escrow agreement with an agent of the
Company, an escrow account is used to ensure contract performance by the Company
under certain foreign contracts. The cash included in the escrow account is
restricted and is paid out over a scheduled term. The balance in the escrow
account has been classified in the accompanying financial statements as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                               MARCH 31,
                                                              -----------
                                                              1998   1997
                                                              ----   ----
<S>                                                           <C>    <C>
Prepaid expenses and other current assets...................   $7    $86
Escrow and other deposits...................................   --      6
                                                               --    ---
          Total.............................................   $7    $92
                                                               ==    ===
</TABLE>
 
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,
                                                              -----------------
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Raw materials...............................................  $11,635   $ 8,233
Work in progress............................................    3,341     2,816
Finished goods..............................................    2,749       916
                                                              -------   -------
                                                              $17,725   $11,965
                                                              =======   =======
</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, 1998, 1997 and
1996 was $897,000, $473,000 and $386,000, respectively.
 
                                      F-11
<PAGE>   41
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The detail of property and equipment is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                              -----------------
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Machinery and equipment.....................................  $ 4,451   $ 2,711
Demonstration equipment.....................................    1,427     1,421
Furniture and fixtures......................................      691       502
Vehicles....................................................      400       280
Leasehold improvements......................................      224        73
                                                              -------   -------
                                                                7,193     4,987
Less accumulated depreciation and amortization..............   (3,222)   (2,327)
                                                              -------   -------
                                                              $ 3,971   $ 2,660
                                                              =======   =======
</TABLE>
 
LONG-LIVED ASSETS
 
     Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. When events or changes in circumstances occur related to long-lived
assets, the Company estimates the future cash flows expected to result from the
use of the asset and its eventual disposition. Having found no instances whereby
the sum of expected future cash flows (undiscounted and without interest
charges) was less than the carrying amount of the asset, thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
 
ACCRUED LIABILITIES
 
     Accrued liabilities consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 MARCH 31,
                                                              ----------------
                                                               1998      1997
                                                              -------   ------
<S>                                                           <C>       <C>
Sales commissions, bonuses and agents' commissions..........  $ 4,175   $2,414
Accrued salaries and related expenses.......................    2,069    1,124
Professional fees...........................................      380      685
Accrued interest............................................      369      369
Accrued warranty costs......................................    1,282      900
Other.......................................................    2,785    2,808
                                                              -------   ------
                                                              $11,060   $8,300
                                                              =======   ======
</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.
 
                                      F-12
<PAGE>   42
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
RESEARCH AND DEVELOPMENT ACTIVITIES
 
     The Company expenses research and development costs as incurred. Research
and development costs included in the accompanying statements of income 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, 1998 and 1997. 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,
1998 and 1997. 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, 1998.
 
NET INCOME PER COMMON SHARE
 
     The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per share" for its calculation of net income per common share.
Basic net income per common share is computed using the weighted average number
of shares of common stock outstanding. Diluted net 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 adjustments are necessary to historical net
income for net income per share presentation. Total CESs included in the
computation of diluted net income per share for the years ended March 31, 1998,
1997 and 1996 were 1,048,000, 1,520,000 and 1,627,000, respectively. The net
income per share effect of the extraordinary item incurred for the year ended
March 31, 1997 was $0.20 and $0.18 per share for basic and diluted net income
per share, respectively. The shares issued in the Recapitalization (Note 11),
all shares issuable upon exercise of stock options granted (Note 6), and all
shares issuable upon exercise of warrants (Note 5) are included in the earnings
per share calculations for all periods presented. As the Company also
repurchased shares in connection with the Recapitalization, the effect of the
repurchased shares is also included in the earnings per share calculations for
all periods presented prior to the offering (the "Offering").
 
     In connection with the purchase of FSS, Inc. in October of 1997, the
Company entered into a purchase agreement requiring the possible issuance of up
to 150,000 shares of common stock upon the subsidiary meeting certain earnings
targets. These contingently issuable shares could potentially dilute basic and
diluted net income per share in future periods.
 
STOCK SPLIT
 
     In connection with the Recapitalization (Note 11), the Company effected a
100,000-for-one stock split during fiscal year 1997. In anticipation of the
Offering, the Company effected another stock split of 1.66-for-one during fiscal
year 1997. All references in the accompanying financial statements to number of
shares and per share amounts of the Company's common stock prior to the
Recapitalization and the Offering have been retroactively restated to reflect
the increased number of common shares outstanding from both the 100,000-for-one
stock split and the 1.66-for-one stock split.
                                      F-13
<PAGE>   43
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
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.
 
RECLASSIFICATIONS
 
     Certain balances in prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year.
 
4. THE OFFERING
 
     In November 1996, the Company completed an initial public offering of
6,000,000 shares of its Class A Common Stock. Net proceeds to the Company were
approximately $75.3 million and were used to repay the $40 million senior
subordinated bridge notes (the "Bridge Notes") (Note 5) issued in connection
with the Recapitalization to reduce by $11.2 million the NationsBank Credit
Agreement (Note 5), to make a $19.3 million contingent payment to THIN
International (Note 11) and to fund certain nonrecurring obligations of the
Company.
 
5. LONG-TERM DEBT
 
NATIONSBANK CREDIT AGREEMENT
 
     On July 31, 1996, the Company replaced its existing credit agreement and
entered into a credit agreement with a group of financial institutions (the
"NationsBank Credit Agreement"). The NationsBank Credit Agreement was amended
and restated on October 15, 1997. The three components of the NationsBank Credit
Agreement are as follows:
 
     - Revolving credit facility with an aggregate principal amount of up to $25
       million (which includes a $10 million letter-of-credit subfacility and a
       $2 million swing line subfacility) (the "Revolving Credit Facility"). The
       Revolving Credit Facility matures and is payable July 31, 2002. At March
       31, 1998, the Company had $6 million of outstanding borrowings under this
       facility.
 
     - A term loan with an initial principal amount of $30 million maturing July
       31, 2002 (the "Tranche A Loan"). At March 31, 1998, $23.6 million was
       outstanding under the Tranche A Loan, with quarterly principal payments
       ranging from $700,000 to $1,600,000.
 
     - A term loan with an initial principal amount of $40 million maturing July
       31, 2003 (the "Tranche B Loan"). At March 31, 1998, $33.4 million was
       outstanding under the Tranche B Loan, with quarterly principal payments
       ranging from $100,000 to $8,000,000.
 
                                      F-14
<PAGE>   44
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At March 31, 1998 and 1997, long-term debt consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Tranche A Loan..............................................  $23,600   $25,000
Tranche B Loan..............................................   33,400    33,600
Revolving Credit Facility...................................    6,000        --
                                                              -------   -------
                                                               63,000    58,600
Current portion.............................................   (5,300)   (1,588)
                                                              -------   -------
                                                              $57,700   $57,012
                                                              =======   =======
</TABLE>
 
     The Company had outstanding irrevocable standby letters of credit in the
principal amount of approximately $2,147,000 and $2,161,000 at March 31, 1998
and 1997, respectively, in connection with the performance of certain sales
contracts.
 
     The Tranche A Loan and the NationsBank Revolving Credit Facility bear
interest at the Company's option of either:
 
     - The greater of (i) prime plus 1.25% to 1.75% (based on the Company's
       leverage ratio and certain other factors defined in the NationsBank
       Credit Agreement) or (ii) the federal funds rate plus .50% plus 1.75% to
       2.25% (based on the Company's leverage ratio and certain other factors
       defined in the NationsBank Credit Agreement) or
 
     - A function of the Eurodollar rate plus 2.25% to 2.75% (based on the
       Company's leverage ratio and certain other factors defined in the
       NationsBank Credit Agreement).
 
     The Tranche B Loan bears interest at the Company's option of either:
 
     - The greater of (i) prime plus 2.5% (based on the Company's leverage ratio
       and certain other factors defined in the NationsBank Credit Agreement) or
       (ii) the federal funds rate plus 3.0% (based on the Company's leverage
       ratio and certain other factors defined in the NationsBank Credit
       Agreement) or
 
     - A function of the Eurodollar rate plus 3.0% (based on the Company's
       leverage ratio and certain other factors defined in the NationsBank
       Credit Agreement).
 
     At March 31, 1998, the interest rates in effect were 7.94% for the
Revolving Credit Facility and the Tranche A Loan and 8.69% for the Tranche B
Loan.
 
     On March 5, 1997, the Company entered into an interest rate protection
agreement which expires on March 5, 1999 (the "protection period"). The
agreement protects outstanding floating rate debt of $20,000,000 over the
protection period. Under the agreement, the Company is reimbursed when actual
interest rates exceed a limit, as defined. The limit, based on the 90-day LIBOR,
is 6.5% over the protection period.
 
     On December 5, 1997, the Company entered into an interest rate swap
agreement that expires on December 5, 2002 (the "swap period"), unless
NationsBank elects to terminate the swap agreement on December 5, 2000. Nothing
in the agreement shall obligate NationsBank to elect the termination date. The
agreement protects outstanding floating rate debt of $10,000,000 over the swap
period. Under the agreement, the company will pay a fixed rate of interest per
quarter as measured by changes in 90-day LIBOR over the length of the swap.
 
     The NationsBank Credit Agreement also provides for a commitment fee of 0.5%
per year, paid quarterly, on the unused portion of the NationsBank Revolving
Credit Facility and a yearly agency fee of $75,000.
 
                                      F-15
<PAGE>   45
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The borrowings under the NationsBank Credit Agreement are secured by
substantially all of the Company's assets, a pledge of all of the common shares
of the Operating Subsidiary, and a pledge of 65% of the capital stock of the
Company's foreign subsidiaries. The NationsBank Credit Agreement also contains
restrictive covenants, which, among other things, limit borrowings and capital
expenditures and require certain leverage, fixed charge, and interest coverage
ratios, as defined, to be maintained and require a minimum net worth, as
defined. Borrowings at March 31, 1998 were $63 million. See Note 12 regarding
amendments to the NationsBank Credit Agreement subsequent to year end.
 
     The aggregate annual maturities of long-term debt at March 31, 1998 are as
follows (in thousands):
 
<TABLE>
<S>                                                           <C>
1999........................................................  $ 5,300
2000........................................................    6,000
2001........................................................    6,000
2002........................................................    6,300
2003........................................................   31,400
Thereafter..................................................    8,000
                                                              -------
                                                              $63,000
                                                              =======
</TABLE>
 
BRIDGE NOTES
 
     Also in July 1996, the Company received $40 million from the sale of Bridge
Notes to a financing institution. The Bridge Notes were repaid from the proceeds
of the Offering (Note 4).
 
WARRANTS
 
     In connection with the issuance of the Bridge Notes, the Company entered
into a warrant escrow agreement (the "warrants") which required the Company to
release from escrow warrants for between 288,434 and 2,019,034 shares of common
stock (in any combination of voting or nonvoting as the holder may elect),
contingent upon how and when the Bridge Notes were repaid and, if issued, the
senior preferred stock redeemed. In connection with the Offering, the holder of
the warrants agreed to cancel the warrants in exchange for a payment of
approximately $3.8 million from the net proceeds of the Offering. The fair value
of these warrants at the date of grant was estimated to be approximately $3.22
per share, which is the price paid per share by the Centre Entities in
connection with the Recapitalization (Note 11). The effective interest rate of
the Bridge Notes, taking into consideration the issuance of such warrants, was
approximately 12.8% to 13.3%.
 
FEES AND EXPENSES
 
     The Company capitalized approximately $640,000 and $6.2 million in 1998 and
1997, respectively, of fees and expenses incurred in connection with the
NationsBank Credit Agreement and the amendment thereto and the Bridge Notes. The
fees were paid to the bank upon consummation of the transactions, and the
expenses consisted primarily of legal, accounting and other miscellaneous
expenses. Fees of approximately $3 million have been expensed as a result of the
repayment of the Bridge Notes and the repayment of a portion of the Tranche A
Loan and the Tranche B Loan and are included in the extraordinary loss in the
accompanying statements of income. The remaining capitalized fees and expenses
have been included in deferred financing costs, net of accumulated amortization,
and are being amortized over the life of the related debt. The accumulated
amortization included in deferred financing costs is $1,151,000 and $514,000 in
1998 and 1997, respectively.
 
                                      F-16
<PAGE>   46
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
EXTRAORDINARY ITEM
 
     A portion of the proceeds from the Offering was used to repay the $40
million Bridge Notes and to reduce the outstanding borrowings of the NationsBank
Credit Agreement by $11.2 million. As a result, an extraordinary loss occurred
on the early extinguishment of debt in the fiscal year ended March 31, 1997.
This extraordinary item includes legal fees, unamortized deferred financing
costs, unamortized basis of the Warrants and a fee paid in connection with the
repayment of the Bridge Notes.
 
6. STOCK-BASED COMPENSATION PLAN
 
     The Company adopted the Firearms Training Systems, Inc. Stock Option Plan
(the "Plan") in fiscal year 1997. The Company has reserved a total of 2,490,000
shares of Class A common stock for issuance under the Plan under four different
nonqualified option series. The Plan provides for antidilution in the event of
certain defined circumstances. The Plan is administered by a committee
designated by the board of directors of the Company. The price of options
granted is determined at the date of grant.
 
SERIES A OPTIONS
 
     Options under this series are available for grant to officers and other
employees. The options are generally exercisable as follows: (i) 50% on the
third anniversary of the option issue date (the "option date"), (ii) 25% on the
fourth anniversary of the option date, and (iii) 25% on the fifth anniversary of
the option date. The options expire on the seventh anniversary of the option
date. In the event of termination of the optionee's employment for any reason
other than cause (as defined in the Plan) prior to the third anniversary of the
option date, 16.7% of the options shall be exercisable for each anniversary of
the option date prior to the optionee's termination date. In the event of
termination of the optionee's employment for cause, all of the optionee's
outstanding options shall be forfeited.
 
SERIES B OPTIONS
 
     Options under this series are available for grant to officers and other
employees. The options are generally exercisable on the ninth anniversary but
are subject to acceleration based on defined earnings targets. The options
expire after the ninth anniversary of the option date. In the event of
termination of the optionee's employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent they are
exercisable on the effective date of the optionee's termination. In the event of
termination of the optionee's employment for cause, all of the optionee's
outstanding options shall be forfeited.
 
SERIES C OPTIONS
 
     Options under this series are available for grant to nonemployee directors.
The options are generally exercisable one-third per year on a cumulative basis
beginning on the first anniversary of the option date. The options expire on the
seventh anniversary of the option date. In the event the optionee ceases to be a
director, options shall be exercisable to the extent they are exercisable on the
effective date of the optionee's ceasing to be a director.
 
SERIES D OPTIONS
 
     Options under this series are available for grant to officers and other
employees. The options are generally exercisable one-third per year on a
cumulative basis beginning on the first anniversary of the option date. The
options expire on the seventh anniversary of the option date. In the event of
termination of the optionee's employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent
 
                                      F-17
<PAGE>   47
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
they are exercisable on the effective date of the optionee's termination. In the
event of termination of the optionee's employment for cause, all of the
optionee's outstanding options shall be forfeited.
 
     A summary of changes in outstanding options during the years ended March
31, 1997 and 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                                                 WEIGHTED
                                                                                 AVERAGE
                                                                    EXERCISE     EXERCISE
                                                       OPTIONS        PRICE       PRICE
                                                      ---------   -------------  --------
<S>                                                   <C>         <C>   <C>       <C>
March 31, 1996......................................         --             --       --
  Granted...........................................  1,772,820   $3.25-$14.00    $3.43
  Canceled..........................................    (14,524)   3.25            3.25
  Exercised.........................................         --             --       --
                                                      ---------
March 31, 1997......................................  1,758,296    3.25- 14.00     3.44
  Granted...........................................    400,100    5.19- 14.25     9.28
  Canceled..........................................    (64,068)   3.25- 14.00     5.97
  Exercised.........................................     (2,679)   3.25            3.25
                                                      ---------
March 31, 1998......................................  2,091,649    3.25- 14.25     4.48
                                                      =========
Shares exercisable as of March 31, 1998.............    114,123    3.25- 14.00     3.57
                                                      =========
Shares available for future grants..................    395,672
                                                      =========
</TABLE>
 
     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, 1998 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>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Risk-free interest rate.....................................  5.7-5.9%   6.5-7.0%
Expected dividend yield.....................................        0          0
Expected lives (in years)...................................      4-9    2.5-7.8
Expected volatility.........................................    78.84      50.53
</TABLE>
 
     The total value of options at March 31, 1998 and 1997 was computed as
approximately $5,141,000 and $17,989,000, respectively, which would be amortized
on a pro forma basis over the vesting period of the options. If the Company had
accounted for the Plan in accordance with SFAS No. 123, the Company's net income
and basic and diluted net income per share would be decreased by the following
pro forma amounts on an annual basis (net of tax):
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------   ----------
<S>                                                           <C>        <C>
Net income, as reported.....................................  $672,000   $2,142,000
Basic net income per share..................................      0.03         0.13
Diluted net income per share................................      0.03         0.12
</TABLE>
 
                                      F-18
<PAGE>   48
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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, 1998:
 
<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                                       ----------------------------------   ----------------------
                                                    WEIGHTED
                                                     AVERAGE     WEIGHTED   EXERCISABLE   WEIGHTED
                                                    REMAINING    AVERAGE       AS OF      AVERAGE
                                       NUMBER OF   CONTRACTUAL   EXERCISE    MARCH 31,    EXERCISE
RANGE OF EXERCISE PRICES                SHARES        LIFE        PRICE        1998        PRICE
------------------------               ---------   -----------   --------   -----------   --------
<S>                                    <C>         <C>           <C>        <C>           <C>
$ 3.25-$ 4.28........................  1,680,799       6.4        $ 3.25      110,728      $ 3.25
  4.28-  5.70........................     16,700       6.8          5.19           --          --
  5.70-  7.13........................    180,000       6.8          6.27           --          --
  7.13-  8.55........................        200       6.3          8.06           --          --
  8.55-  9.98........................        300       7.0          9.17           --          --
 11.40- 12.83........................    138,650       6.0         11.75           --          --
 12.83- 14.25........................     75,000       7.0         14.00        3,395       14.00
                                       ---------       ---        ------      -------      ------
                                       2,091,649       6.5        $ 4.48      114,123      $ 3.57
                                       =========       ===        ======      =======      ======
</TABLE>
 
     In September 1996, the Company entered into a management shares agreement
"Management Shares Agreement") with Centre Partners Management LLC, the Centre
Entities, and those executive officers who either: (i) have been awarded options
pursuant to the Plan; (ii) have been awarded shares of common stock; or (iii)
have purchased shares of common stock from the Company (the "Management
Holders"). Pursuant to the Management Shares Agreement, Centre Partners
Management LLC, on behalf of the Centre Entities, has "bring along rights"
pursuant to which it has the right to require the Management Holders to sell a
pro rata portion of their shares in connection with a sale to an unaffiliated
third party of 5% or more of the common stock held by the Centre Entities. The
Management Holders have similar "tag along" rights pursuant to which they can
participate in a sale by the Centre Entities of 5% or more of the outstanding
shares of common stock to an unaffiliated third party. The Centre Entities also
have agreed to assist the Management Holders in registering proportionate
amounts of the common stock held by such Management Holders if the Centre
Entities exercise any rights to register common stock under a registration
rights agreement, which granted Centre Entities certain demand registration
rights exercisable on no more than ten occasions as well as certain "piggyback'
registration rights. The Management Shares Agreement terminates: (i) with
respect to the Centre Entities, at such time as they hold less than 10% of the
outstanding shares of common stock; and (ii) ten years from the date of the
agreement, if not sooner terminated.
 
7. INCOME TAXES
 
     The significant components of income tax expense are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                              ------------------------
                                                               1998     1997     1996
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Current:
Federal income tax expense..................................  $3,046   $6,844   $5,686
Foreign income tax expense..................................     172      529      385
State income tax expense....................................     234      611      442
Deferred income tax (benefit) expense.......................     440     (625)      52
                                                              ------   ------   ------
                                                              $3,892   $7,359   $6,565
                                                              ======   ======   ======
</TABLE>
 
                                      F-19
<PAGE>   49
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A reconciliation of recorded income taxes with the amount computed at the
statutory rate is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                              ------------------------
                                                               1998     1997     1996
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Tax at statutory federal rate...............................  $2,422   $6,895   $6,774
State taxes, net of federal income tax benefit..............     128      389      404
Research and development tax credit.........................      --       --     (100)
Foreign sales corporation benefit...........................    (294)    (516)    (639)
Nondeductible recapitalization expenses.....................      --      350       --
Acquired in-process research and development charge.........   1,360       --       --
Other.......................................................     276      241      126
                                                              ------   ------   ------
          Total.............................................  $3,892   $7,359   $6,565
                                                              ======   ======   ======
</TABLE>
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and liabilities are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                                 MARCH 31,
                                                              ---------------
                                                               1998     1997
                                                              ------   ------
<S>                                                           <C>      <C>
Inventory reserves..........................................  $  380   $  532
Accrued liabilities.........................................     569      379
Warranty reserve............................................     245      315
Deferred revenue............................................     156      106
Other.......................................................    (300)     159
                                                              ------   ------
          Net deferred tax asset -- current.................  $1,050   $1,491
                                                              ======   ======
Foreign net operating loss carryforward.....................  $1,065   $   --
                                                              ------   ------
          Deferred tax asset -- long-term...................  $1,065   $   --
                                                              ======   ======
</TABLE>
 
     The Company recorded a deferred tax asset of $1,065,000, in connection with
the acquisition of Simtran, related to the net operating loss carryforwards of
Simtran of approximately $3.4 million. These net operating loss carryforwards
expire in 2002. The Company's management has determined that it is more likely
than not that the Company will be able to fully utilize the deferred tax assets.
 
8. CONCENTRATION OF REVENUES
 
     Most of the Company's customers to date have been in the public sector of
the United States ("U.S."), including the federal, state and local governments,
and in the public sectors of a number of other countries. Approximately 40.8% of
the Company's revenues for fiscal 1998 was attributable to sales to military
authorities in the U.S., 11.7% were attributable to sales to law enforcement
authorities in the U.S. and 46.0% was attributable to sales to military and law
enforcement authorities internationally. Sales to public-sector customers are
subject to a multiplicity of detailed regulatory requirements and public
policies. Such contracts may be conditioned upon the continuing availability of
public funds, which in turn depends upon lengthy and complex budgetary
procedures, and may be subject to certain pricing constraints. Moreover, U.S.
government contracts and those of many international government customers may
generally be terminated for a variety of factors when it is in the best
interests of the government. There can be no assurance that these factors or
others unique to government contracts will not have a material adverse effect on
the Company's future results of operations and financial condition.
 
                                      F-20
<PAGE>   50
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     For the year ended March 31, 1998, the Company's five largest customers
accounted for approximately 60.7% 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, 1998, 1997, and 1996:
 
<TABLE>
<CAPTION>
                                                                    AGGREGATE   PERCENT
                                                                    REVENUES    OF TOTAL
      MAJOR CUSTOMERS                                                (000'S)    REVENUES
      ---------------                                               ---------   --------
<S>   <C>                                                           <C>         <C>
1998  U.S. Marine Corps...........................................   $20,994      28.5%
      Italian Air Force...........................................     8,926      12.1
1997  U.S. Marine Corps...........................................    44,802      49.3
1996  U.S. Marine Corps...........................................    17,371      26.5
      Royal Netherlands Army......................................     8,279      12.7
      U.S. Army...................................................     6,610      10.1
</TABLE>
 
     At March 31, 1998 and 1997, the Company had approximately $9,260,000 and
$7,581,000, respectively, in outstanding accounts receivable related to revenues
recognized from major customers for the related year. In addition,
approximately, $12.7 million of the March 31, 1998 accounts receivable was due
from three international customers, of which approximately $7.7 million was
secured by letters of credit.
 
     Given the nature of the Company's contracts, revenues attributable to
specific customers are likely to vary from year to year, and a significant
customer in one year may not be a significant customer in a subsequent year. In
order to reach its growth objectives, the Company will be required to seek
contracts from new domestic and international customers as well as orders from
existing customers for additional types of simulated firearms or increased
quantities of previously ordered systems and simulated weapons. A significant
decrease in demand by or the loss of one or more significant customers could
have a material adverse effect on the Company's results of operations or
financial condition.
 
     The type of government contracts awarded to the Company in the future may
affect its financial performance. A number of the Company's contracts have been
obtained on a sole-source basis, while others, including its largest current
contract (Contract 2014 with the U.S. Marine Corps), were obtained through a
competitive bidding process. The extent to which the Company's contracts and
orders are obtained through a competitive bidding process rather than as
sole-source contracts may affect the Company's profit margins. The contracts
obtained by the Company in the future may also be cost reimbursement-type
contracts rather than fixed-price contracts, which may not take into account
certain costs of the Company such as interest on indebtedness. There can be no
assurance that changes in the type of government contracts and other contracts
entered into by the Company in the future will not have a material adverse
effect on future results of operations or financial condition of the Company.
 
     A significant portion of the Company's sales are made to customers located
outside the U.S., primarily in Europe and Asia. In fiscal 1998, 1997 and 1996,
46.0%, 31.3% and 43.3% of the Company's revenues, respectively, were derived
from sales to customers located outside the U.S. The Company expects that its
international customers will continue to account for a substantial portion of
its revenues in the near future. Sales to international customers may be subject
to political and economic risks, including political instability, currency
controls, exchange rate fluctuations and changes in import/export regulations
and tariff rates or imposition of economic sanctions. 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
 
                                      F-21
<PAGE>   51
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
by international customers or in foreign currency exchange losses. In certain
cases, the Company has reduced certain of the risks associated with
international contracts by obtaining bank letters of credit to support the
payment obligations of its customers and/or by providing in its contracts for
payment in U.S. dollars.
 
9. COMMITMENTS AND CONTINGENCIES
 
OPERATING LEASES
 
     The Company leases its manufacturing and operating facilities and office
equipment under operating leases with terms in excess of one year. Rental
expense under noncancelable operating leases was approximately $755,000,
$743,000 and $552,000 for the years ended March 31, 1998, 1997, and 1996,
respectively.
 
     At March 31, 1998, future minimum payments under noncancelable operating
leases were as follows (in thousands):
 
<TABLE>
<S>                                                           <C>
1999........................................................  $  995
2000........................................................     972
2001........................................................     978
2002........................................................     863
2003........................................................     626
Thereafter..................................................   2,938
                                                              ------
                                                              $7,372
                                                              ======
</TABLE>
 
GOVERNMENT AGENCY REVIEW
 
     The Company is subject to review and regulation by various government
agencies as a result of the nature of its business involving the import and
export of firearms.
 
EMPLOYMENT AGREEMENT
 
     In September 1996, the Company entered into an employment agreement with
its president and chief executive officer. The amount of this contract is not
material to the Company's financial position.
 
LEGAL
 
     The Company is involved in various legal actions arising in the normal
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Company's financial
position or results of operations.
 
                                      F-22
<PAGE>   52
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
 
     The Company operates in one industry segment -- the manufacture, sale, and
service of small and supporting arms training simulators. The Company sells its
products throughout the world and operates primarily in the U.S. Export sales
are handled through F.A.T.S. Foreign Sales Corporation and, to a lesser extent,
through certain other subsidiaries. Geographic financial information on
international sales is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED MARCH 31,
                                                            ---------------------------
                                                             1998      1997      1996
                                                            -------   -------   -------
<S>                                                         <C>       <C>       <C>
International sales:
  Europe..................................................  $25,404   $22,302   $26,252
  Asia....................................................    5,719     5,008     1,165
  Canada..................................................    1,574       745       224
  Other...................................................    1,135       398       687
                                                            -------   -------   -------
          Total...........................................  $33,832   $28,453   $28,328
                                                            =======   =======   =======
</TABLE>
 
11. THE RECAPITALIZATION
 
     In connection with the Recapitalization and prior to the Offering:
 
     - The Company effected a 100,000-for-one stock split, resulting in
       49,800,000 shares of Class A common stock outstanding and owned by THIN
       International.
 
     - The Company sold a total of 11,165,241 shares of Class A common stock and
       Class B nonvoting common stock to the Centre Entities for $36 million
       (the "Stock Sale"). The shares of Class B non voting common stock were
       subsequently converted to Class A common stock.
 
     - The Company obtained $116 million in borrowings (including certain
       warrants) under the NationsBank Credit Agreement and the Bridge Notes
       (collectively, the "Borrowings") (Note 5). Proceeds from the Borrowings
       and the Stock Sale were then used to repurchase 46,832,022 shares of
       common stock from THIN International for approximately $151.9 million, of
       which $15 million was placed in escrow for up to two years pending the
       occurrence of certain events as defined in the escrow agreement. The
       repurchased shares were canceled by the Company. A contingent payment of
       $19.3 million in cash was made to THIN International upon consummation of
       the Offering.
 
     - The Company also sold 232,333 shares to management at fair market value,
       granted 36,852 shares to the new president, and granted stock options for
       1,742,834 shares at fair market value (Note 6).
 
     As a result of the Recapitalization as described above, THIN International
retained approximately 20.6% of the outstanding shares of the Company and the
Centre Entities owned approximately 77.5% of the Company prior to the Offering.
As a result of the Offering and as of March 31, 1997, THIN International
retained approximately 14.5% of the outstanding shares of the Company and the
Centre Entities owned approximately 54.7% of the Company.
 
                                      F-23
<PAGE>   53
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following unaudited pro forma information reflects the effects of the
Recapitalization and the use of the proceeds of the Offering to repay debt for
the years ended March 31, 1997 and 1996 as if these transactions had occurred on
April 1, 1995:
 
<TABLE>
<CAPTION>
                                                              PRO FORMA FOR THE
                                                               RECAPITALIZATION
                                                               AND THE OFFERING
                                                              ------------------
                                                                1997      1996
                                                              --------   -------
                                                                 (UNAUDITED)
<S>                                                           <C>        <C>
Net income..................................................  $13,560    $9,026
Diluted net income per share................................     0.62      0.42
</TABLE>
 
     The pro forma information for the Recapitalization and the Offering
includes the effects of the Recapitalization, and the sale of 6,000,000 shares
of common stock in the Offering and application of $51.2 million of the proceeds
of the Offering to repay indebtedness incurred in the Recapitalization,
resulting in a net interest expense, including amortization of deferred
financing costs, of $5.7 million for the years ended March 31, 1997 and 1996,
less the related income tax effect. The pro forma net income and earnings per
share data do not include approximately $1.2 million of expenses related to the
Recapitalization incurred in fiscal 1997, as well as an extraordinary loss of
approximately $3.3 million, net of tax, incurred upon repayment of indebtedness
with the proceeds from the Offering, as such expenses will not have a continuing
impact on operations. The extraordinary loss was comprised of (1) approximately
$566,000, net of tax, recorded as a discount against the Bridge Notes for the
fair value of the warrants attached to the Bridge Notes (Note 5); (2)
approximately $825,000, net of tax, which relates to a fee in connection with
the Bridge Notes; and (3) approximately $2 million, net of tax, related to the
write-off of capitalized transaction fees on the Bridge Notes and a pro rata
portion of capitalized transaction fees on the Tranche A Loan and Tranche B
Loan. The pro forma information may not be indicative of what results of
operations would have been had the Recapitalization and the Offering actually
occurred at the beginning of the respective periods.
 
12. SUBSEQUENT EVENTS
 
     On April 1, 1998, the Operating Subsidiary acquired the outstanding stock
of Dart International, Inc. ("Dart"), a Colorado-based hunter and sports
simulation company, in exchange for 257,577 Class A common shares of the
Company. Dart has an installed base of over 250 systems. Its current products
include an interactive shooting system for entertainment and amusement, an
archery system and a combination archery firearm system.
 
     On April 24, 1998, 1,694,569 shares of the Company's common stock were
exchanged from Class A shares (voting) to Class B shares (nonvoting) by the
Centre Entities.
 
     The Company has been actively participating in a competitive bidding
process for the proposed U.S. Army Engagement Skills Trainer ("EST") program, a
U.S. military procurement award anticipated to be at least as large as the
Company's current U.S. Marine Corps Contract 2014. On May 14, 1998, the Company
received notification on behalf of the U.S. Army that its proposal in response
to the ongoing competition had been excluded from further consideration. On June
2, 1998, the Company filed an action in the United States Court of Federal
Claims to protest this decision, and to obtain an injunction against any award
of the EST contract until the Court can rule on the Company's protest. As part
of this action, the Company has requested that the Court order the procurement
authority to continue its consideration of the Company's proposal and to engage
in meaningful discussions with the Company. Although the Company intends to
pursue this matter vigorously, there can be no assurance that the Court will
grant the relief requested. Furthermore, even if the Company is successful in
securing the right to continue in the competitive bidding process, there can be
no assurance that the Company would ultimately be successful in securing the EST
contract award. In view of
 
                                      F-24
<PAGE>   54
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the Company's substantial completion of Marine Corps Contract 2014 and the more
limited scope of other U.S. military opportunities, the failure to secure an
award of the U.S. Army EST contract could have a material adverse effect on the
Company's future revenues from the U.S. military, particularly as compared with
the U.S. military revenues in fiscal 1997, and the Company's financial position,
liquidity and results of operations. To support the Company's objectives of
increasing revenues, the Company had developed its infrastructure during the
last several years in expectation that the resulting increase in expense would
be offset by additional revenues. In response to developments concerning the
Army EST procurement process and possible related impact on related business
opportunities, the Company announced on June 24, 1998 that it would take a
restructuring charge of approximately $900,000 for costs incurred in the first
quarter fiscal 1999 related to a workforce reduction and other measures. In
addition, the Company has agreed to a revision of certain financial covenants
under its senior credit facility which will result in incurrence of certain
additional interest costs.
 
     On June 26, 1998, the Company amended the NationsBank Credit Agreement to
provide for an increase in interest rates and for a temporary relaxation of
certain restrictive financial covenants. These covenant changes were based on
the Company's current business outlook. The Company currently has borrowings of
$12 million and has outstanding letters of credit of approximately $1.7 million
under the $25 million revolving credit facility.
 
                                      F-25
<PAGE>   55
 
                        FIREARMS TRAINING SYSTEMS, INC.
                                AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                         MARCH 31, 1998, 1997 AND 1996
 
<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, 1998:
  Allowance for doubtful accounts..................     $100         $--            $--           $100
Fiscal year ended March 31, 1997:
  Allowance for doubtful accounts..................       75          25             --            100
Fiscal year ended March 31, 1996:
  Allowance for doubtful accounts..................       51          24             --             75
</TABLE>
 
                                       S-1
<PAGE>   56
 
                                   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 June 29, 1998.
 
                                          FIREARMS TRAINING SYSTEMS, INC.
 
                                          By:      /s/ PETER A. MARINO
                                            ------------------------------------
                                                      Peter A. Marino
                                             President, Chief Executive Officer
                                                         and Director
                                               (Principal Executive Officer)
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     Each person whose signature appears below constitutes and appoints Peter A.
Marino and Emory O. Berry, 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 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>
                      SIGNATURE                                      TITLE                    DATE
                      ---------                                      -----                    ----
<C>                                                    <S>                                <C>
                 /s/ PETER A. MARINO                   President, Chief Executive         June 29, 1998
-----------------------------------------------------    Officer and Director (Principal
                   Peter A. Marino                       Executive Officer)
 
                 /s/ EMORY O. BERRY                    Chief Financial Officer and        June 29, 1998
-----------------------------------------------------    Treasurer (Principal Financial
                   Emory O. Berry                        and Accounting Officer)
 
                /s/ CHARLES N. BOWEN                   Secretary                          June 29, 1998
-----------------------------------------------------
                  Charles N. Bowen
 
                /s/ ROBERT F. MECREDY                  Executive Vice President           June 29, 1998
-----------------------------------------------------
                  Robert F. Mecredy
 
                 /s/ LESTER POLLACK                    Chairman of the Board and          June 29, 1998
-----------------------------------------------------    Director
                   Lester Pollack
 
               /s/ WILLIAM J. BRATTON                  Director                           June 29, 1998
-----------------------------------------------------
                 William J. Bratton
 
                /s/ GILBERT F. DECKER                  Director                           June 29, 1998
-----------------------------------------------------
                  Gilbert F. Decker
</TABLE>
 
                                       V-1
<PAGE>   57
 
<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                    DATE
                      ---------                                      -----                    ----
<C>                                                    <S>                                <C>
                 /s/ CRAIG I. FIELDS                   Director                           June 29, 1998
-----------------------------------------------------
                   Craig I. Fields
 
                 /s/ FRANK S. JONES                    Director                           June 29, 1998
-----------------------------------------------------
                   Frank S. Jones
 
                /s/ JONATHAN H. KAGAN                  Director                           June 29, 1998
-----------------------------------------------------
                  Jonathan H. Kagan
 
                 /s/ SCOTT PEREKSLIS                   Director                           June 29, 1998
-----------------------------------------------------
                   Scott Perekslis
 
                  /s/ PAUL J. ZEPF                     Director                           June 29, 1998
-----------------------------------------------------
                    Paul J. Zepf
</TABLE>
 
                                       V-2