<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

      (MARK ONE)

         [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
                  MARCH 31, 2001

                                       OR

         [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-21773


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

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


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

       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 27, 2001: $3,193,990 (based on 10,303,192 shares of
non-affiliates Class A common stock outstanding at $0.31 per share; the last
sale price on the Over-The-Counter Bulletin Board ("OTC:BB") on June 27, 2001)

    As of June 27, 2001, there were issued and outstanding 70,153,139 shares of
Class A Common Stock, par value $0.000006 per share.


                                     Page 1
<PAGE>   2


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                                     PART I

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


ITEM 1.  BUSINESS

RESTRUCTURE TRANSACTION

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

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

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

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

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

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

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

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

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

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


                                     Page 2
<PAGE>   3

CHANGE OF CONTROL

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

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


(1) Form 13-D's filed by the first four listed entities below on September 6,
2000 indicate that the following additional entities affiliated with the
respective named party also claim beneficial ownership of such entity's shares:
(a) Bank of America, N.A.: Bank of America Corporation and NB Holdings
Corporation; (b) BHF (USA) Capital Corporation: ING Groep NV, BHF Bank
Aktiengesellschaft, and BHF (USA) Holdings, Inc.; and (c) First Source Financial
LLP: Dominion Resources, Inc., Dominion Capital, Inc., Virginia Financial
Ventures, Inc., and N.H. Capital, Inc.

(2) The foregoing shares are registered in the names of various of the Centre
Entities and were received as a result of the acquisition by such entities of
the senior obligations held by one member of the original Lender group.

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


COMPANY OVERVIEW

         Over its 17-year history, FATS(R) has developed over 200 types of
simulated weapons, manufactured and delivered over 30,000 simulated weapons,
developed over 1,000 training scenarios, and has delivered over 4,000 simulators
to 50 countries. FATS continues to be a world leader in the development and
production of interactive simulation systems designed to provide training for
and in the use of small and supporting arms for dismounted and mounted military
operations, and judgmental and use of force for law enforcement and military
peacekeeping activities. The Company has broadened its array of products to
accommodate the current tactics, training and equipment available to both law
enforcement and military communities. Examples include the provision of
simulators and courseware to support indirect fire, less than lethal weapon
applications, and multiple room engagements. Every system features embedded
capabilities to support customer authoring of scenarios and comprehensive
performance evaluation. Keeping pace with national and international concerns,
FATS has added significant improvements to courseware and software that focus on
situations that require extraordinary judgment - including operations in peace
keeping/making, crowd control and hostage negotiations. Additional emphasis has
been placed on night operations in all environments - in most cases allowing the
customers to utilize their organic night vision equipment.

         FATS software and hardware technologies have evolved along with
advances in the computer industry. Recognizing that commercial technological
capabilities are moving faster than any one company can replicate, the Company
takes advantage of commercially available off the shelf ("COTS") components that
ensure reuse and upgrade capability as well as commonality and the ability to
integrate with other simulation systems. This philosophy seeks to provide each
customer the best technical


                                     Page 3
<PAGE>   4

and economical solutions for its training needs while providing options for life
cycle management of their systems. FATS also partners with each customer to
ensure that each training solution is complete, integrated and functional from
the embedded technology and courseware to the unique language requirements. The
goal is to ensure that each simulated firearm or weapons system is integrated
and compatible with the customer's training programs and replicates precise
weapon ballistic data, desired environmental effects, and target damage realism.
The Company has focused its sales efforts for small arms simulators primarily in
the U.S. and international military and law enforcement market through its
principal facilities near Atlanta, Georgia. Larger gunnery simulation systems
are developed and manufactured by its Canada based subsidiary, Simtran
Technologies, located in Montreal, Canada. Simtran contracts to develop and
deliver four unique products: an air defense missile trainer; an appended
armored vehicle crew trainer; a stand-alone armored vehicle crew trainer: and,
an appended light armored vehicle crew trainer. Other smaller subsidiaries
located in the United Kingdom, the Netherlands, Singapore and Australia provide
sales, service and limited manufacturing support.


INDUSTRY OVERVIEW

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

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

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

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


PRODUCTS

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


                                     Page 4
<PAGE>   5

         Simulators. The major simulator products encompass Law Enforcement
Judgmental Trainers, Military Small Arms Trainers, Indirect Fire Trainers,
deployable appended and standalone Armored Vehicle Trainers, Missile Trainers,
Naval Shipboard Trainers (including large bore cannons), Live Fire systems, and
Sportsman Archery and Firearms Handling Trainers. Hardware and software
components have been standardized across multiple FATS product lines, to ensure
that system compatibility in maximize and supportability requirements are
minimized and reasonable. The Company has the capability to utilize many means
to deliver visual imagery including laser disc, DVD and computer-generated
imagery. Images can be displayed on standard computer monitors or on large
screens ranging from 10 to 50 feet and surround screen up to 150x45-degrees.

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

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

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

         Weaponry. FATS has fielded over 200 types of simulated weapons with
features ranging from stand-alone weapons using simple laser inserts to fully
sensored weapons that detect user behavior by measuring data collected from butt
pressure, cant of the firearm, trigger pressure, and the actual dispersion of
the rounds. Fully sensored weapons with recoil are available with backpacks
allowing the student to move more freely than the tethered versions. In the
Company's history over 30,000 FATS simulated weapons have been sold.

         Simtran. Simtran offers four unique products: a hand held/shoulder
launched anti-armor missile trainers ("EVIGS/TVIGS"); a stand-alone classroom
armored vehicle crew trainer ("CCGT"); an air defense crew missile trainer
("JDT"); an appended armored vehicle crew trainer. Simtran is also under
contract to upgrade the EVIGS system to include thermal imagery. Simtran's
primary focus is on heavy weapons/systems for the military and scenarios are
developed and tailored to the customer and are provided in the medium
(interactive video, CGI, Dynamic CGI) requested. Simtran's engineering group
seeks to control obsolescence and sustain all systems throughout their life
cycle. The Company believes the market is not as substantial as once thought and
is now in decline.

         Dart. The Company believes Dart's product line of video simulation
technology to be a part of the shooting sports industry, which includes portable
and mobile firearms and archery applications. Dart plays a role in hunter and
sportsman development and training. In FY 2001, the Company consolidated
operations of the stand-alone Dart International, Inc. facility in Colorado into
a product line of FATS, Inc., based in Suwanee, GA.


                                     Page 5
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TARGET MARKETS

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

<TABLE>
<CAPTION>
                                    Actual                           Actual                          Actual
                                     FY01                             FY00                            FY99
                           -------------------------        ------------------------        -------------------------
                            Sales               %            Sales               %            Sales               %
                           -------            -----         -------            -----         -------            -----
<S>                        <C>                <C>           <C>                <C>           <C>                <C>
International              $21,875             52.7%        $27,419             70.5%        $35,615             64.2%
U.S. Military               11,224             27.0%          4,268             11.0%          9,507             17.1%
U.S. Law Enforcement         7,419             17.9%          5,560             14.3%          7,868             14.2%
Hunter / Sports                983              2.4%          1,642              4.2%          2,524              4.5%
                           -------            -----         -------            -----         -------            -----
Total                      $41,501            100.0%        $38,889            100.0%        $55,514            100.0%
                           =======            =====         =======            =====         =======            =====
</TABLE>


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

         For fiscal 2001, 52.7% 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 have been the primary reasons for the adoption of
simulation for small and supporting arms training by U.S. military authorities.
The relatively high costs of live fire training considering the use of
ammunition, wear and tear on weapons, the need to transport soldiers and
equipment to the firing range and legal requirements for remediation of
environmental damage to the firing range encourages military forces to use
simulation to ensure proper readiness. Moreover, according to budget estimates
of the U.S. Department of Defense ("DOD") for the Government's fiscal 1999 and
2000, certain elements of the U.S. armed forces have accumulated a substantial
shortfall relative to desired inventory levels of ammunition, which shortfall
has provided an impetus to certain organizations within the U.S. armed forces to
adopt or expand simulation training.

         While all the U.S. military forces have embraced the use of simulation,
each major branch of the U.S. military is at a different stage of implementation
The U.S. Marine Corps has adopted simulation as a fundamental part of its small
arms training activities. In fiscal years 1990, 1995 and again 2000, through
competitive bidding, the Company was awarded contracts by the U.S. Marine Corps
for the supply of small and supporting arms simulators. The U.S. Army has also
purchased systems under GSA, competitive awards and the Company's contract with
the U.S. Marine Corps while the U.S. Air Force has purchased systems from the
Company through the procedures of the U.S. General Services Administration
("GSA"). The Company believes that it has been the primary supplier of
interactive small and supporting arms simulation systems to the U.S. Marine
Corps, the U.S. Air Force and the U.S. Army. The past year has seen a
significant growth in support of the U.S. Army in Europe where the Company now
maintains and supports simulators in support of the Army's Deployed Operational
Group. The Company is part of a contractor team that was selected for a
multi-year contract to support the U.S. Army


                                     Page 6
<PAGE>   7

Engagement Skills Trainer ("EST") procurement with ECC International as prime
contractor and the Company as its sole provider of weapon simulators.

         For fiscal 2001, 27.0% of the Company's total revenues and 57.2% of the
Company's U.S. revenues were attributable to sales to U.S. military authorities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

         For fiscal 2001, 17.9% of the Company's total revenues and 37.8% of the
Company's U.S. revenues were attributable to sales to U.S. law enforcement
authorities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

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

         For fiscal 2001, 2.4% of the Company's total revenues were attributable
to sales in the hunter and sports training component of the market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."


SALES AND MARKETING

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

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


                                     Page 7
<PAGE>   8

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


CUSTOMERS

         The Company's principal customers historically have been in the public
sector of the U.S., including the federal, state and local governments, and in
the public sectors of a number of other countries. Approximately 52.7% of the
Company's revenues for fiscal 2001 were attributable to sales to military and
law enforcement authorities internationally, 27.0% were attributable to sales to
military authorities in the U.S. and 17.9% were attributable to sales to law
enforcement authorities in the U.S. Sales to public sector customers are subject
to a multiplicity of detailed regulatory requirements and public policies. Such
contracts may be conditioned upon the continuing availability of public funds,
which in turn depends upon lengthy and complex budgetary procedures, and may be
subject to certain pricing constraints. Moreover, U.S. government contracts and
those of many international government customers may generally be terminated for
a variety of factors when it is in the best interests of the government. There
can be no assurance that these factors or others unique to government contracts
will not have a material adverse effect on the Company's future results of
operations and financial condition.

         The following table lists certain of the Company's customers in fiscal
2001 in each of its principal market components:


<TABLE>
<CAPTION>
       U.S. MILITARY                   U.S. LAW ENFORCEMENT                     INTERNATIONAL
       -------------                   --------------------                     -------------
       <S>                             <C>                                      <C>

       U.S. Air Force ANG              Ontario Police College                   Carabinieri - Italian Police

       U.S. Air Force Reserves         South Carolina Criminal Justice System   Singapore Army

       U.S. Army                       Texas Department of Public Safety        British Ministry of Defense
</TABLE>

         In fiscal 2001, the Company's five largest customers accounted for
approximately 34.9% of the Company's revenues, with no customer accounting for
more than 10% of revenues. In fiscal 2000, the Company's five largest customers
accounted for approximately 58.2% of the Company's revenues, with the Canadian
Army and Australian Army accounting for approximately 27.7% and 13.6%,
respectively. No other customer accounted for more than 10% of revenues in
either period. Given the nature of the Company's contracts, revenues
attributable to specific customers are likely to vary from year to year, and a
significant customer in one year may not be a significant customer in a
subsequent year. In order to reach its growth objectives, the Company will be
required to seek contracts from new domestic and international customers as well
as orders from existing customers for additional types of simulated firearms or
increased quantities of previously ordered systems and simulated weapons. A
significant decrease in demand by or the loss of one or more significant
customers could have a material adverse effect on the Company's results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 8 of Notes to
Consolidated Financial Statements.


RESEARCH AND DEVELOPMENT

         The Company engages in the research and development (R&D) of new and
enhanced simulation and training technology using internally generated funds.
Electrical and mechanical R&D expenditures totaled $4.8 million, $4.0 million
and $4.0 million in fiscal 2001, 2000, and 1999, respectively. The Company's R&D
efforts are divided into four separate disciplines: electronics, mechanical,
training, and audio-visual. The continued success of the Company will depend on
its ability to incorporate in its products changing technologies in such areas
and to develop and introduce new technology that meets the increasingly
sophisticated training needs of the Company's customers. Although the Company
continuously pursues research and development, there can be no assurance that it
will be successful in adapting technology in a timely fashion.

         The role of mechanical R&D is to design and develop specialized
assemblies as required for specific training scenarios per customer needs.
Within this discipline are motion platforms training stations which
realistically simulate the movement of


                                     Page 8
<PAGE>   9

various land, sea, and air vehicles. Also, the development of specialized system
packages as well as electrode/mechanical camera and lens drives controlling
flexible lighting environments, which expand and enhance training scenarios.

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

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

         Training R&D focuses on the interpretation and translation of customer
training requirements into quantifiable objectives and the development of
simulation programs to meet those objectives. The 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 who have pioneered the
use of multi-screen projection in small arms simulation.


MANUFACTURING OPERATIONS

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

         Weapons manufacturing involves the production of simulated firearms and
non-lethal simulators by either modifying actual firearms and other devices into
simulators or assembling simulators from kits manufactured to the Company's
specifications by a variety of outside sources. The assembly process encompasses
the fitting of modified weapons or kits with the Company's pneumatic and
electrical components, followed by the functional testing of the completed
assembly. The combined weapon manufacturing activities in the U.S. and the U.K.
have a capacity of 400 simulated firearms per month on a single-shift basis. As
with systems manufacturing, this capacity can readily be expanded to 700 by
using additional shifts and/or by acquiring additional facilities and
workstations.


PRODUCT SUPPORT


                                     Page 9
<PAGE>   10

         The Company has established a worldwide customer service network
consisting of personnel at its Suwanee, Georgia headquarters near Atlanta,
Georgia and a Field Service Office on the West Coast. The Company's
subsidiaries, subcontractors and agents provide worldwide support. Accessories,
parts, service, system upgrades/enhancements and training are available through
the 24-hour customer service hotline, or through the customer service electronic
mail, either direct or through the Company's web site. The Company's
headquarters, and the Company's U.K., Netherlands, Singapore and Australian
subsidiaries, maintains an inventory of repair parts, tools, test equipment, and
trained technicians to respond to customer requirements. Simtran maintains a
fully equipped service department to support its individual product lines and is
equipped and trained to support the full Company product line in Canada.
Technical assistance is available through the FATS Helpdesk hotline. The Company
seeks to provide customer service as quickly as possible after notification by
the customer. In addition to its traditional service role, the Company's service
department administers a U.S. Government-owned inventory of spare components.
This assures that when a U.S. Marine Corps or U.S. Army customer experiences a
failure, they are returned to service within 24 to 48 hours by express shipping
a spare component from this inventory. This same concept has been applied
successfully to support the British Ministry of Defense, the Royal Netherlands
Land Army, the Belgian Army, the Swiss Army, the Canadian Department of National
Defense, the Australian Department of Defense and the Singapore Military through
local subsidiaries.


PROPRIETARY OPERATING SYSTEM; RAW MATERIALS AND SUPPLIERS

         The Company currently purchases from numerous suppliers on both a
competitive bid and long-term contract basis. The Company's current products use
a Windows-based operating system; however, some of the Company's earlier model
simulators use a software operating system known as OS-9 which is an operating
system developed and owned by Microware Corporation. The Company has licensed
the OS-9 system from Microware on a non-exclusive, royalty-paying basis for a
term currently expiring October 31, 2001. The Company has begun negotiations to
extend the license; however, the Company does not believe that the loss of its
OS-9 license would have a material adverse effect on the future conduct of its
business operations and financial condition. The Company believes that there are
viable alternative sources for all of its raw materials. In addition, the
Company has a sophisticated machine shop in which it can convert actual weapons
into simulated weapons and produce certain weapon and simulator parts. This
ability provides the Company with the flexibility to produce a large portion of
its principal components if they become unavailable or it becomes economically
advantageous to do so.


BACKLOG

         As of March 31, 2001, the Company had a backlog of approximately $55.4
million compared with $25.8 million as of March 31, 2000. Management expects
that approximately $41.6 million of backlog will be delivered in fiscal 2002.
Revenue from sales of standard products is recorded when title transfers, which
is typically upon shipment. Revenue from development programs under contract is
recorded on the percentage-of-completion method of accounting, measured on the
basis of costs incurred to estimated total costs, which approximates contract
performance to date (see Note 3 to the accompanying consolidated financial
statements). Contracts with U.S. and other governments may generally be
terminated by the customer, in whole or in part, for default or convenience if
such termination would be in the best interest of the customer. Accordingly,
there can be no assurance that the Company's backlog will result in future
revenues. However, these contracts generally provide for reimbursement of actual
cost incurred through the date of termination.


COMPETITION

         The recent increase in sales and acceptance of small arms simulation
products has brought about an increase in competition from both domestic and
international companies. The Company competes with divisions or subsidiaries of
larger companies solely dedicated to simulation for sales of the Company's small
and supporting arms simulation products, which currently include indirect fire,
air defense and armored vehicles. Principal among the competitors for military
business are: CAE Invetron Ltd., a U.K. division of Thales; Short Brothers, a
division of Bombardier; Simtech, a subsidiary of TADIRAN; Solatron, a subsidiary
of Lockheed Martin; and ECC International. In the U.S. law enforcement and
commercial component of the market, the Company's principal competitors include,
among others, Advanced Interactive Systems and I.E.S., Incorporated. The
international law enforcement component of the market has also seen an increase
in competition from small European companies. The growing awareness of
simulation budgets, combined with the competitive nature of the


                                    Page 10
<PAGE>   11

marketplace, have contributed to the formation of teaming arrangements by
competitors that present potent competitive challenges. Many of FATS' current
and potential competitors have significantly greater financial, technical and
marketing resources than the Company.


EMPLOYEES

         As of March 31, 2001, the Company and its subsidiaries employed 327
employees, of which 215 were employed at FATS, Inc., 53 were employed at
Simtran, 34 were employed at FATS-Australia, and 25 were employed by
FATS-Europe. None of the Company's employees are represented by unions. The
Company considers relations with its employees to be satisfactory.


GOVERNMENT CONTRACTS AND REGULATION

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

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

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

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

         The Company has a license from the U.S. Treasury Department's Bureau of
Alcohol, Tobacco and Firearms ("ATF") to import destructive devices and certain
other materials. This license also authorizes the Company to be a dealer in
regulated


                                    Page 11
<PAGE>   12

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

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


ITEM 2.  PROPERTIES

<TABLE>
<CAPTION>
                                                  OWNED OR        SQUARE           LEASE          MONTH OF
   FACILITY                LOCATION                LEASED         FOOTAGE       EXPIRATION       EXPIRATION
   --------                --------               --------        -------       ----------       ----------
<S>                 <C>                           <C>             <C>           <C>              <C>

  FATS, Inc.           Suwanee, Georgia            Leased          98,100           2008             May
  FATS, LTD.        Lincolnshire, England          Leased          12,000           2003             July
  FATS, B.V.        Waardenburg, Netherlands       Leased           4,800           2002            August
    Simtran            Montreal, Canada            Leased          38,800           2001            August
FATS Australia       Lavington, Australia          Leased          10,005           2005           February
</TABLE>


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


ITEM 3.  LEGAL PROCEEDINGS

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


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

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


                                    Page 12
<PAGE>   13



                                     PART II

ITEM 5.  MARKET COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The common stock of Firearms Training Systems, Inc. is traded on the
Over-The-Counter Bulletin Board (OTC:BB) under the symbol FATS. Prior to March
8, 2000, the Company's common stock was traded on the NASDAQ Small Cap Market.
The listing of the Company's stock was moved from the NASDAQ Small Cap Market as
the Company's stock price performance fell below NASDAQ criteria for market
capitalization and minimum share price value. During the period August 23, 2000
to October 31, 2000 the Company's stock for the Second and Third Quarters of
fiscal year 2001 was not eligible for listing on the OTC:BB and quotations
listed were obtained from the web site: http://chart.yahoo.com, based on
information supplied by Commodity Systems, Inc. (CSI). As of June 27, 2001,
there were 172 holders of record of the Company's common stock. The Company
believes its shares are beneficially held by several thousand additional
stockholders based on broker dealer demand for proxy materials in 2000.

         The table shows the high and low closing prices of the common stock
during the period from April 1, 1998 through the year ended March 31, 2001:

                           Quarterly Stock Price Range

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

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

                  FISCAL 2001
                ----------------------
                First Quarter                     0.59             0.14
                Second Quarter                    0.55             0.09
                Third Quarter                     0.34             0.08
                Fourth Quarter                    0.27             0.13
</TABLE>


         The Company currently intends to retain any earnings to finance
operations and expansion and, therefore, does not anticipate paying any
dividends on the common stock in the foreseeable future. Future dividends, if
any, will be determined by the Board of Directors of the Company and will depend
upon the Company's earnings, capital requirements, financial condition, level of
indebtedness and other factors deemed relevant by the Board of Directors. The
Company's Credit Agreement prohibits the payment of any dividends in respect of
the common stock. The closing price of Firearms Training Systems, Inc. (FATS)
common stock on June 27, 2001 as reported by OTC:BB, was $0.31 per share.


                                    Page 13
<PAGE>   14


         RECENT SALES OF UNREGISTERED SECURITIES

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

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

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

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

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

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

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

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

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


                                    Page 14
<PAGE>   15


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, 2001,
which financial statements have been audited by Arthur Andersen LLP. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth below and the financial statements of the
Company included elsewhere in this Report and referred to in the "Index to
Financial Statements" (together with the notes and other reports relating to
such financial statements).

<TABLE>
<CAPTION>
                                                      FISCAL YEARS ENDED MARCH 31,
                                   ---------------------------------------------------------------------
                                     2001            2000            1999           1998          1997
                                   --------        --------        --------        -------       -------
<S>                                <C>             <C>             <C>             <C>           <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue                      $ 41,501        $ 38,889        $ 55,514        $73,547       $90,806
Gross Margin                          7,442           8,200          19,977         39,680        46,592
Gross Margin %                         17.9%           21.1%           36.0%          54.0%         51.3%
Operating Expenses                 $ 19,370        $ 19,275        $ 16,975        $26,553       $19,713
Non-Recurring Expenses                    0            (143)            870              0             0
Operating (Loss) Income             (11,928)        (11,075)          3,002         13,127        26,879
Interest Expense, Net                 4,444           8,056           7,316          5,905         6,069
Other Expense                           257             325             400             97         1,110
Net (Loss) Income                   (14,108)        (18,902)         (3,107)         3,233         9,014
Basic Earnings Per Share              (0.26)          (0.91)          (0.15)          0.16          0.55
Diluted Earnings Per Share            (0.26)          (0.91)          (0.15)          0.15          0.50

BALANCE SHEET DATA:
Working Capital                      15,893          21,020          27,010         18,907        20,350
Total Assets                         32,173          41,575          60,150         56,380        42,121
Total Debt                           43,990          73,772          72,200         63,000        58,600
Stockholders' Deficit                54,086          48,201          29,633         28,231        31,378
</TABLE>


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

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

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


COMPANY OVERVIEW

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


                                    Page 15
<PAGE>   16

weaponry; and commercial hunter and sports activities. The Company derives most
of its revenue from the sale of its products, which include simulators,
simulated firearms, scenarios, integrated software, auxiliary equipment, and
service operations. The Company receives commitments for its products and
services from its customers largely through purchase orders and contracts
principally with governmental entities and law enforcement agencies. Revenues
are recognized primarily upon shipment with milestone billings related to
contracts recorded as deferred revenue and recognized primarily as units are
delivered or on a percentage of completion method for contracts in which
significant customized systems development is required and completion and
delivery exceeds one year. Service revenues are comprised of revenues from
individual purchase orders, which are recognized as services are provided, and
revenues from extended service contracts, which are recognized over the life of
the service contracts.

         Although the Company sells its products and services to a large number
of military and law enforcement agencies both in the U.S. and abroad, the top
five customers accounted for approximately 34.9%, 58.2% and 62.3% of the
Company's revenues in fiscal 2001, 2000, and 1999, respectively. A significant
increase or decrease in demand by a major customer can have a substantial effect
on the Company's revenues and cash flow. Revenue from any one customer can vary
materially from period to period. In addition, a significant decrease in the
overall level or allocation of defense spending in the U.S. or other countries
could have a material adverse effect on the Company's future results of
operations and financial condition. Significant portions of the Company's
revenue are derived from customers located outside the U.S., primarily in
Canada, Europe and Asia. During fiscal 2001, 2000, and 1999, approximately
52.7%, 70.5%, and 64.2%, respectively, of the Company's revenues were derived
from sales to international customers. The Company expects that sales to
international customers will continue to account for a significant percentage of
future revenues, as the worldwide acceptance for simulation-based training
systems continues to grow and U.S. military orders become less significant.
Sales to international customers may be subject to political and economic risks,
including political instability, currency controls, exchange rate fluctuations
and changes in import/export regulations and tariff rates. In addition, various
forms of protectionist trade legislation have been and in the future may be
proposed in the U.S. and certain other countries. The Company, from time to
time, experiences significant delays in receipt of payment for the delivery of
products from certain international customers. Any resulting changes in current
tariff structures or other trade and monetary policies could adversely affect
the Company's sales to international customers. Certain of the Company's
international sales are denominated in foreign currencies. The Company does not
currently hedge these foreign currency transactions, since it believes its
exposure to foreign exchange rate fluctuations has not been material.

         Cost of revenues generally includes materials, direct labor, overhead,
and other direct costs. Operating expenses include selling, general and
administrative expenses, R&D costs, bid and proposal expenses, plus depreciation
and amortization. Selling, general and administrative expenses consist primarily
of salaries, wages, benefits, international agents' commissions, and marketing
expenses. R&D expenses are largely comprised of salaries, wages, benefits,
prototype equipment and project supplies. The Company expenses all R&D costs in
the period in which they are incurred and has funded all of its R&D efforts over
the past 17 years primarily through internally generated funds.


RESTRUCTURE TRANSACTION

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

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

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

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

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


                                    Page 16
<PAGE>   17

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

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

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

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

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


RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
                                                                          FISCAL YEAR ENDED MARCH 31,
                                                                     ------------------------------------
                                                                     2001            2000            1999
                                                                     ----            ----            ----

                     <S>                                             <C>             <C>             <C>
                     Total Revenue                                    100%            100%            100%
                     Gross Margin                                      18%             21%             36%
                     Operating Expenses:
                         Selling, General & Administrative             27%             28%             18%
                         Research & Development                        11%             10%              7%
                         Depreciation and Amortization                  6%              6%              4%
                         Nonrecurring restructuring charge              0%              0%              2%
                         Impairment of Assets                           3%              5%              0%
                                                                     ----            ----            ----
                             Total Operating Expense                   47%             50%             31%
                                                                     ----            ----            ----
                     Operating (Loss) Income                          -29%            -28%              5%
                     Interest Expense, net                             11%             21%             13%
                     Other Expense, net                                 1%              1%              1%
                                                                     ----            ----            ----
                     Net Loss Before Tax                              -40%            -50%             -9%
                     Benefit for Tax                                   -3%             -2%             -3%
                     Accretion of Preferred Stock                       1%              1%              0%
                     Net Loss                                         -34%            -49%             -6%
                     Adjusted EBITDA(1)                               -21%            -18%             10%
</TABLE>


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


                                    Page 17
<PAGE>   18


         FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO THE FISCAL YEAR ENDED
MARCH 31, 2000

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

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

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

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

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

         Other Expense, net. Net interest expense totaled $4.4 million, or 10.7%
of revenues for fiscal 2001 as compared to net interest expense of $8.1 million,
or 20.7% for fiscal 2000. Other income (expense), net for fiscal 2001 primarily
includes a charge of $0.2 million related to foreign currency exchange cost
associated with international revenues. In conjunction with the Restructure
Transaction (see Footnote 4 of the Notes to the Consolidated Financial
Statements) completed in August 2000, the Company's outstanding indebtedness was
exchanged for new borrowings, common stock, and mandatory redeemable preferred
stock. The sum of all future principal and interest payments due under the new
agreements exceeded the carrying value of the old debt, and thus no gain was
recognized on the transaction in accordance with SFAS No. 15. The excess of the
carrying amount of the old borrowings exceeded the fair value of the new
borrowings, common stock, and mandatory redeemable preferred stock and was
allocated proportionately to the new debt and preferred stock. During the year,
the excess amount allocated to debt was reduced by approximately $2.0 million,
resulting in a corresponding reduction of interest expense. Interest expense
will continue to be recognized at a much lower effective interest rate until the
debt matures in March of 2003.

         Benefit from Income Taxes. The effective tax rate increased to 6.3% of
income before income taxes for fiscal 2001 compared to 4.2% of income before
taxes for fiscal 2000. The Company is no longer recording a tax benefit for the
majority of


                                    Page 18
<PAGE>   19

its operating losses due to uncertainty of future realization. However, the
Company recorded a $1.0 million tax benefit for fiscal year 2001, which was
related to an anticipated refund due to the Company for carrybacks of net
operating losses.

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

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

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

         FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO THE FISCAL YEAR ENDED
MARCH 31, 1999

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

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

         Total Operating Expenses. Total operating expenses increased $2.3
million, or 13.5% to $19.3 million for fiscal 2000 as compared to $17.0 million
for fiscal 1999. Total operating expenses as a percentage of revenues increased
to 49.6% for fiscal 2000 from 30.6% for fiscal 1999. Selling, general and
administrative expenses increased as a percentage of revenue to 28.2% for fiscal
2000 from 18.4% for fiscal 1999. The increase in selling, general, and
administrative expenses was primarily due to the inclusion of certain expenses
related to management changes within the organization. Expenses for fiscal year
2000 included approximately $1.0 million related to costs associated with the
resignation agreements of the former President and CEO and Vice President of
Sales and Marketing. Selling, general, and administrative expenses also
increased as a result of higher volume of international agents' commission based
sales and an increase in D&O insurance. Research and development costs remained
at the same level of $4.0 million for fiscal year 2000 and 1999. In fiscal year
2000, management analyzed the goodwill of Dart in accordance with SFAS No. 121
and wrote-off the remaining $1.9 million balance of its goodwill due to a
limited potential in the market because of a softened product demand.


                                    Page 19
<PAGE>   20

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

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

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

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

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


QUARTERLY RESULTS OF OPERATIONS

         The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning April 1, 1999 and
ending March 31, 2001. 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
                                                                  (In thousands, except per share data)
                                     --------------------------------------------------------------------------------------------
                                                   Fiscal Year 2001                               Fiscal Year 2000
                                     --------------------------------------------   ---------------------------------------------
                                      June 30      Sept 30    Dec 31     Mar 31       June 30     Sept 30     Dec 31     Mar 31
                                      --------     -------    -------   --------      --------    -------     -------    -------

<S>                                   <C>          <C>        <C>       <C>           <C>         <C>         <C>        <C>
Revenues                              $ 10,271     $ 7,368    $ 9,109   $ 14,753      $ 15,196    $ 8,328     $ 9,920    $ 5,445
Gross Margin                             3,191      (2,137)       860      5,528         5,451      1,511       2,415     (1,177)
Gross Margin %                              31%        -29%         9%        37%           36%        18%         24%       -22%
Operating Expense                      $ 4,148     $ 3,806    $ 5,907    $ 5,509       $ 3,627    $ 5,168     $ 4,014    $ 6,466
                                      --------     -------    -------   --------      --------    -------     -------    -------
Operating (Loss) Income                   (957)     (5,943)    (5,047)        19         1,824     (3,657)     (1,599)    (7,643)
Interest Expense, Net                    2,346       2,225         64       (191)        1,783      1,937       1,866      2,470
Other Expense                               22         284         (6)       (43)          243        104          60        (82)
                                      --------     -------    -------   --------      --------    -------     -------    -------
Pre-Tax (Loss) Income                   (3,325)     (8,452)    (5,105)       253          (202)    (5,698)     (3,525)   (10,031)
Tax (Benefit) Provision                   (116)         54         54     (1,044)          (69)    (1,949)     (1,022)     2,232
                                      --------     -------    -------   --------      --------    -------     -------    -------
Net (Loss) Income                       (3,209)     (8,506)    (5,159)     1,297          (133)    (3,749)     (2,503)   (12,263)
Accretion of Preferred Stock                66          74         57         63            62         63          64         65
Gain on extinguish. of Pref. Stock           0      (1,729)         0          0             0          0           0          0
                                      --------     -------    -------   --------      --------    -------     -------    -------
Net (Loss) Income applicable to         (3,275)     (6,851)    (5,216)     1,234          (195)    (3,812)     (2,567)   (12,328)
   common stockholders
Earnings per common share
   Basic                                 (0.16)      (0.13)     (0.07)      0.02         (0.01)     (0.18)      (0.12)     (0.59)
   Diluted                               (0.16)      (0.13)     (0.07)      0.02         (0.01)     (0.18)      (0.12)     (0.59)
</TABLE>


                                    Page 20
<PAGE>   21


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


LIQUIDITY AND CAPITAL RESOURCES

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

         The Company is subject to several business and market risks. The risks
are (1) the Company's financial position has significantly improved as a result
of the Restructure Transaction both in terms of a reduction in total amount and
a deferral of maturity dates of its debt, but it must continue to achieve its
current business revenue targets in the current fiscal year in order to
discharge its interest obligations in a timely manner and expand its business
opportunities and (2) the Company must receive new contracts for production to
be delivered in the current fiscal year in order to achieve its revenue
projections. Thus, the Company's continuation as a going concern is dependent
upon its ability to (a) continue production work on existing contracts; (b)
obtain new contracts for future delivery; and (c) generate sufficient cash flow
to meet working capital obligations on a timely basis. Management's plans in
response to the above objectives are (1) continue to reinforce cost control
measures to assure operations are conducted at the lowest cost possible at all
locations; (2) remain focused on revenue maximization of standard products with
higher margin potentials within the domestic and international law enforcement
business segment; (3) minimize capital expenditures in non-strategic areas; (4)
continue to improve inventory turns and lower inventory investment and; (5)
continually negotiate more favorable terms and conditions to reduce extended or
prolonged payment cycles.

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

         As of March 31, 2001, the Company had working capital of $15.9 million
compared to $21.0 million as of March 31, 2000. The Company's spending for its
fiscal 2001 capital expenditures was $0.7 million. Such expenditures include
leasehold improvements, computer equipment and software, marketing product
demonstration equipment, and manufacturing machinery.

         The Company had essentially no change in cash and cash equivalents in
fiscal 2001 compared to a net decrease of $0.9 million and a net decrease of
$0.6 million in fiscal 2000 and 1999, respectively. For fiscal 2001, the
Company's operating activities used cash of approximately $0.2 million. The
Company's investing activities essentially had no change as it liquidated $0.7
million in restricted cash, which had been used to secure contract performance
guarantees, thus offsetting $0.7 million in capital expenditures. The Company
generated $0.2 million from financing activities in fiscal 2001.


RECENT ACCOUNTING PRONOUNCEMENTS

         In 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 will be effective for the Company's fiscal year ending March 31, 2002.
Management does not believe that the adoption of this pronouncement will have a
material impact on the Company's financial position or results of operations.


                                    Page 21
<PAGE>   22

         In 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues. The
Company adopted SAB No. 101 during fiscal year 2001. The adoption of SAB No. 101
did not have a material impact on its consolidated results of operations,
financial position, or cash flows.

         In 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21,
"Accounting for Multiple Element Revenue Arrangements," which addresses (1)
determining whether an arrangement contains multiple components or deliverables
that should be evaluated separately for revenue recognition purposes; (2) how
consideration should be allocated, if separate accounting for a deliverable is
appropriate; and (3) the accounting for direct costs when it is concluded that
those costs are not associated with any single deliverable or are associated
with a specific deliverable that does not qualify as a separate unit. In April
2001, the EITF reached a tentative consensus on this issue. The Company is
currently evaluating the impact that EITF 00-21 will have on its financial
position and results of operations.

         In 2001, the Financial Accounting Standards Board issued a revised
exposure draft entitled "Business Combinations and Intangibles Assets --
Accounting for Goodwill." This exposure draft, if adopted as proposed, would
eliminate the amortization of goodwill against earnings. Instead, goodwill would
be written down against earnings only in the periods in which the recorded value
is more than its fair value. The FASB is expected to issue a final statement on
business combinations and intangible assets in June 2001. The impact of this
statement may be significant if it is issued as currently proposed, as the
Company would no longer recognize goodwill amortization expense. As of March 31,
2001, the Company has unamortized goodwill of approximately $1.2 million.
However, the Company would be required to test goodwill for impairment under new
standards, which could have an adverse effect on future results of operations if
impairment occurs.


YEAR 2000 ISSUES

         During the Year 2000 the Company did not experience any significant
disruptions to our business nor are we aware of any significant Year
2000-related disruptions that impacted our customers and suppliers. The Company
continues to monitor its systems and operations and is reasonably assured that
no significant business interruptions have, nor will, occur as a result of any
Year 2000-related issues.


ITEM 7(A)  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to a number of market risks in the ordinary
course of business, such as, foreign currency exchange risk in the fulfillment
of international contracts and interest rate risk associated with non trading
assets utilized to manage the interest rate cost of the outstanding long term
liabilities. The majority of the Company's contracts are denominated in U.S.
dollars, thus reducing foreign exchange risk. The Company's net exposure to
interest rate risk consists of its floating rate senior debt and working capital
borrowings which are tied to changes in the prime rate. Assuming a 10% increase
in interest rates, interest expense, net related to the senior debt and working
capital borrowings for fiscal year 2001 would have increased by approximately
$0.1 million.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Report of Independent Public Accountants, the Consolidated
Financial Statements, Financial Statement Schedule and Notes to Consolidated
Financial Statements that appear on pages F-1 through F-21 and S-1 of this Form
10-K are incorporated herein by reference.


                                    Page 22
<PAGE>   23

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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

         The following table sets forth the name, age, and position of each
director and executive officer as of March 31, 2001. The Board currently
consists of seven directors, Robert F. Mecredy having resigned as of May 16,
2001. The Company divides the Board of Directors into three classes, each of
which is elected for a three-year term. Executive officers of the Company are
elected by the Board of Directors annually and hold office until the next annual
meeting of stockholders or until they sooner resign or are removed from office
by the Board of Directors.

<TABLE>
<CAPTION>
NAME                                  AGE                               POSITION
--------------------------------    ------    --------------------------------------------------------------
<S>                                 <C>       <C>
Randy Sugarman                        59      Chairman of the Board of Directors (and Interim President
                                              and CEO since May 11, 2001)
William J. Bratton                    53      Director
Mary Ann Gilleece                     60      Director
Ronovan Mohling                       59      Director
Scott Perekslis                       33      Director
Ronald C. Whitaker                    53      Director
Robert F. Mecredy - RESIGNED          54      President, Chief Executive Officer and Director
John A. Morelli                       52      Vice President, Chief Financial Officer, Chief Operating
                                              Officer and Treasurer
</TABLE>


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


ROBERT F. MECREDY
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
FIREARMS TRAINING SYSTEMS, INC.

         Robert F. Mecredy, age 54, served as President, Chief Executive
Officer, and Director from October 1,1999 to May 16, 2001. Prior thereto, Mr.
Mecredy served as Executive Vice President from July 18, 1997 to September 30,
1999, as Vice President, Domestic from 1996 to 1997, Director of the Company
from 1993 to 1996, as Director of Domestic Sales and Marketing from 1994 to 1996
and as Director of U.S. Military Marketing from 1990 to 1994.

         On May 16, 2001, Mr. Mecredy resigned from his positions as President,
Chief Executive Officer and Director. Mr. Randy Sugarman, Chairman of the Board
of Directors, has replaced Mr. Mecredy as Interim President and CEO until a
successor is named.


SCOTT PEREKSLIS
DIRECTOR
CENTRE PARTNERS MANAGEMENT LLC

         Scott Perekslis, age 33, has served as a Director of the Company since
July 31, 1996. Mr. Perekslis also served as a Vice President of the Company from
July 31, 1996 through July 18, 1997. Since 1995, Mr. Perekslis has been a
Principal of Centre Partners Management LLC and a Principal of Corporate
Advisors, L.P. From 1991 to 1995, Mr. Perekslis was an Associate of Corporate
Advisors, LP. Mr. Perekslis also serves as a director of Hyco International,
Inc. and KIK Corporation Holdings, Inc. Mr. Perekslis is a member of the
Compensation Committee of the Board of Directors.


                                    Page 23
<PAGE>   24

R. C. WHITAKER
PRESIDENT AND CEO
STRATEGIC DISTRIBUTION

         R.C. Whitaker, age 53, was named as a Director of the Company in
October 2000 to fill a vacancy that was due to resignation of a director
following the Restructure Transaction in FY 2001. Mr. Whitaker has been with
Strategic Distribution Inc. since September 2000. Prior to joining SDI, he was
an Operating Partner with Pegasus Investors (a private equity funds group) from
1999 to 2000. Previous operational positions were President and CEO of Johnson
Worldwide Associates (a sporting goods manufacturer) from 1996 to 1999,
President and CEO of EWI, Inc. (an automotive tier 1 supplier) from 1995 to
1996, Chairman, President and CEO of Colt's Manufacturing Company (a designer
and producer of military firearms) from 1992 to 1995, and President & CEO of
Wheelabrator Corporation (an industrial equipment manufacturer). In addition to
Strategic Distribution Inc., he serves on the Board of Directors of Weirton
Steel Corporation, Precision Navigation, Inc., and Code-Alarm Inc. as well as a
member of the Board of Trustees for The College of Wooster. Mr. Whitaker is a
member of the Audit Committee of the Board of Directors.


Class II directors were elected in fiscal 1999 and their present terms expire
with the Annual Meeting of Stockholders in 2001; Mr. Mohling was named as a
director in October 2000 to fill a vacancy that was due to resignation of a
director following the Restructure Transaction in FY 2001:


WILLIAM J. BRATTON
PRESIDENT
THE BRATTON GROUP LLC

         William J. Bratton, age 53, has served as a Director of the Company
since September 17, 1996. He has been the President of The Bratton Group LLC
since 1999. From 1997 to 1999, he served as the President and Chief Operating
Officer of CARCO Group, Inc. From 1996 to 1997, Mr. Bratton served as Vice
Chairman of First Security Services Corporation and President of its new
subsidiary First Security Consulting, Inc. From 1994 to 1996, Mr. Bratton served
as Police Commissioner of the City of New York. In 1991, he served as
Superintendent in Chief of the Boston Police Department and was appointed Police
Commissioner of the Boston Police Department in 1993. From 1990 to 1991, Mr.
Bratton served as Chief of the New York City Transit Police. Mr. Bratton also
serves as a director of Rite Aid Corporation, First Security Services
Corporation and Smart Cop Corporation. Mr. Bratton is a member of the
Compensation Committee and the Stock Options Sub-Committee of the Board of
Directors.


RONOVAN MOHLING
PARTNER AND PRINCIPAL
CAPITOL PLACES, LLC

         Ronovan Mohling, age 59, was named as a Director of the Company in
October 2000. Mr. Mohling, a Partner and Principal of Capitol Places, LLC (a
private real estate group) since 1998, recently served for ten years with
Bristol-Myers Squibb Company in Europe, the Middle East, and Africa from 1988 to
1998. From 1995 to 1998, he was the Vice President of Business Development,
responsible for acquisitions and divestitures, for the company's Consumer
Medicines Division and, from 1992 to 1995 was President of the Consumer Products
Division with responsibility for the regions of Europe, the Middle East, and
Africa. From 1972 to 1988, Mr. Mohling served in the capacities of President and
Vice-President with Schering-Plough Corporation where he was responsible for
overseeing the company's Consumer Products Division. Mr. Mohling is a member of
the Audit Committee of the Board of Directors.


                                    Page 24
<PAGE>   25


Class III directors were elected in fiscal 2000 and their present terms expire
with the Annual Meeting of Stockholders in 2002; Mr. Sugarman was named as a
director in October 2000 to fill a vacancy that was due to resignation of a
director following the Restructure Transaction in FY 2001 and Ms. Gilleece was
named as a director in March 2001 to replace a vacancy due to the resignation of
Craig I. Fields:


MARY ANN GILLEECE, J.D., L.L.M.
PARTNER
MANATT PHELPS & PHILLIPS LLP

Mary Ann Gilleece, age 60, was named as a Director of the Company in March 2001.
Ms. Gilleece is a Partner in the law firm of Manatt Phelps & Phillips, LLP,
which has offices in Washington, D.C., Los Angeles, Palo Alto, Sacramento,
Mexico City and Monterrey, Mexico. The firm is organized in four business units:
Litigation; Business, Finance, and Real Estate; Government and International
Trade and Policy; and, entertainment, Media, and Intellectual Property.


RANDY SUGARMAN, CPA
MANAGING PARTNER
SUGARMAN & COMPANY, LLP

         Randy Sugarman, age 59, was named as a Director of the Company and as
Chairman of the Board of Directors in October 2000. Randy Sugarman is the
managing partner of Sugarman & Company LLP (Financial Consultants), which he
founded in 1977. Mr. Sugarman is a member of the Compensation Committee. Mr.
Sugarman has replaced Mr. Mecredy, who resigned his positions as President,
Chief Executive Officer and Director on May 16, 2001, on an interim basis until
a successor is named.


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

         John A. Morelli, age 52, has served as Chief Financial Officer and
Treasurer since March 1999. Mr. Morelli was named Chief Operating Officer in
fiscal year 2001. Mr. Morelli previously served as Corporate Controller from
September 1996 to March 1999. Prior to joining the Company, Mr. Morelli served
as Financial Liaison from January 1996 to August 1996 with General Dynamics
during their acquisition of Teledyne Continental Motors, a major weapons defense
contractor. From April 1990 to December 1995, Mr. Morelli served as Division
Controller with Sparton Electronics, Inc., an electronics-manufacturing firm
with the defense industry. From 1979 to 1990, Mr. Morelli served as Controller
for Fairchild-ASD, an aircraft manufacturing & modification company. From 1974
to 1979, Mr. Morelli served as Finance Manager with Fairchild-Republic, an
aircraft manufacturing company.


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:

         Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during the fiscal year ended
March 31, 2001 and Form 5 and amendments thereto furnished to the Company with
respect to such fiscal year, the Company has identified the following persons
who during such fiscal year were beneficial owners of more than 10 percent of
its Class A Common Stock and which failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during such fiscal year, in each
case related to the August 25, 2000 Restructure: (1) although the various
partnerships described herein as the Centre Entities filed a Form 13-G reporting
changes in beneficial ownership of the common stock in connection with the
Restructure, they did not file Form 4's amending previous Form 3's and 4's filed
with respect to the Company to reflect certain changes in their share ownership
as a result of the Restructure; and (2) although the various entities described
herein as Dominion Resources/First Source Financial filed a Form 13-D reporting
acquisition of beneficial ownership of more than 10% of the Class A Common Stock
in connection with the Restructure, they did not file a Form 3 with respect to
acquisition of Class A Common Stock in exchange for certain debt securities in
connection with the Restructure.


                                    Page 25
<PAGE>   26



ITEM 11.  EXECUTIVE COMPENSATION

DIRECTORS' COMPENSATION

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

         Pursuant to the Securities Purchase Agreement dated November 13, 1998
with Centre Capital Investors II, L.P., Centre Partners Coinvestment, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., and Centre Capital Offshore
Investors II, L.P., Messrs. Pollack, Kagan, and Zepf, former directors of the
Company who resigned in connection with the fiscal year 2001 Restructure, and
Mr. Perekslis, who remains a director, all of whom are affiliated with the
Centre Partnerships agreed to receive in lieu of annual director's fees of
$20,000, for each director, options to purchase at $1.03125 per share an
aggregate of 106,700 shares of Class A Common Stock, exercisable in equal
quarterly installments beginning December 31, 1998 which such directors assigned
to Centre Partners Management LLC. As of June 27, 2001, 106,700 shares of Class
A Common Stock are exercisable from this grant.


SUMMARY COMPENSATION TABLE

         The following summary compensation table sets forth information
concerning the annual and long-term compensation earned by the Chief Executive
Officer and each of the other highly compensated executive officers whose annual
salary and bonus during fiscal 2001 exceeded $100,000.

<TABLE>
<CAPTION>
                                                ANNUAL COMPENSATION                        Long Term Compensation
                                 -------------------------------------------------     ------------------------------
                                                                          Other        RESTRICTED       SECURITIES
OFFICER NAME AND                 FISCAL      SALARY       BONUS          Annual           STOCK           UNDERLYING
PRINCIPAL POSITION                YEAR        ( $ )       ( $ )       Compensation      AWARDS ($)      OPTIONS ( # )
------------------                ----        -----       -----       ------------      ----------      -------------
<S>                              <C>         <C>          <C>         <C>               <C>             <C>
Robert F. Mecredy                 2001       200,000            0        5,998(2)               0               0(1)
  President and Chief             2000       160,000            0        5,049(2)               0               0
  Executive Officer - RESIGNED    1999       158,000            0        4,740(2)               0          20,000
                                  1998       155,000      120,000        2,435(2)               0          10,000

John A. Morelli                   2001       125,000            0        3,089(2)               0               0(5)
  Chief Financial Officer &       2000       105,000            0        5,689(2)          18,750          90,000(4)
  Chief Operating Officer         1999        84,950            0        2,482(2)               0          13,000(3)
                                  1998        72,000        6,000        1,170(2)               0           3,000
</TABLE>

(1)      Mr. Mecredy became the Company's President and Chief Executive Officer
         on October 1, 1999. He resigned effective May 16, 2001.

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

(3)      Mr. Morelli had 3,000 options repriced at $3.253 per share during
         fiscal 1999. He was not an executive officer at the time.

(4)      Mr. Morelli received 30,000 grants priced at $0.625 per share during
         fiscal 2000.

(5)      Mr. Morelli assumed the duties of Chief Operating Officer in addition
         to his role as Chief Financial Officer of the Company.


OPTIONS GRANTED IN FISCAL 2001

The following table contains certain information regarding stock options granted
to Executive Officers during fiscal 2001.


                                    Page 26
<PAGE>   27


<TABLE>
<CAPTION>
                                                                                           POTENTIAL REALIZABLE
                        NUMBER OF        % OF TOTAL                                          VALUE AT ASSUMED
                       SECURITIES          OPTIONS        EXERCISE OF                      ANNUAL RATES OF STOCK
                       UNDERLYING        GRANTED TO       BASE PRICE                        PRICE APPRECIATION
                      OPTIONS/SARS      EMPLOYEES IN       ($/SHARE)        EXPIRATION      FOR OPTION TERMS(2)
OFFICER NAME             GRANTED         FISCAL YEAR          (1)              DATE           5%          10%
-------------------  ---------------    -------------   --------------    --------------  ---------    --------
<S>                  <C>                <C>             <C>               <C>              <C>          <C>

Robert F. Mecredy        240,000            19.89%          0.01000         04/01/2007      $ 64,164    $ 88,861
Robert F. Mecredy        480,000            39.77%          0.50000         04/01/2007             0           0

John A. Morelli          150,000            12.43%          0.01000         04/01/2007        40,102      55,538
John A. Morelli          300,000            24.86%          0.50000         04/01/2007             0           0
</TABLE>

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

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

FISCAL YEAR-END OPTION VALUES

         The following table contains certain formation regarding stock options
exercised during the fiscal year and options to purchase common stock held as of
March 31, 2001 by each of the Executive Officers.


<TABLE>
<CAPTION>
                          NUMBER OF SECURITIES UNDERLYING           VALUE OF UNEXERCISED
                              UNEXERCISED OPTIONS AT                IN-THE-MONEY OPTIONS
                                FISCAL YEAR-END                     AT FISCAL YEAR-END(1)
                        -----------------------------------  ----------------------------------
OFFICER NAME              EXERCISABLE       UNEXERCISABLE      EXERCISABLE      UNEXERCISABLE
----------------------  ---------------   -----------------  ---------------  -----------------
<S>                     <C>               <C>                <C>              <C>
Robert F. Mecredy           100,125            832,475              $ 0           $ 43,200

John A. Morelli              65,854            500,106                0             27,000
</TABLE>

(1)      As required by the rules of the Securities and Exchange Commission, the
         value of unexercised in-the-money options is based on the closing sales
         price of the Company's Common Stock on the NASDAQ Stock Markets as of
         the last day of the fiscal year, March 31, 2001, which was $0.19 per
         share.


                                    Page 27
<PAGE>   28


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

OWNERSHIP OF STOCK BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS

         The following table sets forth certain information regarding the
beneficial ownership of Class A Voting Common Stock ("Common Stock") as of June
27, 2001 by: (i) each person (or group of affiliated persons) who is known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each of the Company's directors; (iii) the Company's chief executive
officer and each of the other employees included in the Summary Compensation
Table; and (iv) the Company's current directors and officers as a group. Except
as indicated in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
indicated as being beneficially owned by them.

<TABLE>
<CAPTION>
                                                                             NUMBER OF
                                                                             SHARES OF
                                                                           COMMON STOCK
                                                                           BENEFICIALLY
NAME OF BENEFICIAL OWNER (1)                                                 OWNED (6)            %
----------------------------                                               ------------        ------
<S>                                                              <C>       <C>                 <C>
Bank of America Corporation                                      (1)        12,757,426          18.2%
ING Groep NV                                                     (2)         7,100,391          10.1%
Dominion Resources, Inc. c/o First Source Financial, LLP         (3)         9,467,188          13.5%
U.S. Bank National Association (First Bank, N.A.)                (4)         4,260,375           6.1%
Centre Capital Investors II, LP                                  (5)        21,468,963          29.1%
Centre Partners Coinvestment LP                                  (5)         3,102,072           4.4%
Centre Capital Offshore Investors II, LP                         (5)         4,254,330           6.0%
Centre Capital Tax-Exempt                                        (5)         2,399,949           3.4%
Centre Partners Management LLC                                   (7)        28,229,942          37.7%
Centre Partners II LLC                                           (8)        31,853,626          42.3%
Robert F. Mecredy - RESIGNED                                     (9)           127,502            *
John A. Morelli                                                  (9)           176,132            *
William J. Bratton                                                              21,100            *
Scott Perekslis                                                 (10)             9,005            *
All current directors and executive officers as a group                        333,739           0.5%
</TABLE>

(1)      The address of Bank of America Corporation is 100 North Tryon Street,
         Charlotte, North Carolina. Bank of America is the parent of NB Holdings
         Corporation, which is the parent company of Bank of America, N.A.
         Information regarding ownership of Common Stock included herein is in
         reliance on information set forth in a Form 3 filed on September 6,
         2000 with the Securities Exchange Commission (the "Commission"),
         reflecting ownership as of August 25, 2000, as well as information set
         forth in Schedule 13-D filed on September 6, 2000.

(2)      The address of ING Groep NV is Stravinskylaan 2631, 1077 ZZ Amsterdam,
         The Netherlands. It is the parent company of BHF-Bank
         Aktiengesellschaft, BHF (USA) Holdings, Inc. and BHF (USA) Capital
         Corporation is 590 Madison Avenue, New York City, New York. Information
         regarding ownership of Common Stock included herein is in reliance on
         information set forth in a Form 3 filed on September 6, 2000 with the
         Commission, reflecting ownership as of August 25, 2000, as well as
         information set forth in Schedule 13-D filed on September 6, 2000.

(3)      The address of Dominion Resources, Inc. is 120 Tredegear Street,
         Richmond, Virginia 23219. Dominion Resources is a holding company and
         its subsidiaries include Dominion Capital, Inc., whose subsidiaries
         include Virginia Financial Ventures, Inc. and N.H. Capital, Inc., the
         general partners of First Source Financial, LLP. Information regarding
         ownership of Common Stock included herein is in reliance on information
         set forth in a Schedule 13-D filed on September 6, 2000 with the
         Commission, reflecting ownership as of August 25, 2000.

(4)      The address of U.S. Bank National Association is U.S. Bank Place, 601
         Second Avenue South, Minneapolis, Minnesota. Information regarding
         ownership of Common Stock included herein in reliance on information
         set forth in a Schedule 13-D filed on September 6, 2000 with the
         Commission, reflecting ownership as of August 25, 2000.


                                    Page 28
<PAGE>   29

(5)      The address of Centre Capital Investors II, L.P., Centre Partners
         Coinvestment, L.P., Centre Capital Tax-exempt Investors II, L.P.
         (together with Centre Capital Offshore Investors II, L.P., the "Centre
         Partnerships"), Centre Partners Management LLC ("Centre Management")
         and Centre Partners II, LLC (together with Centre Capital Offshore
         Investors II, L.P., the "Centre Partnerships") is 30 Rockefeller Plaza,
         New York, New York 10020; and the address of Centre Capital Offshore
         Investors II, L.P. is c/o Reid Management, Cedar House, 41 Cedar
         Avenue, Box HM 1179, Hamilton, Bermuda. . Information regarding
         ownership of Common Stock included herein is in reliance on information
         set forth in a Schedule 13-G/A filed on November 27, 2000 with the
         Securities Exchange Commission (the "Commission"), reflecting ownership
         as of August 25, 2000.

(6)      Based on 70,153,139 shares of Common Stock outstanding on June 27,
         2001. Calculation of percentage of beneficial ownership assumes the
         exercise of all options exercisable within 60 days of June 27, 2001
         only by the respective named shareholder.

(7)      Information regarding ownership of Common Stock by the Centre
         Partnerships is included herein in reliance on information provided by
         Centre Management. Pursuant to a Management Agreement, Centre Capital
         Investors II, L.P., Centre Partners Offshore Investors II, L.P. and
         Centre Capital Tax-exempt Investors II, L.P. have delegated voting and
         investment power with respect to the Common Stock beneficially owned by
         them to Centre Management; accordingly, the aggregate security
         ownership of those Centre Partnerships is reflected for Centre
         Management as well.

(8)      As general partner of Centre Partners Coinvestment, L.P. and general
         partner of Centre Capital Investors II, L.P., Centre Partners Offshore
         Investors II, L.P. and Centre Capital Tax-exempt Investors II, L.P.,
         Centre Partners II LLC ("Centre Partners") is reflected as beneficially
         owning the Common Stock owned by those Centre Partnerships. In
         addition, pursuant to certain co-investment arrangements, Centre
         Partners has been delegated voting and investment power with respect to
         an additional 571,181 shares of Common Stock and 57,131 warrants. In
         addition, included within the shares of Common are 5,246,164 warrants
         currently exercisable into shares of Common Stock.

(9)      Messrs. Mecredy and Morelli's beneficial ownership includes exercisable
         options for 106,792 shares and 85,854 shares, respectively. In
         addition, Messrs. Mecredy and Morelli's beneficial ownership includes
         16,800 shares and 8,616 shares, respectively held in a 401(k) plan for
         the benefit of each person as of June 27, 2001, over which each such
         person has been delegated voting and investment power.

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


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

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

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

         (1) The Company issued $504,129 principal amount of Centre senior
secured loans which are pari passu with and secured by the same security as the
Lender senior secured loans in exchange for a portion of the Centre Guarantee
Obligation;

         (2) The Company issued $966,248 principal amount of Centre junior
secured loans which are pari passu with and secured by the same security as the
Lender junior secured loans in exchange for a portion of the Centre Guarantee
Obligation;

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

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

         (5) The Company issued 6,695,212 additional shares of Class A Common
Stock in exchange for the existing Series A Preferred Stock, having a
liquidation value of $3,607,606 held by the Centre Entities and certain
co-investors and amended existing warrants held by the Centre Entities to
purchase 3,246,164 shares of Class A Common Stock at $1.00 per share by
providing for payment of the exercise price in cash rather than the Series A
Preferred Stock, and making a slight adjustment in the original exercise price
of $1.03 per share;


                                    Page 29
<PAGE>   30


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

         (7) The Centre Entities received with respect to their portion of the
secured debt under the senior credit agreement, $2,028,683 principal amount of
senior secured debt, $3,888,309 principal amount of junior secured debt,
3,611.244 shares of Series A Preferred Stock having a liquidation value of
$3,611,244 and 7,100,391 shares of Class A Common Stock which are subject to the
Voting Agreement and letter described under Item 1 Change of Control.


RELATED TRANSACTIONS

         The Company has entered into a consulting agreement with Sugarman &
Company, LLP, a company in which Randy Sugarman is the managing partner and has
an 80% ownership interest. Under the agreement, the consulting company's main
focus is to provide managerial and strategic guidance in accordance with the
terms of the Restructure Agreement. As of March 31, 2001, the Company incurred
consulting fees of $221,000, plus expenses of $51,000, for consulting services
under the agreement. Mr. Sugarman has been recently named as interim CEO and the
extent of his services is likely to increase for the current fiscal year. The
amount expected to be incurred for the current fiscal year has not yet been
determined.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Messrs. Bratton, Perekslis, and Sugarman served as members of the
Company's Compensation Committee during the 2001 fiscal year. While Mr.
Perekslis was a Vice President of the Company through July 18, 1997, none is
otherwise an employee, officer or former employee or officer of the Company or
its subsidiaries.


REPORT ON EXECUTIVE COMPENSATION

         The Compensation Committee has provided the following report:

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


PHILOSOPHY AND COMPONENTS

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

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

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

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

         Base Salary. Base salary is intended to be set at a level that
approximates the competitive amounts paid to executive officers of similar
businesses in structure, size, and industry orientation. Competitive amounts are
determined informally through a review of published compensation surveys and
proxy statements of other companies.

         Incentive Compensation. In accordance with the Company's philosophy of
tying a substantial portion of the overall compensation of its executive
officers to the achievement of specific performance goals, an incentive plan has
been developed


                                    Page 30
<PAGE>   31


for the executive officers. The Company's incentive plan is designed to reward
superior performance with total compensation above competitive levels. On the
other hand, if performance goals are not achieved and the Company suffers as a
result, compensation of affected executive officers may fall below competitive
levels.

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

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


CEO COMPENSATION

         Effective October 1, 1999, the Company appointed Mr. Robert F. Mecredy
as Chief Executive Officer and entered into an employment agreement with Mr.
Mecredy effective April 1, 2000 as a result of the new financial position of the
Company and the opportunity to improve performance of the Company in fiscal 2001
and beyond. The base salary provided to Mr. Mecredy was consistent with what the
Compensation Committee believes is competitive in the Company's industry,
opportunities for bonus compensation were tied to the Company's performance, and
options granted to Mr. Mecredy were subject to vesting over a period of time
consistent in terms of value to its stockholders. Details regarding Mr.
Mecredy's employment agreement can be found filed as Exhibit 10.31 to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter ended September
30, 2000. Mr. Mecredy resigned as CEO effective May 16, 2001.

         Under the terms of his Separation Agreement, Mr. Mecredy will continue
in the Company's employment until 60 days after May 16, 2001 to assist in the
transition of the new management team for an aggregate compensation of $12,500.
In addition, the Company agreed to pay him $61,854.26 for accrued and unused
vacation and an aggregate amount of $200,000 in bi-weekly installments during
the 24 month period following termination of his employment and a further amount
of $37,500. The Company also amended Series F and Series H stock option
agreements, each in the amount of 240,000 shares of common stock so that (1) the
Series F Options (i) remain exercisable until the second anniversary of
termination of employment, and (ii) are terminable for breach of certain
provisions of the Separation Agreement rather than his existing agreements and
(2) the Series H Options: (i) expire on the third rather than the seventh
anniversary of the Option date, (ii) continue to be exercisable after
termination of his employment and (iii) are terminable for breach of certain
provisions of the Separation Agreement rather than his existing agreements.
Further details in connection with this agreement may be found as Exhibit
10.31-04 filed as an Exhibit to this Form 10-K.


                           The Compensation Committee
                           --------------------------
                            William J. Bratton
                            Scott Perekslis
                            Randy Sugarman


                                    Page 31
<PAGE>   32



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

         (a) 1. Financial Statements

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


                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
        <S>                                                                 <C>
        Report of Independent Public Accountants                            F-1


        Consolidated Balance Sheets as of March 31, 2001 and 2000           F-2


        Consolidated Statements of Operations for the Fiscal Years
          Ended March 31, 2001, 2000, and 1999                              F-3


        Consolidated Statements of Changes in Stockholders' Deficit
          for the Fiscal Years Ended March 31, 2001, 2000 and 1999          F-4


        Consolidated Statements of Cash Flows for the Fiscal Years
          Ended March 31, 2001, 2000 and 1999                               F-5


        Notes to Consolidated Financial Statements                          F-6
</TABLE>



2.       Financial Statement Schedule.

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

Schedule II -- Valuation and Qualifying Accounts



3.       Exhibits.

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


<TABLE>
<CAPTION>
   EXHIBIT
   NUMBER                  DESCRIPTION OF EXHIBITS
   ------                  -----------------------
<S>             <C>        <C>

     3.01       --         By-laws of the Company. (filed as Exhibit 3.06 to the
                           Company's Registration Statement No. 333-13105)

     3.02       --         Restated Certificate of Incorporation of the Company,
                           dated December 23, 1996. (filed as Exhibit 3.03 to
                           the Company's Quarterly Report on Form 10-Q for the
                           Fiscal Quarter ended December 31, 1996)

     3.03       --         Certificate of Designation of Series A Preferred
                           Stock of the Company setting forth the powers,
                           preferences, rights, Qualification, limitations and
                           restrictions of the series dated November 13, 1998.
                           (filed as exhibit 3.03 to the Company's Quarterly
                           Report on Form 10-Q for the Fiscal Quarter ended
                           December 31, 1998).
</TABLE>


                                    Page 32
<PAGE>   33


<TABLE>
<S>             <C>        <C>
     3.04       --         Certificate of Amendment to the Certificate of
                           Incorporation of the Company dated (and filed with
                           the Office of the Secretary of State of Delaware on)
                           August 25, 2000.

     3.05       --         Certificate of Designations of Series B Preferred
                           Stock of the Company setting forth the powers,
                           preferences, rights, qualifications, limitations and
                           restrictions of the series dated August 24, 2000
                           (filed with the office of the Secretary of State of
                           Delaware on August 25, 2000).

     9.01       --         Voting and Stock Restriction Agreement dated as of
                           April 1, 2000 among the financial institutions listed
                           on the signature pages thereof and Bank of America,
                           N.A., successor in interest to NationsBank N.A.

     9.02       --         Letter from Bank of America dated August 25, 2000 and
                           signed by the Centre entities named therein and the
                           non-Centre lenders named therein with respect to the
                           Board of Directors of the Company.

   10.01-01     --         Second Amended and Restated Credit Agreement and
                           Partial Exchange Agreement dated as of April 1, 2000,
                           among the Company, FATS, Inc. and Bank of America,
                           N.A., successor in interest to NationsBank, N.A., as
                           Agent and as Issuing Bank, and the Financial
                           institutions parties thereto.

   10.01-02     --         Loan Agreement and Exchange Agreement dated as of
                           April 1, 2000 among the Company, FATS, Inc., the
                           lenders named therein and Centre Capital Investors
                           II, L.P. as Agent.

    10.03       --         Pledge and Security Agreement, dated as of July 31,
                           1996, between the Company and NationsBank, N.A.
                           (South). (filed as Exhibit 10.06 to the Company's
                           Registration Statement No. 333-13105)

    10.04       --         Assignment and Assumption Agreement dated as of
                           January 1, 1997 among the Company, FATS, Inc. and
                           NationsBank N.A. (South). (Filed as Exhibit 10.03 to
                           the Company's Annual Report on Form 10-K for the
                           Fiscal Year ended March 31, 1997)

    10.05       --         Borrower's Consent and Agreement dated as of October
                           15, 1997 between FATS, Inc. and NationsBank N.A.
                           (South). (Filed as Exhibit 10.01 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 1997)

    10.06       --         Pledge Agreement dated as of January 1, 1997 between
                           the Company and NationsBank N.A. (South). (Filed as
                           Exhibit 10.03 to the Company's Annual Report on Form
                           10-K for the Fiscal Year ended March 31, 1997)

    10.07       --         Parent's Consent dated as of October 15, 1997 between
                           the Company and NationsBank N.A. (South). (Filed as
                           Exhibit 10.01 to the Company's Quarterly Report on
                           Form 10-Q for the Fiscal Quarter ended September 30,
                           1997)

   10.09-01     --         Lease, dated May 4, 1993, between the Company and
                           Technology Park/Atlanta, Inc. (filed as Exhibit 10.09
                           to the Company's Registration Statement No.
                           333-13105).

   10.09-02     --         First Amendment to Lease Agreement, dated December
                           21,1993, between the Company and Technology
                           Park/Atlanta, Inc. (filed as Exhibit 10.09 to the
                           Company's Registration Statement No. 333-13105).

   10.09-03     --         Second Amendment to Lease Agreement, dated December
                           21,1995, between the Company and Schneider Atlanta,
                           L.P. (filed as Exhibit 10.10 to the Company's
                           Registration Statement No. 333-13105).

    10.10       --         Management Shares Agreement, dated as of September
                           18, 1996, between the Company and Peter A. Marino,
                           Robert F. Mecredy, Juan de Ledebur and certain other
                           individuals. (filed as Exhibit 10.12 to the Company's
                           Registration Statement No. 333-13105).

    10.11       --         Firearms Training Systems, Inc. Stock Option Plan.
                           (filed as Exhibit 10.13 to the Company's Registration
                           Statement No. 333-13105).

    10.12       --         Stock Option Agreement Series A, dated as of
                           September 18, 1996 between the Company and Peter A.
                           Marino. (filed as Exhibit 10.14 to the Company's
                           Registration Statement No. 333-13105).

   10.12-01     --         Schedule identifying Stock Option Agreements Series A
                           substantially identical in all material respects to
                           Exhibit 10.12.

    10.13       --         Stock Option Agreement Series B, dated as of
                           September 18, 1996 between the Company and Peter A.
                           Marino. (filed as Exhibit 10.15 to the Company's
                           Registration Statement No. 333-13105)

   10.13-01     --         Schedule identifying Stock Option Agreements Series B
                           substantially identical in all material respects to
                           Exhibit 10.13.

    10.14       --         Stock Option Agreement Series C, dated as of
                           September 18, 1996 between the Company and William J.
                           Bratton. (filed as Exhibit 10.16 to the Company's
                           Registration Statement No. 333-13105)

   10.14-01      --        Schedule identifying Stock Option Agreements Series C
                           substantially identical in all material respects to
                           Exhibit 10.14. (filed as Exhibit 10.16.01 to the
                           Company's Registration Statement No. 333-13105)
</TABLE>


                                    Page 33
<PAGE>   34






<TABLE>
   <S>          <C>        <C>
   10.14-02     --         Form of Restricted Stock Award Agreement issued to
                           Mr. Morelli under Item 11, "Executive Compensation,"
                           herein

    10.15       --         Registration Rights Agreement, dated as of July 31,
                           1996, between the Company and the Institutional
                           Holders set forth on Schedule I thereto. (filed as
                           Exhibit 10.17 to the Company's Registration Statement
                           No. 333-13105) (filed as Exhibit 10.18 to the
                           Company's Registration Statement No. 333-13105)

    10.16       --         Registration Rights Agreement, dated as of April 1,
                           2000 among the Company and the Institutional Holders
                           set forth on Schedule I thereto.

    10.17       --         Firearms Training Systems, Inc. Executive Severance
                           Benefit Plan. (filed as Exhibit 10.19 to the Company
                           Registration Statement No. 333-13105)

    10.18       --         Employment Agreement, dated as of September 18, 1996,
                           between the Company and Peter A. Marino. (filed as
                           Exhibit 10.20 to the Company's Registration Statement
                           No. 333-13105)

   10.18-01     --         Resignation Agreement, dated as of September 15,
                           1999, between the Company and Peter A. Marino. (filed
                           as Exhibit 10.29 to the Company's Quarterly Report on
                           Form 10-Q for the Fiscal Quarter ended September 30,
                           1999)

    10.19       --         Form of Agreement to Limit Future Competition entered
                           into with each member of senior management of the
                           Company. (filed as Exhibit 10.21 to the Company's
                           Registration Statement No. 333-13105)

   10.19-01     --         Schedule listing Agreements to Limit Future
                           Competition Substantially identical in all material
                           respects to Exhibit 10.19. (filed as Exhibit 10.21-01
                           to the Company's Registration Statement No.
                           333-13105)

    10.20       --         License Agreement, dated October 31, 1991 by and
                           between Microware Systems Corporation and the
                           Company. (filed as Exhibit 10.23 to the Company's
                           Registration Statement No. 333-13105)

    10.21       --         Warrant to purchase Class B Non Voting Common Stock
                           of the Company dated November 13, 1998. (filed as
                           Exhibit 10.21 to the Company's Quarterly Report on
                           Form 10-Q for the Fiscal Quarter ended Quarter ended
                           December 31, 1998).

    10.22       --         Form of Amended Warrant to Purchase Class A Common
                           Stock of the Company dated August 25, 2000.

    10.23       --         Form of Warrant to Purchase Class A Common Stock of
                           the Company dated August 25, 2000.

    10.24       --         Stock Option Agreement dated as of November 13, 1998
                           between the Company and Centre Partners Management
                           LLC. (filed as Exhibit 10.22 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended December 31, 1998).

    10.25       --         Securities Purchase Agreement dated as of November
                           13, 1998 between the Company and Centre Entities.
                           (filed as Exhibit 10.23 to the Company's Quarterly
                           Report on Form 10-Q for the Fiscal Quarter ended
                           December 31, 1998).

    10.26       --         Agreement among Borrowers and other Borrower
                           Guarantors of the Company, Firearms Training Systems
                           Limited and Firearms Training Systems, B.V. and the
                           Centre Entities dated June 1, 1999. (Filed as Exhibit
                           10.24 to the Company's Annual Report on Form 10-K for
                           the Fiscal Year ended March 31, 1999)

    10.27       --         Securities Exchange and Release Agreement dated as of
                           April 1, 2000 among the investors named therein and
                           the Company.

    10.29       --         Employment Agreement dated as of April 1, 1999,
                           between the Company and John A. Morelli. (Filed as
                           Exhibit 10.26 to the Company's Annual Report on Form
                           10-K for the Fiscal Year ended March 31, 1999)

   10.29-01     --         Amended Employment Agreement dated as of February 18,
                           2000, between the Company and John A. Morelli. (Filed
                           as Exhibit 10.29-01 to the Company's Quarterly Report
                           on Form 10-Q for the Fiscal Quarter ended September
                           30, 2000)

   10.29-02     --         Form of Series F stock option agreement dated as of
                           April 1, 2000 between the Company and John A.
                           Morelli. (Filed as Exhibit 10.29-02 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 2000)

   10.29-03     --         Form of Series G stock option agreement dated as of
                           April 1, 2000 between the Company and John A.
                           Morelli. (Filed as Exhibit 10.29-03 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 2000)

   10.29-04     --         Form of Series H stock option agreement dated as of
                           April 1, 2000 between the Company and John A.
                           Morelli. (Filed as Exhibit 10.29-04 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 2000)
</TABLE>


                                    Page 34
<PAGE>   35






<TABLE>
   <S>          <C>        <C>
    10.31       --         Employment agreement dated as of November 1, 2000
                           between the Company and Robert F. Mecredy. (Filed as
                           Exhibit 10.31 to the Company's Quarterly Report on
                           Form 10-Q for the Fiscal Quarter ended September 30,
                           2000)

   10.31-01     --         Form of Series F stock option agreement dated as of
                           April 1, 2000 between the Company and Robert F.
                           Mecredy. (Filed as Exhibit 10.31-01 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 2000)

   10.31-02     --         Form of Series G stock option agreement dated as of
                           April 1, 2000 between the Company and Robert F.
                           Mecredy. (Filed as Exhibit 10.31-02 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 2000)

   10.31-03     --         Form of Series H stock option agreement dated as of
                           April 1, 2000 between the Company and Robert F.
                           Mecredy. (Filed as Exhibit 10.31-03 to the Company's
                           Quarterly Report on Form 10-Q for the Fiscal Quarter
                           ended September 30, 2000)

   10.31-04     --         Separation and General Release Agreement, dated as of
                           May 16, 2001, between the Company and Robert F.
                           Mecredy including form of amendments to Series F and
                           Series H options agreements.

    21.01       --         Subsidiaries of the Company.

    23.01       --         Consent of Arthur Andersen, LLP

    24.01       --         Power of Attorney (set forth on page V-1).
</TABLE>



         (b) Reports on Form 8-K:

                          None

                          (c) Exhibits.

                          See (a) (3) above.

                          See (a) (2) above.


                                    Page 35
<PAGE>   36



                    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, 2001 and 2000 and the related consolidated statements of operations,
changes in stockholders' deficit, and cash flows for each of the three years in
the period ended March 31, 2001. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.

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

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

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


ARTHUR ANDERSEN LLP

Atlanta, Georgia
May 18, 2001


                                    Page F-1
<PAGE>   37

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                            MARCH 31
                                                                    ---------------------------
                                                                       2001              2000
                                                                    ---------         ---------
<S>                                                                 <C>               <C>
                            ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                           $   1,864         $   1,886
Restricted cash                                                           628             1,342
Accounts receivable, net of allowance of $359 and
  $215 in 2001 and 2000, respectively                                   8,591             6,667
Income taxes receivable                                                   809             1,177
Unbilled receivables                                                    2,835             4,386
Inventories                                                            12,526            16,369
Prepaid expenses and other current assets                               1,117               628
                                                                    ---------         ---------
  Total current assets                                                 28,370            32,455

Property and equipment, net                                             2,647             4,856
Deferred financing costs, net                                               0             2,200
Goodwill, net of accumulated amortization of $3,958 and
  $3,119 in 2001 and 2000, respectively                                 1,156             2,064
                                                                    ---------         ---------
  Total assets                                                      $  32,173         $  41,575
                                                                    =========         =========

            LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable                                                    $   2,902         $   2,413
Accrued liabilities                                                     3,895             4,065
Accrued interest                                                          954             3,273
Deferred revenue                                                        1,910             1,013
Warranty and contracts cost provision - Current                         2,816               671
                                                                    ---------         ---------
  Total current liabilities                                            12,477            11,435

Long-term debt                                                         43,990            73,772
Noncurrent deferred tax                                                   223               319
Warranty and contracts cost provision - Noncurrent                      1,724                 0
Other noncurrent liabilities                                              796               903
                                                                    ---------         ---------
  Total liabilities                                                    59,210            86,429

COMMITMENTS AND CONTINGENCIES (Note 11)
Mandatory redeemable preferred stock (Note 5)                          27,049             3,347

Stockholders' Deficit:
  Class A common stock, $0.000006 par value; 100,000 shares
    authorized, 70,084 and 19,394 shares issued and
    outstanding in 2001 and 2000, respectively                              0                 0
  Class B nonvoting common stock, $0.000006 par value; 6,200
    shares authorized, 0 and 1,695 shares issued and
    outstanding in 2001 and 2000, respectively                              0                 0
Additional paid-in capital                                            122,273           114,592
Stock warrants                                                            613                 0
Unearned compensation                                                       0              (177)
Accumulated deficit                                                  (176,686)         (162,578)
Cumulative foreign currency translation adjustment                       (286)              (38)
                                                                    ---------         ---------
  Total stockholders' deficit                                         (54,086)          (48,201)
                                                                    ---------         ---------
  Total liabilities and stockholders' deficit                       $  32,173         $  41,575
                                                                    =========         =========
</TABLE>

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


                                    Page F-2
<PAGE>   38

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                         MARCH 31, 2001, 2000, AND 1999
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              2001             2000             1999
                                                            --------         --------         --------
<S>                                                         <C>              <C>              <C>
Revenues                                                    $ 41,501         $ 38,889         $ 55,514
Cost of revenues                                              34,059           30,689           35,537
                                                            --------         --------         --------
Gross margin                                                   7,442            8,200           19,977
Operating expenses:
  Selling, general, and administrative expenses               11,086           10,974           10,204
  Research and development expenses                            4,747            3,992            3,963
  Depreciation and amortization                                2,293            2,508            1,938
  Nonrecurring restructuring charge (Note 3)                       0             (143)             870
  Impairment of assets                                         1,244            1,944                0
                                                            --------         --------         --------
      Total operating expenses                                19,370           19,275           16,975

Operating (Loss) Income                                      (11,928)         (11,075)           3,002
Other expense
  Interest income                                                247                0               72
  Interest expense                                            (4,691)          (8,056)          (7,388)
  Other expense, net                                            (257)            (325)            (400)
                                                            --------         --------         --------
      Total other expense, net                                (4,701)          (8,381)          (7,716)

Loss before benefit for income taxes                         (16,629)         (19,456)          (4,714)
Benefit for income taxes                                      (1,052)            (808)          (1,700)
                                                            --------         --------         --------
Loss before accretion of preferred stock                     (15,577)         (18,648)          (3,014)
Accretion of preferred stock                                    (260)            (254)             (93)
Gain on extinguishment of preferred stock                      1,729                0                0
                                                            --------         --------         --------
Net loss applicable to common shareholders                  $(14,108)        $(18,902)        $ (3,107)
                                                            ========         ========         ========

Basic Loss per share                                        $  (0.26)        $  (0.91)        $  (0.15)
Diluted Loss per share                                      $  (0.26)        $  (0.91)        $  (0.15)
Weighted average common shares outstanding - basic            53,643           20,760           20,686
Weighted average common shares outstanding - diluted          53,643           20,760           20,686
</TABLE>

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


                                    Page F-3
<PAGE>   39

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                 CONSOLIDATED CHANGES IN STOCKHOLDERS' DEFICIT
               FOR THE YEARS ENDED MARCH 31, 2001, 2000, and 1999
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                      Class A                   Class B Nonvoting

                                                                       Common                         Common
                                          Comprehensive        -----------------------------------------------------
                                          Income (Loss)          Shares        Amount          Shares         Amount
                                          --------------------------------------------------------------------------
<S>                                       <C>                  <C>             <C>           <C>              <C>
Balance, March 31, 1998                             0          20,415,322         $0                 0         $  0
Net loss                                     $ (3,107)                  0          0                 0            0
Exchange of Class A Voting for Class
B Nonvoting Shares-Centre Entities                  0          (1,694,569)         0         1,694,569            0

Common stock issued in connection
with the Dart acquisition                           0             257,577          0                 0            0

Purchase & retirement of stock                      0             (15,000)         0                 0            0

Compensatory stock options issued                   0                   0          0                 0            0

Common stock issued to Company
Employee Stock 401(k) Plan                          0              56,883          0                 0            0

Foreign currency translation
adjustment                                       (229)                  0          0                 0            0
                                             ----------------------------------------------------------------------
Balance, March 31, 1999                      $ (3,336)         19,020,213          0         1,694,569            0
                                             ========
Net loss                                      (18,902)                  0          0                 0            0

Common stock issued to Company
Employee Stock 401(k) Plan                          0             101,734          0                 0            0

Issuance of restricted stock                        0             272,500          0                 0            0


Amortization of deferred stock-based
compensation                                        0                   0          0                 0            0

Foreign currency translation
adjustment                                        243                   0          0                 0            0
                                             ----------------------------------------------------------------------
Balance, March 31, 2000                      $(18,659)         19,394,447          0         1,694,569            0
                                             ========

Net loss                                      (14,108)                  0          0                 0            0

Common stock issued to Company
Employee Stock 401(k) Plan                          0             332,875          0                 0            0

Forfeiture of restricted stock                      0             (32,500)         0                 0            0

Common stock issued in conjunction
with debt restructuring                             0          48,695,212          0                 0            0

Exchange of  Class B Nonvoting
Shares for Class A Voting shares-
Centre Entities                                     0           1,694,569          0        (1,694,569)           0

Stock warrants issued in exchange for
Series A preferred stock                            0                   0          0                 0            0

Amortization of deferred stock-based
compensation                                        0                   0          0                 0            0

Foreign currency translation
adjustment                                       (248)                  0          0                 0            0
                                             ----------------------------------------------------------------------
Balance, March 31, 2001                      $(14,356)         70,084,603         $0                 0         $  0
                                             ======================================================================


<CAPTION>
                                                                                                      Cumulative
                                                            Stock       Unearned       Retained       Translation
                                               APIC        Warrants   Compensation     Earnings        Adjustment       TOTAL
                                             ----------------------------------------------------------------------------------
<S>                                          <C>           <C>        <C>              <C>            <C>              <C>
Balance, March 31, 1998                      $112,390        $  0        $   0         $(140,569)        $ (52)        $(28,231)
Net loss                                            0           0            0            (3,107)            0           (3,107)
Exchange of Class A Voting for Class
B Nonvoting Shares-Centre Entities                  0           0            0                 0             0                0

Common stock issued in connection
with the Dart acquisition                       1,829           0            0                 0             0            1,829

Purchase & retirement of stock                    (75)          0            0                 0             0              (75)

Compensatory stock options issued                  71           0            0                 0             0               71

Common stock issued to Company
Employee Stock 401(k) Plan                        109           0            0                 0             0              109

Foreign currency translation
adjustment                                          0           0            0                 0          (229)            (229)
                                             ----------------------------------------------------------------------------------
Balance, March 31, 1999                       114,324           0            0          (143,676)         (281)         (29,633)

Net loss                                            0           0            0           (18,902)            0          (18,902)

Common stock issued to Company
Employee Stock 401(k) Plan                         84           0            0                 0             0               84

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

Amortization of deferred stock-based
compensation                                        0           0            7                 0             0                7

Foreign currency translation
adjustment                                          0           0            0                 0           243              243
                                             ----------------------------------------------------------------------------------
Balance, March 31, 2000                       114,592           0         (177)         (162,578)          (38)         (48,201)

Net loss                                            0           0            0           (14,108)            0          (14,108)

Common stock issued to Company
Employee Stock 401(k) Plan                         72           0            0                 0             0               72

Forfeiture of restricted stock                      0           0            0                 0             0                0

Common stock issued in conjunction
with debt restructuring                         7,609           0            0                 0             0            7,609

Exchange of  Class B Nonvoting
Shares for Class A Voting shares-
Centre Entities                                     0           0            0                 0             0                0

Stock warrants issued in exchange for
Series A preferred stock                            0         613            0                 0             0              613

Amortization of deferred stock-based
compensation                                        0           0          177                 0             0              177

Foreign currency translation
adjustment                                          0           0            0                 0          (248)            (248)
                                             ----------------------------------------------------------------------------------
Balance, March 31, 2001                      $122,273        $613        $   0         $(176,686)        $(286)        $(54,086)
                                             ==================================================================================
</TABLE>


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


                                    Page F-4
<PAGE>   40


                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         MARCH 31, 2001, 2000, AND 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                  2001             2000             1999
                                                                --------         --------         --------
<S>                                                             <C>              <C>              <C>
OPERATING ACTIVITIES:
 Net loss                                                       $(14,108)        $(18,902)        $ (3,107)
 Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
 Employee stock compensation plan - 401(k)                            72               84              109
 Gain on extinguishment of preferred stock                        (1,729)               0                0
 Noncash reduction of debt restructuring liability                (2,049)               0                0
 Noncash refinancing cost                                            250                0                0
 Amortization of deferred stock-based compensation                   177                7                0
 Accretion of mandatory redeemable preferred stock                   260              254               93
 Depreciation                                                      2,042            1,991            1,419
 Loss on impairment of long-lived assets                           1,244            1,944                0
 Amortization of goodwill                                            251              517              519
 Amortization of loan costs                                          332              910              731
 Loss on sale of assets                                              178               10                0
 Compensatory stock options issued                                     0                0               71
 Deferred income taxes                                               (96)           2,651             (296)
 Changes in assets and liabilities:
    Accounts receivable, net                                      (1,937)          12,594            3,608
    Unbilled receivables                                           1,427              472           (4,744)
    Inventories                                                    3,820            1,495             (257)
    Prepaid expenses and other current assets                       (493)              79              (90)
    Escrow and other deposits                                          0                0              103
    Accounts payable                                                 504           (3,047)           1,885
    Accrued liabilities                                            4,605              439           (3,752)
    Income taxes payable/receivable                                  364           (1,527)             (46)
    Deferred revenue                                               1,180              338           (5,094)
    Warranty and contracts costs provision                         3,885                0                0
    Noncurrent liabilities                                          (390)             316             (195)
                                                                --------         --------         --------
 Total adjustments                                                13,897           19,527           (5,936)
                                                                --------         --------         --------
 Net cash (used in) provided by operating activities                (211)             625           (9,043)
                                                                --------         --------         --------
INVESTING ACTIVITIES:
 Payments for business acquisitions                                    0                0             (394)
 Sale of business                                                      0                0              200
 Liquidation (purchase) of performance guarantees                    714           (1,342)               0
 Purchase of property and equipment                                 (736)          (1,494)          (2,783)
 Proceeds from disposal of property and equipment                     52                0                0
                                                                --------         --------         --------
 Net cash provided by (used in) investing activities                  30           (2,836)          (2,977)
                                                                --------         --------         --------
FINANCING ACTIVITIES:
 Proceeds from borrowings of long-term debt                          200           43,372           24,700
 Repayments of long-term debt                                          0          (41,800)         (15,599)
 Proceeds from mandatory redeemable preferred stock                    0                0            3,000
 Deferred financing costs                                              0             (315)            (520)
 Repurchase and sale of common stock                                   0                0              (75)
                                                                --------         --------         --------
 Net cash provided by financing activities                           200            1,257           11,506
                                                                --------         --------         --------
EFFECT OF CHANGE IN FOREIGN EXCHANGE RATES                           (41)              35              (76)
 Net decrease in cash and cash equivalents                           (22)            (919)            (590)
 Cash and cash equivalents, beginning of year                      1,886            2,805            3,395
                                                                --------         --------         --------
 Cash and cash equivalents, end of year                         $  1,864         $  1,886         $  2,805
                                                                --------         --------         --------
Supplemental disclosure of cash paid for:
 Interest                                                       $  1,010         $  4,695         $  6,265
 Income taxes                                                   $ (1,327)        $    433         $    241
</TABLE>


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


                                    Page F-5
<PAGE>   41


                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         MARCH 31, 2001, 2000, AND 1999


1.       ORGANIZATION AND NATURE OF BUSINESS

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

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

         The Company has one wholly owned subsidiary, FATS, Inc., which is the
operating subsidiary (the "Operating Subsidiary"). As of March 31, 2001, FATS,
Inc. had eight wholly owned subsidiaries (collectively, the "Subsidiaries"):
Firearms Training Systems Limited (the Operating Subsidiary's U.K. subsidiary),
F.A.T.S. Singapore Pte, Ltd., Firearms Training Systems Netherlands, B.V.,
F.A.T.S. Foreign Sales Corporation, Simtran Technologies, Inc., which is based
in Montreal, Canada ("Simtran"), FATS Canada Holdings, Dart International, Inc.
(Dart), and Firearms Training Systems Australia Pty Ltd.

         The Company is subject to several business and market risks. The risks
are as follows: (1) the Company did not during the year ended March 31, 2001
generate sufficient cash flow from its current operations to pay in a timely
manner its outstanding senior indebtedness, necessitating the debt restructuring
(see Note 4), (2) while the Company's financial position has significantly
improved as a result of the debt restructuring both in terms of a reduction in
total amount and a deferral of maturity dates of its debt, it must continue to
achieve its current business revenue targets in the current fiscal year in order
to discharge its interest obligations in a timely manner and expand its business
opportunities, and (3) the Company must receive new contracts for production to
be delivered in the current fiscal year in order to achieve its revenue
projections. Thus, the Company's continuation as a going concern is dependent
upon its ability to: (a) continue production work on existing contracts, (b)
obtain new contracts for future delivery, and (c) generate sufficient cash flow
to meet working capital obligations on a timely basis. Management's plans in
response to the above objectives are to: (1) continue to reinforce cost control
measures to ensure operations are conducted at the lowest cost possible at all
locations, (2) remain focused on revenue maximization of standard products with
higher margin potentials within the domestic and international law enforcement
business segment, (3) minimize capital expenditures in nonstrategic areas, (4)
improve inventory turns and lower inventory investment, and (5) negotiate more
favorable terms and conditions to reduce extended or prolonged payment cycles.

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


2.       ACQUISITIONS

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

         The Company amortizes all goodwill associated with acquisitions over a
ten-year period. During the fiscal year ended March 31, 2000, the Company
reviewed the historical and projected results for its Dart subsidiary, noting
that the division was performing well below the expectations of management and
had experienced recurring operating losses and negative cash flows. As a result
of the changes in operations at the subsidiary, the Company reviewed the
goodwill created as a result of the purchase of Dart for impairment as an event
occurred that may indicate that the carrying amount of the goodwill may


                                    Page F-6
<PAGE>   42

not be recoverable. The Company estimated the future cash flows expected to
result from future Dart operations and determined that the entire amount of the
unamortized goodwill associated with this subsidiary had no value. An impairment
charge of $1,944,000 equal to the unamortized goodwill was recorded under
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and is included in operating expenses in the accompanying statement of
operations.

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


3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


         PRINCIPLES OF CONSOLIDATION

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


         FOREIGN CURRENCY TRANSLATION

         The assets and liabilities of the Operating Subsidiary's foreign
subsidiaries are translated into U.S. dollars using current exchange rates in
effect at the balance sheet date, and revenues and expenses are translated at
average monthly exchange rates. The resulting translation adjustments are
recorded as a separate component of stockholders' deficit. Gains and losses
which result from foreign currency transactions are included in the accompanying
consolidated statements of operations.


         REVENUE RECOGNITION

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


         RESTRICTED CASH

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


         INVENTORIES


                                    Page F-7
<PAGE>   43



         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.


<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):            MARCH 31,
                                                         ----------------------
                                                            2001           2000
                                                         ----------------------
                  <S>                                    <C>            <C>
                  Raw materials ......................   $ 6,969        $ 8,507
                  Work in process ....................     3,998          6,134
                  Finished goods .....................     1,559          1,728
                                                         ----------------------
                      Total inventories ..............   $12,526        $16,369
                                                         ======================
</TABLE>


         PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Major property additions,
replacements, and improvements 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, 2001, 2000, and
1999 was $2,042,000, $1,991,000, and $1,419,000, respectively.

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

<TABLE>
<CAPTION>
                                                                                    MARCH 31,
                                                                            ------------------------
                                                                              2001            2000
                                                                            ------------------------
                  <S>                                                       <C>              <C>
                  Machinery and equipment ..........................        $  5,726         $ 6,119
                  Demonstration equipment ..........................           3,458           2,895
                  Furniture and fixtures ...........................             422             418
                  Vehicles .........................................             303             333
                  Leasehold Improvements ...........................             179             187
                                                                            ------------------------
                     Subtotal ......................................        $ 10,088         $ 9,952
                  Less accumulated depreciation and amortization ...          (7,441)         (5,096)
                                                                            ------------------------
                     Net ...........................................        $  2,647         $ 4,856
                                                                            ========================
</TABLE>


         LONG-LIVED ASSETS

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


         ACCRUED LIABILITIES


                                    Page F-8
<PAGE>   44


         Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                   MARCH 31,
                                                                               2001          2000
                                                                              --------------------
                  <S>                                                         <C>           <C>
                  Sales commissions, bonuses, and agents' commissions ...     $  843        $  640
                  Accrued salaries and related expenses .................        894           968
                  Professional fees .....................................        414           120
                  Accrued severance costs ...............................         23           431
                  Other .................................................      1,721         1,906
                                                                              --------------------
                       Total accrued liabilities ........................     $3,895        $4,065
                                                                              ====================
</TABLE>


         WARRANTY AND CONTRACTS COST PROVISION

         During the fiscal year ended March 31, 2001, the Company recorded
accruals of approximately $4.0 million associated with the costs to complete the
warranty provisions of certain contracts as well as to accrue for anticipated
losses on existing contracts. These accruals are primarily due to recent
increases in costs associated with the delivery of products. The additional
costs were not originally anticipated at the time the warranty program or
related contracts were entered into. Based on the Company's revised estimates,
the related revenue from these programs is no longer expected to offset the
anticipated expenses. Therefore, an accrual for this loss contingency was made
when the loss was determined and when it was reasonably estimable.


         STOCK-BASED COMPENSATION PLANS

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

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


         RESEARCH AND DEVELOPMENT ACTIVITIES

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


         ADVERTISING COSTS

         The Company expenses all advertising costs as incurred.


         FINANCIAL INSTRUMENTS

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


                                    Page F-9
<PAGE>   45

31, 2001 and 2000. A portion of long-term debt bears interest at a fluctuating
rate based on the prime rate. The other portion bears interest at a fixed rate
that is close to this fluctuating rate. The Company therefore believes that the
carrying amount of its long-term debt approximates fair value.


         NET LOSS PER COMMON SHARE

         Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding. Diluted net loss per share is
computed using the weighted average number of shares of common stock outstanding
and common equivalent shares from warrants and from stock options using the
treasury stock method. No common stock equivalents were included in the
computation of diluted net loss per share for the years ended March 31, 2001,
2000, and 1999, as all were antidilutive.


         CLASS B TO CLASS A COMMON SHARES EXCHANGE

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


         INCOME TAXES

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


         NEW ACCOUNTING PRONOUNCEMENTS

         In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will be effective for the Company's fiscal year ending March 31, 2002.
Management does not believe that the adoption of this pronouncement will have a
material impact on the Company's financial position or results of operations.

         In 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues.
Management adopted SAB No. 101 for the fiscal year ending March 31, 2001. The
adoption of this pronouncement did not have a material impact on the Company's
financial position or results of operations.

         In 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21,
"Accounting for Multiple Element Revenue Arrangements," which addresses (1)
determining whether an arrangement contains multiple components or deliverables
that should be evaluated separately for revenue recognition purposes; (2) how
consideration should be allocated, if separate accounting for a deliverable is
appropriate; and (3) the accounting for direct costs when it is concluded that
those costs are not associated with any single deliverable or are associated
with a specific deliverable that does not qualify as a separate unit.


                                   Page F-10
<PAGE>   46


In April 2001, the EITF reached a tentative consensus on portions of this issue.
The Company is currently evaluating the impact that EITF No. 00-21 will have on
its financial position and results of operations.

         In 2001, the Financial Accounting Standards Board issued a revised
exposure draft for a proposed Statement of Financial Accounting Standards
entitled "Business Combinations and Intangible Assets-Accounting for Goodwill."
This exposure draft, if adopted as proposed, would eliminate the amortization of
goodwill against earnings. Instead, goodwill would be written down against
earnings only in the periods in which the recorded value is more than its fair
value. The FASB is expected to issue a final statement on business combinations
and intangible assets in June 2001. The impact of this statement may be
significant if it is issued as currently proposed, as the Company would no
longer recognize goodwill amortization expense. As of March 31, 2001, the
Company has unamortized goodwill of approximately $1.2 million. However, the
Company would be required to test goodwill for impairment under new standards.


         USE OF ESTIMATES AND ACCRUALS

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


         NONRECURRING RESTRUCTURING CHARGE

         The Company recognized a nonrecurring restructuring charge of $870,000
related to a workforce reduction and certain other measures implemented to
enhance future profitability in fiscal year 1999. As of March 31, 2000, no
balance remains in the restructuring accrual. The Company recorded a $143,000
decrease in operating expenses in fiscal year 2000 as a result of the unused
portion of this accrual.


         EMPLOYEE BENEFIT PLAN

         The Company has a defined contribution profit sharing plan (the "Plan")
for substantially all company employees. The Plan provides for annual
contributions by the Company at the discretion of the board of directors. The
Plan also contains a 401(k) feature which allows participants to contribute up
to 15% of their eligible compensation, as defined, and provides for
discretionary employer matching contributions of cash and company stock. Total
contributions by the Company to the Plan were approximately $182,000, $200,000,
and $266,000 for the years ended March 31, 2001, 2000, and 1999, respectively.


         SHIPPING AND HANDLING EXPENSES

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


         RECLASSIFICATIONS

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


4.       LONG-TERM DEBT

         At March 31, 2001 and 2000, long-term debt consisted of the following
(in thousands):


                                   Page F-11
<PAGE>   47


<TABLE>
<CAPTION>
                                                               2001           2000
                                                             ----------------------
                  <S>                                        <C>            <C>
                  Tranche A loan ....................        $     0        $17,300
                  Tranche B loan ....................              0         32,600
                  Revolving credit facility .........              0         20,872
                  Revolving promissory note .........              0          3,000
                  Working capital - borrowings ......            200              0
                  Long-term debt - senior ...........         12,000              0
                  Long-term debt - junior ...........         24,765              0
                  Long-term accrued interest ........          7,025              0
                                                             ----------------------
                       Total ........................        $43,990        $73,772
                                                             ======================
</TABLE>



         In August 2000, the Company entered into a Second Amended and Restated
Credit Agreement (the "New Credit Agreement") and Partial Exchange Agreement
with Bank of America, N.A. and other lenders. The New Credit Agreement replaced
the Company's previous credit facility, including the Tranche A and B loans and
Revolving credit facility. In accordance with the New Credit Agreement, the
unpaid principal of approximately $70,772,000 and accrued interest of
approximately $5,312,000 under the old facility was converted to 40,235,548
shares of Class A common stock, 20,463.716 shares of Series B mandatory
redeemable preferred stock, approximately $11,496,000 in senior secured loans,
and approximately $22,034,000 of junior secured loans.

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

         The exchange of the old credit facility and note for the new loans,
preferred stock, and common stock was accounted for as a troubled debt
restructuring in accordance with Statement of Financial Accounting Standards No.
15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings"
("SFAS 15"). Under SFAS 15, in a troubled debt restructuring involving partial
settlement of a payable through the issuance of equity interests, the new
obligation should be recorded at the carrying amount of the prior obligation at
the time of the restructuring, less the fair value of equity interest received,
unless the net carrying amount exceeds the total future undiscounted cash
payments specified by the new terms. Thus, the common stock issued was recorded
at the market value at the time of issuance. The carrying value of the old
credit facility and note, including accrued interest and unamortized debt
issuance costs, less the value of the common stock received and face values of
the new debt and preferred stock, resulted in a debt restructuring liability of
approximately $14.6 million. The liability was allocated to the new debt and
mandatory redeemable preferred stock based on the relative face values of the
instruments. As a result, the Company will record future interest expense and
accretion of preferred stock on a discounted basis. As of March 31, 2001,
approximately $7,025,000 and $4,382,000 of the liability remained and is
included in long-term debt and mandatory redeemable preferred stock,
respectively, on the accompanying balance sheet. The reduction in the liability
allocated to long-term debt and corresponding reduction in interest expense is
shown as noncash reduction of debt restructuring liability on the accompanying
statements of cash flows. Expenses relating to the restructuring, including the
$250,000 funding fee related to the Revolving promissory note, totaled
approximately $656,000 and are included in interest expense in the accompanying
statement of operations for the year ended March 31, 2001.

         The New Credit Agreement also includes a senior secured credit line in
the amount of approximately $882,000 to support letters of credit and working
capital requirements. As of March 31, 2001, borrowings of $200,000 and
irrevocable standby letters of credit in the principal amount of approximately
$660,000 in connection with the performance of certain sales contracts were
outstanding.

         All borrowings under the new agreements mature on March 31, 2003 but
may be extended for one additional year at the Company's option for a 1% fee.
The senior loans bear interest at prime plus 1%, (9% at March 31, 2001), payable
quarterly in


                                   Page F-12
<PAGE>   48


cash. The junior loans bear interest at 10%, payable quarterly in cash or in
notes with the same terms, depending on interest coverage ratios, as defined.
During the year ended March 31, 2001, approximately $1,765,000 of junior loan
interest was paid by issuing additional notes which have been included in the
total junior debt amount above. As of March 31, 2001, the effective future
interest rate on all borrowings under the new credit agreement was approximately
0.2%.

         The borrowings under the old agreement and the New Credit Agreement are
secured by substantially all of the Company's assets, a pledge of all of the
common shares of the operating subsidiary, and a pledge of 65% of the capital
stock of the Company's foreign subsidiaries. The New Credit Agreement also
contains restrictive covenants, which, among other things, limit borrowings and
capital expenditures and require certain interest coverage ratios, as defined,
to be maintained. As of March 31, 2001, the Company was in compliance with these
covenants.


5.       MANDATORY REDEEMABLE PREFERRED STOCK


         SERIES A PREFERRED STOCK

         In November 1998, the board of directors created a new class of Series
A preferred stock with 38,000 authorized shares. The Company then entered into a
Securities Purchase Agreement with Centre Entities whereby Centre Entities
purchased, for $3,000,030, securities comprised of Series A preferred stock and
nondetachable warrants to purchase Class B Nonvoting Common Stock with an
exercise price of $1.03. The securities bore dividends at 8% per year and were
subject to mandatory redemption on November 13, 2003. The Company recorded
accretion of the dividends of approximately $110,000, $254,000, and $93,000 for
the years ended March 31, 2001, 2000, and 1999, respectively.

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


         SERIES B PREFERRED STOCK

         In August 2000, the board of directors approved an amendment to the
articles of incorporation to change the number of authorized shares of preferred
stock to 100,000. The board of directors then created a new class of Series B
preferred stock with 50,000 authorized shares. Holders of the Series B preferred
stock are entitled to receive cumulative dividends equal to 10% of the
liquidation preference payable quarterly in additional shares of Series B
preferred stock. The preferred stock is subject to mandatory redemption on the
later of March 31, 2003 or the latest maturity date of the senior secured debt
(see Note 4) at the liquidation value thereof. The Company issued 21,361.113
shares of Series B preferred stock with a liquidation value of $1,000 per share
(approximately $21.4 million) in August 2000 in conjunction with its debt
restructuring (Note 4). Accretion related to dividends earned during the year
ended March 31, 2001 totaled approximately $1,306,000. As discussed in Note 4,
this amount was offset by the reduction in the debt restructuring liability
allocated to the preferred stock, resulting in net accretion of approximately
$150,000 for the year ended March 31, 2001.


6.       STOCK-BASED COMPENSATION PLANS


         STOCK OPTION PLAN

         The Company adopted the Firearms Training Systems, Inc. Stock Option
Plan (the "Option Plan") in fiscal year 1997. The Company has reserved a total
of 7,500,000 shares of Class A common stock for issuance under the Option Plan
under eight different nonqualified option series. The Option Plan provides for
antidilution in the event of certain defined circumstances.


                                   Page F-13
<PAGE>   49


The Option Plan is administered by a committee designated by the board of
directors of the Company. The price of options granted is determined at the date
of grant.


         SERIES A OPTIONS

         Options under this series are available for grant to officers and other
employees. 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 the optionee ceases to be a director.


         SERIES D AND SERIES E OPTIONS

         Options under these series are available for grant to officers and
other employees. The options are generally exercisable one-third per year on a
cumulative basis beginning on the first anniversary of the option date. The
options expire on the seventh anniversary of the option date. In the event of
termination of the optionee's employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent they are
exercisable on the effective date of the optionee's termination. In the event of
termination of the optionee's employment for cause, all of the optionee's
outstanding options shall be forfeited.


         SERIES F OPTIONS

         Options under this series are available for grant to executive
officers. The options are generally exercisable one-third per year on a
cumulative basis beginning on the first anniversary of the option date. The
options expire on the seventh anniversary of the option date. In the event of
termination of the optionee's employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent they are
exercisable on the effective date of the optionee's termination. In the event of
termination of the optionee's employment for cause, all of the optionee's
outstanding options shall be forfeited.


         SERIES G OPTIONS


                                   Page F-14
<PAGE>   50


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

         During the year ended March 31, 2001, 390,000 Series G options were
issued to executive officers of the Company with an exercise price of $0.50.
Under APB No. 25, the Company is required to make estimates of the number of
shares expected to be earned at the end of each reporting period. The estimated
shares to be earned are multiplied by the excess, if any, of the fair market
value of the common stock at period-end over the $0.50 exercise price. This
amount will be recognized as stock compensation expense over the performance
period. As of each reporting period for the year ended March 31, 2001, the
exercise price exceeded the fair market value of the common stock and thus no
related expense was recorded.

         SERIES H OPTIONS

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

         During the year ended March 31, 2001, 390,000 Series H options were
issued to executive officers of the Company with an exercise price of $0.01. The
value of these options computed as the excess of the fair market value of the
common stock over the exercise price will be recorded at the time the
contingency is resolved upon the sale of the Company.

         A summary of changes in outstanding options during the years ended
March 31, 1999, 2000, and 2001 is as follows:


<TABLE>
<CAPTION>
                                                                                                                 Weighted Average
                                                              OPTIONS                EXERCISE PRICE               Exercise Price
                                                             ---------          -------------------------        ----------------
                  <S>                                        <C>                <C>             <C>              <C>
                  Outstanding,  March 31, 1998 .........      2,091,649         $   3.25   -    $   14.25           $   4.48
                  Granted ..............................        827,401             0.69   -        12.00               3.58
                  Cancelled ............................       (697,898)            1.25   -        14.25               6.08
                                                              ---------         --------   -    ---------           --------
                  Outstanding, March 31, 1999 ..........      2,221,152         $   0.69   -    $   14.00           $   3.65
                  Granted ..............................        673,400             0.50   -         1.00               0.69
                  Cancelled ............................       (679,698)            0.56   -        14.00               3.86
                                                              ---------         --------   -    ---------           --------
                  Outstanding, March 31, 2000 ..........      2,214,854         $   0.50   -    $   12.00           $   2.82
                  Granted ..............................      1,206,900             0.01   -         0.69               0.35
                  Cancelled ............................       (425,069)            0.56   -        12.00               3.21
                                                              ---------         --------   -    ---------           --------
                  Outstanding, March 31, 2001 ..........      2,996,685         $   0.01   -    $   12.00           $   1.77
                                                              =========
                  Shares available for future grants ...      4,500,636
                                                              =========
</TABLE>


         As of March 31, 2001, 2000, and 1999, options to purchase 1,057,416,
810,288, and 289,169 shares, respectively, were exercisable with weighted
averages prices of $3.15, $3.59, and $3.83, respectively.

         Grants and cancellations for fiscal year 1999 include 189,950 shares
reissued at a price of $3.253 on December 11, 1998. The options were cancelled
and reissued to certain employees. The Company has elected to account for its
stock-based compensation plans under APB No. 25; however, the Company has
computed for pro forma disclosure purposes the value of all options granted at
March 31, 2001 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following ranges of weighted average assumptions used for
grants:


                                   Page F-15
<PAGE>   51


<TABLE>
<CAPTION>
                                                    YEAR ENDED MARCH 31,
                                            2001            2000           1999
                                         ----------------------------------------
     <S>                                 <C>              <C>         <C>
     Risk-free interest rate ......         5.00%           5.00%     5.75 - 5.80%
     Expected dividend yield ......            0               0                0
     Expected lives (in years) ....          4.0             4.0        4.0 - 5.0
     Expected volatility ..........       150.00%         153.20%          104.30%
</TABLE>


         The total value of options granted during the years ended March 31,
2001, 2000 and 1999 was computed as approximately $194,000, $340,000, and
$1,039,000, respectively, which would be amortized on a pro forma basis over the
vesting period of the options. If the Company had accounted for the plan in
accordance with SFAS No. 123, the Company's net loss (in thousands) and net loss
per diluted share for the years ended March 31, 2001, 2000, and 1999 would have
been as follows:

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                       2001              2000             1999
                                                    --------------------------------------------
         <S>                                        <C>               <C>               <C>
         Net loss ..........................        $ (16,184)        $ (20,254)        $ (5,287)
         Net loss per share - diluted ......        $   (0.30)        $   (0.98)        $  (0.26)
</TABLE>


         The following table sets forth the Company's outstanding options and
options exercisable, including the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date as of March 31, 2001:

<TABLE>
<CAPTION>
           OPTIONS OUTSTANDING                                                                     OPTIONS EXERCISABLE
        --------------------------                      Weighted                            --------------------------------
                                       Outstanding       Average              Weighted      Exercisable          Weighted
                                          as of         Remaining              Average          as of             Average
         Range of Exercise Prices       03/31/2001   Contractual Life       Exercise Price   03/31/2001       Exercise Price
         ------------------------       ----------   ----------------       --------------   ----------       --------------
         <S>           <C>             <C>           <C>                    <C>             <C>               <C>
            $ 0.00  -  $ 1.43            1,906,534         8.9                   $ 0.49         314,717            $ 0.81
              1.44  -    2.85               48,750         7.7                     1.79          32,501              1.79
              2.86  -    4.28              886,134         3.9                     3.25         587,728              3.25
              4.29  -    5.70               16,600         3.8                     5.19          16,600              5.19
              5.71  -    7.13                3,000         3.4                     7.13           3,000              7.13
              7.14  -    8.55               74,733         5.1                     7.58          51,602              7.59
              8.56  -    9.98                  100         4.0                     9.00             100              9.00
             11.40  -   12.83               60,834         4.8                    11.79          51,168             11.79
                                        ----------      ------                   ------       ---------            ------
                                         2,996,685         7.2                   $ 1.77       1,057,416            $ 3.15
</TABLE>

         STOCK COMPENSATION PLAN

         The Company adopted the Firearms Training Systems, Inc. Employee Stock
Compensation Plan ("the Stock Plan") on July 1, 1997. The Company has reserved a
total of 1,000,000 shares of Class A common stock for issuance under the Plan.
As of March 31, 2001, 258,269 shares were available for future grant under the
Stock Plan. The Stock Plan provides for antidilution in the event of certain
defined circumstances. Under the Plan, the Company may issue shares of Class A
common stock for compensation, including issuances to make Company matching
contributions under the Company's 401(k)


                                   Page F-16
<PAGE>   52



Profit Sharing Plan. During the years ended March 31, 2001, 2000, and 1999, the
Company issued 332,875, 101,734, and 56,883 shares, respectively, of Class A
common stock to the 401(k) Profit Sharing Plan as matching contributions (Note
3).

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


         MANAGEMENT SHARES AGREEMENT

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


7.       INCOME TAXES

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


<TABLE>
<CAPTION>
                                                                        YEAR ENDED MARCH 31,
         Current:                                               2001            2000            1999
                                                              ---------------------------------------
         <S>                                                  <C>             <C>             <C>
              Federal income tax (benefit)/expense ........   $  (999)        $(3,751)        $(2,001)
              Foreign income tax (benefit)/expense ........        43             292             868
              State income tax (benefit)/expense ..........         0              --            (271)
              Deferred income tax expense/(benefit) .......       (96)          2,651            (296)
                                                              ---------------------------------------
                                                              $(1,052)        $  (808)        $(1,700)
                                                              =======================================
</TABLE>


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

<TABLE>
<CAPTION>
                                                                            YEAR ENDED MARCH 31,
                                                                     2001            2000            1999
                                                                   ---------------------------------------
         <S>                                                       <C>             <C>             <C>
         Tax at statutory rate ............................        $(5,654)        $(6,631)        $(1,603)
         Nondeductible goodwill ...........................             22              83              83
         Research and development tax credit ..............              0            (679)              0
         Foreign sales corporation benefit ................              0            (188)           (201)
         Impairment of nondeductible goodwill .............            216             661               0
         Taxable discount of accretion ....................            393               0               0
         Increase in valuation allowance ..................          3,904           6,207               0
         Other ............................................             67            (261)             21
                                                                   ---------------------------------------
              Total .......................................        $(1,052)        $  (808)        $(1,700)
                                                                   =======================================
</TABLE>


                                   Page F-17
<PAGE>   53


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

<TABLE>
<CAPTION>
                                                                          MARCH 31,
                                                                   ------------------------
         Deferred Tax Assets:                                        2001            2000
         -------------------------------------------------         --------         -------
         <S>                                                       <C>              <C>
         Inventory reserves ...............................        $    350         $   358
         Accrued Liabilities ..............................             193             368
         Warranty and contract costs reserve ..............           1,640             140
         Deferred revenue .................................             412             295
         Gain related to cancelation of indebtedness ......           3,992              --
         Loss on impairment of property and equipment .....             319              --
         Net Domestic operating loss carryforwards ........           4,873           5,121
         Net Foreign operating loss carryforwards .........               0             181
         Other ............................................             227             144
         Valuation allowance ..............................         (10,621)         (6,207)
                                                                   ------------------------
              Total Gross Deferred Tax Assets .............        $  1,385         $   400
                                                                   ========================
<CAPTION>
         Deferred Tax Liabilities:
         -------------------------------------------------
         <S>                                                       <C>              <C>
         Accelerated Depreciation .........................              36             144
         Inventory basis differences ......................           1,155             331
         Other ............................................             417             244
                                                                   ------------------------
              Total Gross Deferred Tax Liabilities ........           1,608             719
                                                                   ------------------------
         Net Deferred Tax liabilities .....................            (223)           (319)
            Less: Non-current Deferred Tax Assets .........               0               0
                                                                   ------------------------
              Non-current Net Deferred Tax Liabilities ....        $   (223)        $  (319)
                                                                   ========================
</TABLE>


         The debt restructuring completed by the Company in August 2000 resulted
in a gain for tax purposes. However, due to the fact that the sum of all future
principal and interest payments due under the new agreements exceeded the
carrying value of the old debt, no gain was recognized on the transaction for
book purposes in accordance with SFAS 15. The excess of the carrying amount of
the old borrowings exceeded the fair value of the new borrowings, common stock,
and mandatory redeemable preferred stock by approximately $14.6 million and was
allocated proportionately to the new debt and preferred stock based on their
relative carrying values. During the year ended March 31, 2001, the excess
amount allocated to debt was reduced by approximately $2,049,000, resulting in a
corresponding reduction of interest expense. The excess amount allocated to
preferred stock was reduced by approximately $1,156,000, resulting in a
corresponding reduction of accretion of preferred stock. The deferred tax asset
for the gain related to the cancellation of indebtedness above represents the
difference between the gain recognized for tax purposes and the gain recognized
for book purposes through the reductions in interest expense and accretion. The
taxable discount of accretion included in the rate reconciliation represents the
tax effect of the accretion discount recorded of $1,156,000.

         The Company recorded a federal income tax benefit of $999,000 for the
fiscal year ended March 31, 2001 related to the anticipated refund due to the
Company for carrybacks of net operating losses.

         As of March 31, 2001, the Company has available domestic operating loss
carryforwards of approximately $13,922,000. A valuation allowance is provided
when it is determined that some portion or all of the deferred tax assets may
not be realized. Due to uncertainty of future income, the Company has recorded a
valuation allowance for the entire amount of deferred tax assets attributable to
the operating loss carryforwards as well as for the amount of deferred tax
assets created as a result of temporary differences between book and tax. The
domestic operating losses expire in 2021 and 2022.


8.       CONCENTRATION OF REVENUES

         For the years ended March 31, 2001, 2000, and 1999, the Company's five
largest customers accounted for approximately 34.9%, 58.2%, 62.3% of the
Company's total revenues, respectively. 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. For the fiscal year ended March


                                   Page F-18
<PAGE>   54


31, 2001, no customer accounted for more than 10% of the Company's revenues. The
following table summarizes information about the Company's major customers for
the years ended March 31, 2000 and 1999:


<TABLE>
<CAPTION>
                                                                Aggregate        Percent
                                                                 Revenues        of Total
          Year                     Major Customers                (000s)         Revenues
         --------------------------------------------------------------------------------
         <S>       <C>                                          <C>              <C>

          2000     Canadian Department of National Defence       $ 10,791          27.7%
                   The Australian Army                              5,295          13.6%

          1999     Canadian Department of National Defence         20,247          36.5%
</TABLE>



         As of March 31, 2001, the Company had two customers that comprised
approximately 20.0% and 13.9% of total accounts receivable. As of March 31,
2000, the Company had three customers that comprised approximately 25%, 18%, and
15% of total accounts receivable.

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

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

         A significant portion of the Company's sales is made to customers
located outside the U.S., primarily in Canada, Europe and Asia. In fiscal 2001,
2000, and 1999, 52.7%, 70.5%, and 64.2%, respectively, of the Company's revenues
were derived from sales to customers located outside the United States. The
Company expects that its international customers will continue to account for a
substantial portion of its revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations and changes in
import/export regulations and tariff rates. In addition, various forms of
protectionist trade legislation have been, and in the future may be, proposed in
the U.S. and certain other countries. Any resulting changes in current tariff
structures or other trade and monetary policies could adversely affect the
Company's sales to international customers. Political and economic factors have
been identified by the Company with respect to certain of the markets in which
it competes. There can be no assurance that these factors will not result in
defaults by customers in making payments due to the Company, in reductions in
the purchases of the Company's products by international customers or in foreign
currency exchange losses. In certain cases, the Company has reduced certain of
the risks associated with international contracts by obtaining bank letters of
credit to support the payment obligations of its customers and/or by providing
in its contracts for payment in U.S. dollars.


9.       NET LOSS PER COMMON SHARE

         Net loss per share at March 31, 2001, 2000, and 1999 were as follows
(in thousands except per share amounts):


                                   Page F-19
<PAGE>   55


<TABLE>
<CAPTION>
                                                       2001             2000             1999
<S>                                                 <C>              <C>              <C>
Basic:
Net loss attributable to common shareholders        $(14,108)        $(18,902)        $ (3,107)
Weighted average common shares outstanding            53,643           20,760           20,686
                                                    --------         --------         --------
Per share amount                                    $  (0.26)        $  (0.91)        $  (0.15)

Diluted:
Net loss attributable to common shareholders        $(14,108)        $(18,902)        $ (3,107)
Weighted average common shares outstanding            53,643           20,760           20,686
                                                    --------         --------         --------
Per share amount                                    $  (0.26)        $  (0.91)        $  (0.15)
</TABLE>


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


10.      RELATED PARTY TRANSACTIONS

         In conjunction with the debt restructuring, the Company has entered
into a consulting agreement with a company in which a board member has an
ownership interest. The consulting company's main focus is to provide managerial
and strategic guidance to the Company. During the fiscal year ended March 31,
2001, the Company incurred fees of approximately $272,000 for consulting
services under the agreement. As of March 31, 2001, approximately $44,000 is due
to the consulting company and is included in accrued liabilities of the
accompanying balance sheet.


11.      COMMITMENTS AND CONTINGENCIES


         OPERATING LEASES

         The Company leases its manufacturing and operating facilities and
office equipment under operating leases with terms in excess of one year. Rental
expense under noncancellable operating leases was approximately $1,001,000,
$942,000, and $725,000 for the years ended March 31, 2001, 2000, and 1999,
respectively.

         At March 31, 2001, future minimum payments under noncancellable
operating leases were as follows (in thousands):


<TABLE>
                 <S>                                     <C>
                 2002.................................   $  849
                 2003.................................      709
                 2004.................................      587
                 2005.................................      565
                 2006.................................      545
                 Thereafter...........................    1,291
                                                         ------
                                                         $4,546
                                                         ======
</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 AGREEMENTS


                                   Page F-20
<PAGE>   56


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

         Mr. Robert F. Mecredy, the Company's Executive Vice President, assumed
responsibilities as President and CEO as of October 1, 1999. On November 1,
2000, the Company entered into an employment agreement with Mr. Mecredy for a
period of three years retroactive to April 1, 2000. On May 18, 2001, Robert F.
Mecredy tendered his resignation from his positions of President, Chief
Executive Officer, and Director of the Company (Note 13).

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

         LEGAL

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


12.      INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

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



<TABLE>
<CAPTION>
                                                   YEAR ENDED MARCH 31,
                                           -------------------------------------
         International sales:               2001           2000           1999
         --------------------              -------------------------------------
         <S>                               <C>            <C>            <C>
         Europe ...................        $ 9,149        $ 8,044        $ 9,480
         Asia .....................          2,629          3,007          5,109
         Canada ...................          5,705         10,790         20,259
         Australia ................          1,773          5,296             --
         Other ....................          2,619            282            767
                                           -------------------------------------
                   Total ..........        $21,875        $27,419        $35,615
                                           =====================================
</TABLE>


         As of March 31, 2001, the Company had property and equipment, net of
approximately $2,415,000 in the United States and $232,000 at its subsidiaries
in foreign countries.


13.      SUBSEQUENT EVENTS


                                   Page F-21
<PAGE>   57


         On May 18, 2001, Robert F. Mecredy tendered his resignation from his
positions of President, Chief Executive Officer, and Director of the Company.
Mr. Mecredy will receive severance payments totaling approximately $250,000
through July 2003. The terms of certain options held by Mr. Mecredy were
extended to permit exercise for the length of the option despite termination of
his employment, but the total term of the Series H options was shortened to 3
years from 7 years. Mr. Randy Sugarman, Chairman of the Board of Directors,
replaced Mr. Mecredy on an interim basis. The Company will record the related
expense associated with the termination in the first quarter of fiscal year
2002.


                                                                      Schedule I

                FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                         MARCH 31, 2001, 2000, AND 1999


<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, 2001:
       Allowance for doubtful accounts......         $ 215            $ 150            $   6             $ 359

 Fiscal year ended March 31, 2000:
       Allowance for doubtful accounts......           228               15               28               215

 Fiscal year ended March 31, 1999:
       Allowance for doubtful accounts......           100              128                0               228

 Fiscal year ended March 31, 2000:
       Restructuring reserve................           318             (143)(2)          175(1)              0

 Fiscal year ended March 31, 1999:
       Restructuring reserve................             0              870              552(1)            318
</TABLE>

(1)      Represents amounts charged against the restructuring reserve.

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


                                   Page F-22
<PAGE>   58


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 28, 2001.

                             FIREARMS TRAINING SYSTEMS, INC.

                             By:         /s/  Randy Sugarman
                                -----------------------------------------------
                                              Randy Sugarman
                               Interim President and Chief Executive Officer and
                               Chairman of the Board of Directors and Director
                                       (Principal Executive Officer)


                        POWER OF ATTORNEY AND SIGNATURES

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

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

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

         *                 Chairman of the Board and Director                    June 28, 2001
----------------------     Interim President and Chief Executive Officer
Randy Sugarman

         *                 Chief Financial Officer and Treasurer                 June 28, 2001
----------------------     (Principal Financial and Accounting Officer)
John A. Morelli

         *                 Director                                              June 28, 2001
----------------------
William J. Bratton

         *                 Director                                              June 28, 2001
----------------------
Mary Ann Gilleece

         *                 Director                                              June 28, 2001
----------------------
Ronovan Mohling

         *                 Director                                              June 28, 2001
----------------------
Scott Perekslis

         *                 Director                                              June 28, 2001
----------------------
Ron Whitaker
</TABLE>


                                    Page V-1