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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K/A
(Amendment Number 2)

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One)
|          
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  |                                                                                         
|           |  | For the fiscal year ended March 31, 2002                                                
|           |  |                                                                                         
|           |  | OR                                                                                      
|           |  |                                                                                         
|[ ]        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-13105

Firearms Training Systems, Inc.
(Exact name of registrant as specified in its charter)

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|                                                                                   |  |                                               
|---------------------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State or other jurisdiction of
Incorporation or organization)             |  | 57-0777018(I.R.S. Employer Identification No.)
|                                                                                  
|7340 McGinnis Ferry Road
Suwanee, Georgia
(Address of principal executive offices) |  | 30024
(Zip Code)                              

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

Name of exchange on which registered:

None

Securities pursuant to Section 12(g) of the Act:

Class A Common Stock, $0.000006 par value per share

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

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

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

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

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TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|EXPLANATORY NOTE                                 
|PART I                                           
|                                                  | Item 1. Business                                                                             
|PART II                                          
|                                                  | Item 5. Market Common Equity and Related Stockholder Matters                                 
|                                                  | Item 6. Selected Financial Data                                                              
|                                                  | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 7(a). Quantitative and Qualitative Disclosures About Market Risk                        
|                                                  | Item 8. Financial Statements and Supplementary Data                                          
|                                                  | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Company                                     
|                                                  | Item 11. Executive Compensation                                                              
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                  | Item 13. Certain Relationships and Related Transactions                                      
|                                                  | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|Index to Financial Statements                    
|REPORT OF INDEPENDENT ACCOUNTANTS                
|REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|EX-21.01 SUBSIDIARIES OF THE COMPANY             
|EX-23.02 CONSENT OF PRICEWATERHOUSECOOPERS LLP   
|EX-99.1 CERTIFICATION OF THE CEO                 
|EX-99.2 CERTIFICATION OF THE CFO                 



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EXPLANATORY NOTE

We are filing this Annual Report on Form 10-K/A as Amendment Number 2 to our
Form 10-K originally filed on July 16, 2002, and amended on August 14, 2002,
for the following reasons.

Item 8 and Item 14   Financial Statements -

Note 9 to the financial statements, Related Party Transactions, is being
revised to better reflect the relationships among certain lending institutions
and between the lending institutions and the Company. This amendment does not
affect the Companys historical results of operations, financial conditions or
cash flows for any period presented. Other than this change to Note 9, there is
no change to the consolidated financial statements, the notes to the
consolidated financial statements, the report of the independent auditors or
the certifications of management.

Item 10  Directors and Executive Officers of the Company has been revised to
reflect the current committee assignments of our directors.

Item 11  Executive Compensation -

The second paragraph under Directors Compensation has been deleted. The
paragraph described arrangements made in a prior year with certain directors
that were not applicable in the last fiscal year.
The table of Fiscal Year-End Option Values has been corrected for numbers and
values of exercisable and unexercisable options.
The information contained in the first paragraph under Employment and Related
Matters has been corrected.

Item 12  Security Ownership of Certain
Beneficial Owners and Management -

The information in the table and related notes has been corrected.

Item 13  Certain Relationship and Related Transactions -

The information contained under the caption Certain Transactions has been
revised to more accurately describe the transactions between the Company and
its shareholders.

Exhibit 21.01  Subsidiaries of the Company -

The Exhibit has been revised to disclose that FATS, Inc. is a wholly owned
subsidiary of Firearms Training Systems, Inc. and that FATS, Inc. has six
wholly owned subsidiaries, including FATS Canada Holdings and Firearms Training
Systems Australia Pty Ltd., which were previously omitted.

This Annual Report on Form 10-K/A, Amendment Number 2, is substantially
identical to the Annual Report on Form 10-K/A originally filed on August 14,
2002, in all other respects.

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PART I

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




Item 1.  Business

Restructure Transaction

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

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



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

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

On December 31, 2001 and March 29, 2002, the Company and its lenders
amended the Companys senior credit agreement (the Credit Agreement) See Item
7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources, Item 13. Certain Relationships and
Related Transactions and Note 3 of Notes to Consolidated Financial Statements.

1

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Change of Control

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

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

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

Company Overview

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

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FATS software and hardware technologies have evolved along with advances
in the computer industry. Recognizing that commercial technological
capabilities are moving faster than any one company can replicate, the Company
takes advantage of commercially available off the shelf (COTS) components that
ensure reuse and upgrade capability as well as commonality and the ability to
integrate with other simulation systems. This philosophy seeks to provide each
customer the best technical and economical solutions for its training needs
while providing options for life cycle management of their systems. FATS also
partners with each customer to ensure that each training solution is complete,
integrated and functional from the embedded technology and courseware to the
unique language requirements. The goal is to ensure that each simulated firearm
or weapons system is integrated and compatible with the customers training
programs and replicates precise weapon ballistic data, desired environmental
effects, and target damage realism. The Company has focused its sales efforts
for small arms simulators primarily in the U.S. and international military and
law enforcement market through its principal facilities near Atlanta, Georgia.
Larger gunnery simulation systems are developed and manufactured by its Canada
based subsidiary, Simtran Technologies, Inc. (Simtran) located in Montreal,
Canada. Simtran contracts to develop and deliver five unique products: an air
defense missile trainer; an appended armored vehicle crew trainer; a
stand-alone armored vehicle crew trainer: and, an appended light armored
vehicle crew trainer. Other smaller subsidiaries located in the United Kingdom,
the Netherlands, Singapore and Australia provide sales, service and limited
manufacturing support.

Industry Overview

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

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

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

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

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Products

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

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

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

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

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

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

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

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

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

Target Markets

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

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

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

For fiscal 2002, 40.3% of the Companys total revenues were attributable
to sales to military and law enforcement authorities outside the U.S. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 7 of Notes to Consolidated Financial Statements.

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

5

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

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

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

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

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

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

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Sales and Marketing

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

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

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

Customers

The Companys principal customers historically have been in the public
sector of the U.S., including the federal, state and local governments, and in
the public sectors of a number of other countries. Approximately 40.3% of the
Companys revenues for fiscal 2002 were attributable to sales to military and
law enforcement authorities internationally, 47.1% were attributable to sales
to military authorities in the U.S. and 11.3% were attributable to sales to law
enforcement authorities in the U.S. Sales to public sector customers are
subject to a multiplicity of detailed regulatory requirements and public
policies. Such contracts may be conditioned upon the continuing availability of
public funds, which in turn depends upon lengthy and complex budgetary
procedures, and may be subject to certain pricing constraints. Moreover, U.S.
government contracts and those of many international government customers may
generally be terminated for a variety of factors when it is in the best
interests of the government. There can be no assurance that these factors or
others unique to government contracts will not have a material adverse effect
on the Companys future results of operations and financial condition.

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

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

In fiscal 2002, the Companys five largest customers accounted for
approximately 50.5% of the Companys revenues, with four customers accounting
for more than 10% of revenues. In fiscal 2001, the Companys five largest
customers accounted for approximately 34.9% of the Companys revenues, with no
customer accounting for more than 10% of revenues. Given the nature of the
Companys contracts, revenues attributable to specific customers are likely to
vary from year to year, and a significant customer in one year may not be a
significant customer in a subsequent year. In order to reach its growth
objectives, the Company will be required to seek contracts from new domestic
and international customers as well as orders from existing customers for
additional types of simulated firearms or increased quantities of previously
ordered systems and simulated weapons. A significant decrease in demand by or
the loss of one or more significant customers could have a material adverse
effect on the Companys results of operations or financial condition. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 7 of Notes to Consolidated Financial Statements.

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Research and Development

The Company engages in the research and development (RD) of new and
enhanced simulation and training technology using internally generated funds.
Software and hardware RD expenditures totaled $4.1 million, $4.8 million and
$4.0 million in fiscal 2002, 2001, and 2000, respectively. The Companys RD
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 RD is to design and develop specialized assemblies
as required for specific training scenarios per customer needs. Within this
discipline are motion platforms training stations, which realistically simulate
the movement of various land, sea, and air vehicles. Also, the development of
specialized system packages as well as electrode/mechanical camera and lens
drives controlling flexible lighting environments, which expand and enhance
training scenarios.

Management believes that FATS small arms weapon simulators excel in the
simulation industry for fidelity and reliability. The FATS weapon RD 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.

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

Audio-visual RD 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.

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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 occurs at the Companys headquarters where electrical
assemblers and technicians can assemble 30 primary simulation computers and
other unique simulator components per month on a single-shift basis. The
Company believes that this capacity can be expanded to 75 simulation computers
per month by adding additional personnel, using a second shift or to an even
greater capacity by acquisition of the requisite workstations and floor space
for manufacturing and warehouse operations.

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

Product Support

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

Proprietary Operating System; Raw Materials and Suppliers

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

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Backlog

As of March 31, 2002, the Company had a backlog of approximately $59.6
million compared with $55.4 million as of March 31, 2001. Management expects
that approximately $30.9 million of backlog will be delivered in fiscal 2003.
Contracts with U.S. and other governments may generally be terminated by the
customer, in whole or in part, for default or convenience if such termination
would be in the best interest of the customer. Accordingly, there can be no
assurance that the Companys backlog will result in future revenues. However,
these contracts generally provide for reimbursement of actual cost incurred
through the date of termination.

Competition

The recent increase in sales and acceptance of small arms simulation
products has brought about an increase in competition from both domestic and
international companies. The Company competes with divisions or subsidiaries of
larger companies solely dedicated to simulation for sales of the Companys
small and supporting arms simulation products, which currently include indirect
fire, air defense and armored vehicles. In the military market, FATS faces a
number of major competitors. They are Thales, CAE and ECC International. The
Thales product is a combination of Thales Training and Simulation, formerly
Thomson Training and Simulation of the UK, Cergy of France, Thales Air Defence
of Northern Ireland, formerly Shorts and Thales Elektronic Systeme in Koblenz,
Germany. CAE, a Canadian owned company, has a subsidiary operating out of the
UK, which specializes in indirect fire training systems. In the U.S. law
enforcement and commercial component of the market, the Companys principal
competitors include, among others, Advanced Interactive Systems and I.E.S.,
Incorporated. The international law enforcement component of the market has
also seen an increase in competition from small European companies. The growing
awareness of simulation budgets, combined with the competitive nature of the
marketplace, have contributed to the formation of teaming arrangements by
competitors that present potent competitive challenges. Many of the Companys
current and potential competitors have significantly greater financial,
technical and marketing resources than FATS.

Employees

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

Government Contracts and Regulation

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

The U.S. Government or the relevant agency in whole or in part for its
convenience may generally terminate government contracts if such termination
would be in the best interest of the U.S. Government.

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Furthermore, any contractor who is suspected of, or found to have engaged in,
commission of fraud or a criminal offense in connection with a government
contract or subcontract, a serious violation of the terms of a government
contract or subcontract, unfair trade practices, or any other offense
indicating moral turpitude or a lack of business integrity or business honesty
faces the possibility of being suspended or debarred from all further
government contracting. The decision to suspend or debar a contractor is
generally at the discretion of the government. Any such suspension or debarment
could have a material adverse effect on the Companys future results of
operations and financial condition. See Legal Proceedings.

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

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

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

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

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Item 2.  Properties

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

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

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

Item 3.  Legal Proceedings

Pursuant to applicable ATF regulations, the Company recently advised the
ATF that approximately 33 weapons that the Company believed were at customer
locations could not be accounted for after the Company conducted a physical
inventory of its weapons. The ATF responded that the Company should confirm the
number of missing weapons and file the formal report required by ATF
regulations. The Company conducted an investigation into this matter and
concluded that the number of weapons missing is 41. The Company has filed the
formal report with the ATF and local law enforcement authorities. The Company
anticipates that it will have further communication with the ATF and it is too
early to determine whether this matter will have a material adverse effect upon
the Company.

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

During fiscal year 2002, the Company reserved $0.3 million for legal fees
regarding claims made by certain customers of the Companys former subsidiary,
Dart International concerning the DVD component of the electronic archery
system. The Company successfully mitigated these claims and all were either
settled for a total amount within the reserve or the charges were dropped
altogether. In the opinion of management, these proceedings did not have a
material adverse effect on the Companys financial position, liquidity or
results of operations.

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.

Executive Officers of the Registrant

Ronavan Mohling,age 60, a Director of the Company since October 2000, was
elected Chairman of the Board of Directors and Chief Executive Officer on
August 9, 2002. 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 1998
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.

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David W. McGrane,age 51, was named Chief Operating Officer of the Company
in July 2002. Mr. McGrane previously served as Senior Vice President for ABB,
Inc.; he was employed by ABB, Inc. from 1989 to 2002, where he served in
various capacities. From 1973 to 1989, Mr. McGrane served as General Manager
and other managerial positions with Westinghouse Electric Corporation.

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

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PART II




Item 5.  Market Common Equity and Related Stockholder Matters

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

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

Quarterly Stock Price Range

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

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




Item 6.  Selected Financial Data

The selected consolidated financial data set forth below should be read in
conjunction with Managements 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).

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

|                                             |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                             |  | Fiscal Years Ended March 31,         
|                                             |  |                                      
|                                             |  | 2002                                  |        | 2001 |  | 2000 |         | 1999 |  | 1998
|                                             |  |                                       |        |      |  |      |         |      |  |     
|                                             |  | (In thousands, except per share data)
|Statement of Operations Data:                |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|Total Revenue                                |  | $                                     | 59,057 |      |  | $    | 41,501  |      |  | $    | 38,889  |   |  | $ | 55,514 |   |  | $ | 73,547 |  
|Gross Margin                                 |  |                                       | 17,450 |      |  |      | 6,475   |      |  |      | 7,194   |   |  |   | 19,331 |   |  |   | 36,321 |  
|Gross Margin %                               |  |                                       | 29.5   | %    |  |      | 15.6    | %    |  |      | 18.5    | % |  |   | 34.8   | % |  |   | 49.4   | %
|Operating Expenses                           |  | $                                     | 17,895 |      |  | $    | 18,403  |      |  | $    | 18,269  |   |  | $ | 16,329 |   |  | $ | 23,194 |  
|Operating Income (Loss)                      |  |                                       | (445   | )    |  |      | (11,928 | )    |  |      | (11,075 | ) |  |   | 3,002  |   |  |   | 13,127 |  
|Interest (Income) Expense, Net               |  |                                       | (220   | )    |  |      | 4,444   |      |  |      | 8,056   |   |  |   | 7,316  |   |  |   | 5,905  |  
|Other Expense                                |  |                                       | 61     |      |  |      | 257     |      |  |      | 325     |   |  |   | 400    |   |  |   | 97     |  
|Net Income (Loss) Applicable to Shareholders |  |                                       | 4,336  |      |  |      | (14,108 | )    |  |      | (18,902 | ) |  |   | (3,107 | ) |  |   | 3,233  |  
|Basic Earnings Per Share                     |  |                                       | 0.06   |      |  |      | (0.26   | )    |  |      | (0.91   | ) |  |   | (0.15  | ) |  |   | 0.16   |  
|Diluted Earnings Per Share                   |  |                                       | 0.06   |      |  |      | (0.26   | )    |  |      | (0.91   | ) |  |   | (0.15  | ) |  |   | 0.15   |  
|Balance Sheet Data:                          |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|Working Capital                              |  |                                       | 20,957 |      |  |      | 15,893  |      |  |      | 21,020  |   |  |   | 27,010 |   |  |   | 18,907 |  
|Total Assets                                 |  |                                       | 36,351 |      |  |      | 32,173  |      |  |      | 41,575  |   |  |   | 60,150 |   |  |   | 56,380 |  
|Long-term Debt                               |  |                                       | 42,977 |      |  |      | 43,990  |      |  |      | 73,772  |   |  |   | 72,200 |   |  |   | 63,000 |  
|Redeemable Preferred Stock                   |  |                                       | 27,319 |      |  |      | 27,049  |      |  |      | 0       |   |  |   | 0      |   |  |   | 0      |  
|Stockholders Deficit                         |  |                                       | 49,802 |      |  |      | 54,086  |      |  |      | 48,201  |   |  |   | 29,633 |   |  |   | 28,231 |  




Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations

This analysis of the Companys results of operations should be viewed in
conjunction with the accompanying financial statements, including notes
thereto, contained in Item 8 of the Annual Report on Form 10-K. This report may
contain certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Statements that are
predictive in nature and 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.

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

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

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

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

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

Company Overview

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

Although the Company sells its products and services to a large number of
military and law enforcement agencies both in the U.S. and abroad, the top five
customers accounted for approximately 50.5%, 34.9% and 58.2% of the Companys
revenues in fiscal 2002, 2001, and 2000, respectively. A significant increase
or decrease in demand by a major customer can have a substantial effect on the
Companys revenues and cash flow. Revenue from any one customer can vary
materially from period to period. In addition, a significant decrease in the
overall level or allocation of defense spending in the U.S. or other countries
could have a material adverse effect on the Companys future results of
operations and financial condition. The Company expects that sales to the U.S.
military will continue to comprise a significant portion of the Companys
revenues due to renewed commitments of the U.S. government to protect and
safeguard its domestic and international interests. Significant portions of the
Companys revenue are derived from customers located outside the U.S.,
primarily in Canada, Europe and Asia. During fiscal 2002, 2001, and 2000,
approximately 40.3%, 52.7%, and 70.5%, respectively, of the Companys revenues
were derived from sales to international customers. The Company expects that
sales to international customers will continue to account for a significant
percentage of future revenues, as the worldwide acceptance of simulation-based
training systems continues to grow. Sales to international customers may be
subject to political and economic risks, including political instability,
currency controls, exchange rate fluctuations and changes in import/export
regulations and tariff rates. In addition, various forms of protectionist trade
legislation have been and in the future may be proposed in the U.S. and certain
other countries. The Company, from time to time, experiences significant delays
in receipt of payment for the delivery of products from certain international
customers. Any resulting changes in current tariff structures or other trade
and monetary policies could adversely affect the Companys sales to
international customers. Certain of the Companys international sales are
denominated in foreign currencies. The Company does not currently hedge these
foreign currency transactions, since it believes its exposure to foreign
exchange rate fluctuations has not been material.

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Cost of revenues generally includes materials, direct labor, overhead, and
other direct costs. Operating expenses include selling, general and
administrative expenses, RD costs, bid and proposal expenses, plus depreciation
and amortization. Selling, general and administrative expenses consist
primarily of salaries, wages, benefits, international agents commissions, and
marketing expenses. RD expenses are largely comprised of salaries, wages,
benefits, prototype equipment and project supplies. The Company expenses all RD
costs in the period in which they are incurred.

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.                                                              
| 
| |  | Approximately $21 million of new preferred stock with a 10% cumulative dividend rate payable in additional shares
of preferred stock. This new preferred stock must be redeemed by the Company when junior secured debt is repaid.                                                                    
| 
| |  | 48,695,212 additional shares of Common Stock. As a result of this share issuance, the Companys senior lenders have
the power to vote a majority of the Companys voting common stock. See Item 1 Change of Control.                                                                                  
| 
| |  | Warrants to purchase 2,000,000 shares of Common Stock with an exercise price of $0.25 issued to the Centre Entities.                                                                                                                                                                                  
| 
| |  | Amended warrants already held by the Centre Entities to purchase 3,246,164 shares of Common Stock at $1.00 per
share by providing for payment of the exercise price in cash rather than the Series A Preferred Stock and making a
slight adjustment in the original exercise price of $1.03 per share.

Certain of the financial institutions that participated in the
restructuring transaction became holders of significant amounts of our common
stock issued in exchange for indebtedness. For a further discussion of the
relationship between the Company and its lenders see Item 13, Certain
Relationships and Related Transactions.

On December 31, 2001 and March 29, 2002, the Company and its lenders
amended the Credit Agreement. See Liquidity and Capital Resources and Note 3 of
Notes to Consolidated Financial Statements.

Related Party Transactions

The Company entered into a consulting agreement, dated October 4, 2000,
with Sugarman Company, LLP, a company in which Randy Sugarman is the managing
partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
were performed on an hourly basis, plus out-of-pocket expenses, and the Company
was billed accordingly. From May 16, 2001 until August 9, 2002, Mr. Sugarman
served as Interim Chief Executive Officer and President of the Company. Mr.
Sugarman ceased to be an officer of the Company on August 9, 2002 in connection
with the conclusion of the Companys engagement of Sugarman Company LLP. The
Company incurred consulting fees of $390,000 and $221,000, plus expenses of
$72,000 and $51,000, for consulting services under the agreement for the fiscal
years 2002 and 2001, respectively.

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Results of Operations

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

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



---

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

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

Net Revenues.Revenues increased $17.6 million, or 41.7%, to $59.1 million
for the twelve months ended March 31, 2002 as compared to $41.5 million for the
twelve months ended March 31, 2001. Sales to U.S. military customers for the
twelve months ended March 31, 2002, increased by $16.6 million, or 148.2%, from
$11.2 million to $27.8 million. The increase in military sales is due to
significant deliveries of items to customers that were in the Companys $55.4
million backlog of sales as of March 31, 2001. Sales to U.S. law enforcement
customers for the twelve months ended March 31, 2002 decreased $0.7 million or
(9.5%) to $6.7 million due to increased competition in this market. Sales to
international customers for the twelve months ended March 31, 2002 increased
$1.9 million, or 8.8%, to $23.8 million.

Gross Margin.Cost of revenues increased $6.6 million, or 18.8% to $41.6
million or 70.4% of revenues for fiscal 2002 as compared to $35.0 million, or
84.4% of revenues, for fiscal 2001. The decrease in cost of revenues as a
percentage of revenues is attributed to a higher volume of revenues to cover
fixed costs. In addition, the Company recorded a $4.2 million contract loss
provision in fiscal 2001 associated with certain contracts and anticipated
losses on existing contracts and a $0.5 million inventory write-off due to
anticipated changes in future sales demand of a certain product. These
decreases in costs were partially off-set by a $2.5 million increase in the
Companys inventory reserve for excess inventory related to older, slow-moving
products and $0.5 million increase in the warranty provisions for certain
contracts as well as to accrue for anticipated losses on existing contracts
during fiscal 2002. For fiscal year 2002, the Company began classifying
commissions paid to its agents in cost of revenues. The corresponding amount of
$967,000 for the twelve months ended March 31, 2001 has been reclassified from
selling, general, and administrative expenses to cost of revenues. As a result
of the foregoing, gross margin increased $10.9 million, or 167.7% to $17.4
million, or 29.5% of revenues, for fiscal year 2002 as compared to $6.5
million, or 15.6% of revenues, for fiscal 2001.

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Total Operating Expenses.Total operating expenses decreased $0.5 million,
or (2.7%) to $17.9 million for fiscal 2002 as compared to $18.4 million for
fiscal 2001. As a percentage of revenues, total operating expenses decreased to
30.4% for the twelve months ended March 31, 2002 as compared to 44.6% for the
twelve months ended March 31, 2001. Selling, general and administrative (SGA)
expenses increased $0.9 million, or 9.3%. This increase in SGA is due primarily
to increases in employee compensation costs, including $0.3 million related to
the separation agreement with the Companys former President and CEO and a
reserve for legal fees regarding recent claims made by certain customers of the
Companys former subsidiary, Dart International, concerning the DVD component
of the electronic archery system. In the opinion of management, these
proceedings did not have a material adverse effect on the Companys financial
position, liquidity or results of operations. Research and development expenses
decreased $0.6 million, or (14.0%), primarily attributable to the Companys
reduction in expenditures for research and development activities relating to
new products and product lines. Depreciation and amortization expense decreased
$0.5 million, or (22.6%), due to the impairment of long-lived assets recorded
in fiscal year 2001, which lowered the basis of long-lived assets and goodwill.
The Company assessed the carrying value of its goodwill during fiscal 2002
relating to the acquisition of certain assets from SBS Technologies during
fiscal year 1998 and determined it to have no value as the customer list
acquired no longer had merit for future sales of the Companys present product
lines. As a result, the Company recorded an impairment loss of $1.0 million in
the quarter ended March 31, 2002. The Company has no goodwill remaining as of
March 31, 2002. Also, fiscal year 2002 excludes an impairment loss of $1.2
million that was related to the impairment of long-lived assets of the
Companys Simtran subsidiary in fiscal year 2001.

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

Other Income (Expense), Net.Net interest income totalled $0.2 million, or
0.4% of revenues for the twelve months ended March 31, 2002 as compared to
interest expense of $4.4 million, or 10.6% of revenues for the twelve months
ended March 31, 2001. The reduction in interest expense is attributable to the
debt restructuring completed by the Company in August 2000. The exchange of the
old and new credit facilities 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) in August 2000. 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. During the twelve months ended March
31, 2002 and 2001, approximately $3.5 million and $2.0 million of the excess
carrying value was amortized as a reduction of interest expense. Interest
expense for the twelve months ended March 31, 2002 also excluded fees
associated with the restructuring of approximately $0.6 million in fiscal year
2001. The amortization of the excess carrying amount of old borrowings will
result in a much lower effective interest cost until the debt matures in
September of 2003.

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

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

Accretion of Preferred Stock.The expense for the accretion of the
preferred stock was a total of $0.3 million for the twelve months ended March
31, 2002 as compared to $0.3 million for the twelve months ended March 31, 2001
related to the preferred stock issued in November, 1998 which was exchanged in
August 2000 for new preferred stock. As a result, the Company will record
future interest expense and accretion of preferred stock on a discounted basis.
The Company records accretion of preferred stock as an offset against the
amortization of the debt liability incurred during the restructure transaction
in August 2000. As a result the Company incurred $2.4 million of expense
related to the accretion of preferred stock during fiscal year 2002, which was
off-set by ($2.1 million) of debt liability amortization, thereby resulting in
a net accretion of preferred stock of $0.3 million during fiscal year 2002.

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

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 was 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 (SGA) expenses increased $0.1 million or 1.0%. This decrease
in SGA 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. RD 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.

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

Accretion of Preferred Stock.The expense for the accretion of the
preferred stock issued in November 2000 was a total of $0.3 million for the
twelve months ended March 31, 2001 as compared to $0.3 million for the twelve
months ended March 31, 2000 related to the preferred stock issued in November,
1998 which was exchanged in August 2000 for new preferred stock. The exchange
of the old and new credit facilities 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) in August 2000. 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.
The Company records accretion of preferred stock offset against the
amortization of the debt liability incurred during the restructure transaction
in August 2000. As a result the Company incurred $1.3 million of expense
related to the accretion of preferred stock during fiscal year 2001, which was
off-set by ($1.1 million) of debt liability amortization, thereby resulting in
a net accretion of preferred stock of $0.3 million during fiscal year 2001. An
additional accretion amount of $0.1 million was recorded for preferred stock
issued in November 1998.

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 $1.7 million was
recorded during fiscal year 2001 as a result of the Restructure Transaction.

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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.

Quarterly Results of Operations

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

|                                                    |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|--------------------------------------------------- | ------- | - | ------------------------------------- | ---- | ---------------- | - | ---------- | ---- | ------- | - | ------- | ---- | -------- | - | ------- | ---- | ------- | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ---- | 
|                                                    |         |   | Quarter Ended                        
|                                                    |         |   |                                      
|                                                    |         |   | Fiscal Year 2002                      |      | Fiscal Year 2001
|                                                    |         |   |                                       |      |                 
|                                                    |         |   | (Restated)                            |      | (Restated)       |   | (Restated) |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |       
|                                                    |         |   | June 30                               |      | Sept. 30         |   | Dec. 31    |      | Mar. 31 |   | June 30 |      | Sept. 30 |   | Dec. 31 |      | Mar. 31
|                                                    |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |        
|                                                    |         |   | (In thousands, except per share data)
|Revenues                                            |         | $ | 11,639                                |      |                  | $ | 16,897     |      |         | $ | 15,396  |      |          | $ | 15,125  |      |         | $ | 10,271 |       |   | $ | 7,368  |       |   | $ | 9,109  |       |   | $ | 14,753 |     
|Gross Margin                                        |         |   | 4,480                                 |      |                  |   | 4,687      |      |         |   | 4,652   |      |          |   | 3,631   |      |         |   | 2,987  |       |   |   | (2,163 | )     |   |   | 758    |       |   |   | 5,225  |     
|Gross Margin %                                      |         |   | 38                                    | %    |                  |   | 28         | %    |         |   | 30      | %    |          |   | 24      | %    |         |   | 29     | %     |   |   | (29    | )%    |   |   | 8      | %     |   |   | 35     | %   
|Operating Expense                                   |         | $ | 4,139                                 |      |                  | $ | 4,073      |      |         | $ | 4,267   |      |          | $ | 5,416   |      |         | $ | 3,944  |       |   | $ | 3,780  |       |   | $ | 5,805  |       |   | $ | 5,206  |     
|                                                    |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|Operating Income (Loss)                             |         |   | 341                                   |      |                  |   | 614        |      |         |   | 385     |      |          |   | (1,785  | )    |         |   | (957   | )     |   |   | (5,943 | )     |   |   | (5,047 | )     |   |   | 19     |     
|Interest (Income) Expense, Net                      |         |   | (145                                  | )    |                  |   | 1          |      |         |   | 67      |      |          |   | (143    | )    |         |   | 2,346  |       |   |   | 2,225  |       |   |   | 64     |       |   |   | (191   | )   
|Other (Income) Expense                              |         |   | (33                                   | )    |                  |   | 64         |      |         |   | 31      |      |          |   | (1      | )    |         |   | 22     |       |   |   | 284    |       |   |   | (6     | )     |   |   | (43    | )   
|                                                    |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|Pre-Tax Income (Loss)                               |         |   | 519                                   |      |                  |   | 549        |      |         |   | 287     |      |          |   | (1,641  | )    |         |   | (3,325 | )     |   |   | (8,452 | )     |   |   | (5,105 | )     |   |   | 253    |     
|Tax Provision (Benefit)                             |         |   | 296                                   |      |                  |   | 186        |      |         |   | 63      |      |          |   | (5,437  | )    |         |   | (116   | )     |   |   | 54     |       |   |   | 54     |       |   |   | (1,044 | )   
|                                                    |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|Net Income (Loss)                                   |         |   | 223                                   |      |                  |   | 363        |      |         |   | 224     |      |          |   | 3,796   |      |         |   | (3,209 | )     |   |   | (8,506 | )     |   |   | (5,159 | )     |   |   | 1,297  |     
|Accretion of Preferred Stock                        |         |   | 65                                    |      |                  |   | 67         |      |         |   | 68      |      |          |   | 70      |      |         |   | 66     |       |   |   | 74     |       |   |   | 57     |       |   |   | 63     |     
|Gain on extinguishment of Preferred Stock           |         |   | 0                                     |      |                  |   | 0          |      |         |   | 0       |      |          |   | 0       |      |         |   | 0      |       |   |   | (1,729 | )     |   |   | 0      |       |   |   | 0      |     
|                                                    |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|Net Income (Loss) applicable to common
stockholders |         |   | 158                                   |      |                  |   | 296        |      |         |   | 156     |      |          |   | 3,726   |      |         |   | (3,275 | )     |   |   | (6,851 | )     |   |   | (5,216 | )     |   |   | 1,234  |     
|Earnings per common share                           |         |   |                                       |      |                  |   |            |      |         |   |         |      |          |   |         |      |         |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|                                                    | Basic   |   |                                       | 0.00 |                  |   |            | 0.00 |         |   |         | 0.00 |          |   |         | 0.05 |         |   |        | (0.16 | ) |   |        | (0.13 | ) |   |        | (0.07 | ) |   |        | 0.02 | 
|                                                    | Diluted |   |                                       | 0.00 |                  |   |            | 0.00 |         |   |         | 0.00 |          |   |         | 0.05 |         |   |        | (0.16 | ) |   |        | (0.13 | ) |   |        | (0.07 | ) |   |        | 0.02 | 

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Restatement

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

Summary of Changes

Condensed Consolidated Statements of Operations
(Unaudited and in thousands)


|                                      |  |                   |        |          |  |               |        | 
|------------------------------------- |  | ----------------- | ------ | -------- |  | ------------- | ------ | 
|                                      |  | Quarter Ended    
|                                      |  | December 31, 2001
|                                      |  |                  
|                                      |  |                   |        |          |  | As Previously
|                                      |  | Restated          |        | Reported
|                                      |  |                   |        |         
|Revenues                              |  |                   | 15,396 |          |  |               | 15,999 | 
|Cost of Revenues                      |  |                   | 10,744 |          |  |               | 11,255 | 
|Gross Margin                          |  |                   | 4,652  |          |  |               | 4,744  | 
|Operating income                      |  |                   | 385    |          |  |               | 477    | 
|Income before taxes                   |  |                   | 287    |          |  |               | 379    | 
|Provision for income taxes            |  |                   | 63     |          |  |               | 94     | 
|Net income                            |  |                   | 224    |          |  |               | 285    | 
|Net income applicable to Shareholders |  |                   | 156    |          |  |               | 217    | 
|Earnings per share basic              |  |                   | 0.00   |          |  |               | 0.00   | 
|Earnings per share diluted            |  |                   | 0.00   |          |  |               | 0.00   | 

|                                      |  |                    |        |          |  |               |        | 
|------------------------------------- |  | ------------------ | ------ | -------- |  | ------------- | ------ | 
|                                      |  | Quarter Ended     
|                                      |  | September 30, 2001
|                                      |  |                   
|                                      |  |                    |        |          |  | As Previously
|                                      |  | Restated           |        | Reported
|                                      |  |                    |        |         
|Revenues                              |  |                    | 16,897 |          |  |               | 15,863 | 
|Cost of Revenues                      |  |                    | 12,210 |          |  |               | 11,457 | 
|Gross Margin                          |  |                    | 4,687  |          |  |               | 4,406  | 
|Operating income                      |  |                    | 614    |          |  |               | 333    | 
|Income before taxes                   |  |                    | 549    |          |  |               | 268    | 
|Provision for income taxes            |  |                    | 186    |          |  |               | 91     | 
|Net income                            |  |                    | 363    |          |  |               | 177    | 
|Net income applicable to shareholders |  |                    | 296    |          |  |               | 110    | 
|Earnings per share basic              |  |                    | 0.00   |          |  |               | 0.00   | 
|Earnings per share diluted            |  |                    | 0.00   |          |  |               | 0.00   | 

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

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

Liquidity and Capital Resources

The Companys principal liquidity and capital needs are to fund working
capital, provide debt service, and make capital expenditures necessary to
support and grow its business. The Company has entered into a restructured
Credit Agreement as discussed above under Restructure Transaction. The initial
and further amended capital structure provides approximately $2.2 million to
support existing letters of credit and $0.8 in revolving loan commitments to
provide future working capital requirements in connection therewith. Therefore,
the Companys primary source of liquidity and capital resources is cash
generated from its operating activities. On December 31, 2001 and March 29,
2002, the Company and its Lenders amended the Amended Agreement as follows:

On December 31, 2001, the Company and its lenders amended the Credit
Agreement thereby entering into the First Amendment and Waiver to the Credit
Agreement (the First Amendment), which made the following changes:



| |  | The quarterly limitations on capital expenditures were removed, but
the full year limitation on capital expenditures for the Company
remains at an amount equal to 20% of the Companys EBITDA for such
fiscal year.                                                                                                                                                                                                                             
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The requirement of the Credit Agreement calling for payment of
interest in cash on the Junior Secured Loans for the interest periods
ending on March 31, 2001, June 30, 2001, September 30, 2001, December
31, 2001 and March 31, 2002 was waived and it was provided that
interest due on the Junior Secured Loans for such interest periods
would be payable in kind by the delivery to each of the lenders of
additional Junior Secured Notes.

On March 29, 2002, the Company and its lenders amended the Credit
Agreement thereby entering into the Second Amendment and Waiver to the Credit
Agreement (the Second Amendment), which made the following changes:



| |  | Certain of the Lenders agreed to provide a $2,200,000 Support Letter of Credit Facility. This new facility has first out rights in the Collateral.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | The lenders agreed to continue to receive interest payments on the Junior Secured Loans after
March 31, 2002 by payment in kind by the delivery to each of the lenders of additional Junior
Secured Loans. The amendment requires that the Support Letters of Credit Facility be
cash-collateralized at 105%.                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The amendment further provides that if EBITDA exceeds 120% of the amount necessary for payment of
interest on the Loans (other than the Junior Secured Loans) plus the quarterly amount necessary
to cash-collateralize the Support Letters of Credit, the interest on the Junior Secured Loans
will be paid, to the extent of such excess, in cash and not in kind.
| 
| |  | The negative pledge contained in the Credit Agreement was amended to allow the Company to deposit
up to $2,310,000 in a cash collateral account to secure the Support Letter of Credit.                                                                                                                                                                             
| 
| |  | The maturity date of the Senior Secured Loans, Junior Secured Loans and New Revolving Loans was
extended from March 31, 2003 to September 30, 2003.                                                                                                                                                                                                                 
| 
| |  | The interest rate on New Revolving Loans was raised to Prime Rate plus 2% from Prime Rate plus 1%.                                                                                                                                                                                                                                                                  
| 
| |  | The Credit Agreement was amended to provide that the Company pay an unused commitment fee with
respect to the unused portion of the New Revolving Credit Commitment of 0.5% per annum.                                                                                                                                                                              
| 
| |  | The Company shall pay a non-refundable fronting fee for each New Letter of Credit issued in an
amount equal to 0.25% of the amount of such New Letter of Credit; an annual non-refundable letter
of credit commission for each New Letter of Credit equal to 1.25% of the average daily aggregate
amount of all New Letter of Credits outstanding.                  

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 entered into a restructured Credit
Agreement in August 2000 as discussed above under Restructure Transaction. The
Company amended the restructured Credit Agreement in December and March 2002 to
provide additional working capital through a new $2.2 million letter of credit
commitment and the extension of the Companys option to pay interest on the
Companys junior secured loans through the issuance of additional junior
secured loans. In addition, the Company received a $4.9 million federal income
tax refund in April 2002 as a result of recent changes in the tax laws. The
amendments and federal tax refund received have provided additional working
capital for the Company in the near term. However, the Companys primary source
of liquidity and capital resources continues to be cash generated from its
operating activities. The Companys future operations will be constrained
unless it can continue to increase revenues and reduce costs improving
operating margins and generating adequate cash flow to finance working capital
needs.

The Company is subject to several business and market risks. The Company
must continue to achieve its revenue targets and cost reduction objectives in
the current fiscal year in order to generate adequate cash flow to fund working
capital needs and to service debt requirements; the Company must receive new
contracts for production to be delivered in the current fiscal year to meet its
revenue targets and to replenish existing backlog to sustain the revenue
targets in future periods; the Company must continue to negotiate favourable
repayment terms under the Credit Agreement which is currently scheduled to
mature in September 2003.

As a result of the business and market risks noted above, the Companys
continuation as a going concern is dependent on achieving the following
business objectives: (a) continue production work on existing contracts; (b)
obtain new contracts for delivery in the current period and future periods; 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 assure operations are conducted
at the lowest cost possible; (2) remain focused on revenue maximization of
standard products and continue to seek out new contracts with higher margin
potentials and more favourable payment terms, primarily within the
international and military segments of the market; (3) minimize capital
expenditures in non-strategic areas; (4) continue to improve inventory turns
and lower inventory investment and; (5) continue to negotiate favorable
repayment terms with its lenders.

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The Company believes that this business strategy may achieve positive
operating results and cash flows provided that the Company achieves the new
business revenue targets necessary to finance working capital needs. There can
be no assurances that this strategy, and the objectives cited above, will be
successful or that the new contracts will be awarded to the Company. In
addition, the Company could elect to pursue other business objectives that
include seeking strategic partnering, a secondary offering or merger, or
acquisition transactions.

As of March 31, 2002, the Company had working capital of $21.0 million
compared to $15.9 million as of March 31, 2001. The Companys spending for its
fiscal 2002 capital expenditures was $0.8 million. Such expenditures include
leasehold improvements, computer equipment and software, marketing product
demonstration equipment, and manufacturing machinery.

The Companys cash and cash equivalents increased by $2.4 million in
fiscal 2002 compared to essentially no change and a net decrease of $0.9
million in fiscal 2001 and 2000, respectively. For fiscal 2002, the Companys
operating activities generated cash of approximately $4.4 million. The
Companys investing activities used $0.8 million in restricted cash, which was
used to secure contract performance guarantees, used $0.8 million for capital
expenditures and generated $0.1 million from the disposal of property and
equipment. The Company used $0.1 million for financing activities in fiscal
2002 for repayment of long-term debt. The overall effect of foreign exchange
for fiscal 2002 was a decrease in cash and cash equivalents of $0.2 million as
compared to essentially no change for fiscal 2001.

Recent Accounting Pronouncements

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

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

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

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

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

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Critical Accounting Policies

The SEC has recently issued Financial Reporting Release No. 60, Cautionary
Advice Regarding Disclosure About Critical Accounting Policies (FRR 60),
suggesting companies provide additional disclosure and commentary on those
accounting polices considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to the Companys financial condition
and results, and requires significant judgement and estimates on the part of
management in its application. Refer to footnote 2 in the disclosures to the
Companys financial statements included in Form 10-K for a complete listing of
significant accounting policies. Firearms Training Systems, Inc. believes the
following represents the critical accounting policies of the Company as
contemplated by FRR 60.

Revenue Recognition

Customer contracts that require significant customization of the Companys
existing proprietary platform or require the development of new systems to meet
required customer specifications are accounted for under the percentage of
completion method, measured by the percentage of cost incurred to date to the
estimated total cost for each contract. Accounting for such contracts is
essentially a process of measuring the results of relatively long-term events
and allocating those results to relatively short-term accounting periods. This
involves considerable use of estimates in determining costs and profits and
thereby estimating the timing of revenue recognition and in assigning the
amounts to accounting periods. The process is complicated by the need to
evaluate continually the uncertainties inherent in the performance of contracts
and by the need to rely on estimates of revenues, costs, and the extent of
progress toward completion. The company continually monitors each of these
estimates based on the most current information available from the project
managers and project engineers assigned to the programs. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. These revisions could materially increase
or decrease profit margins on particular contracts in future periods.

Impairment of Long-Lived Assets

Management periodically assesses the recoverability of the Companys
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In assessing the
recoverability of long-lived assets management assesses the historical cash
flow associated with that asset in conjunction with undiscounted future cash
flow projections. The undiscounted future cash flow analysis is based on
numerous assumptions including, but not limited to, sales history and future
estimated sales demand. In the event the undiscounted cash flow analysis does
not support the underlying assets carrying value, the asset is written-down to
its estimated fair market value.

Inventory Reserve

Inventories are valued at the lower of cost on a moving weighted average
or market, cost being determined on the first-in, first-out basis and market is
defined as net realizable value. Management periodically reviews Company
inventory for items that may be deemed obsolete, damaged or for amounts on hand
in excess of anticipated future demand. The underlying assumptions utilized in
assessing the Companys inventory change from time-to-time due to change in the
underlying sales mix, the release of new versions of the Companys proprietary
system and overall changes in technology and the marketplace. As the Company
develops new product lines future charges against income may be necessary to
reduce inventory to its net realizable value.

Contract Cost Provision Reserve

Management routinely assesses the Companys performance and estimated cost
to complete ongoing sales contracts. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income. In the event Management anticipates incurring costs in excess
of contract revenues, the Company records a contract cost provision reserve in
an amount equal to the estimated costs in excess of contracted revenues in the
period in which such information becomes apparent.

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Warranty Cost Provision Reserve

Management periodically estimates expected warranty costs under the
Companys standard product warranty. In determining the estimate, Management
analyzes the relationship of historical standard warranty costs incurred on
historical sales and the underlying product mix comprising the historical
sales. Management, in turn, utilizes this historical information to estimate
expected warranty costs on recent sales within the standard warranty time
frame. Due to the inherent limitations in the estimation process, the potential
for product defects and other unforeseen circumstances by the Company, the
possibility exists that the recorded warranty provision reserve will be
inadequate to offset actual warranty costs incurred resulting in additional
charges against income. Also, actual warranty costs may be significantly lower
than expected resulting in the reduction of the Companys warranty provision
reserve generating an addition to income in future periods.

Commitments and Other Contractual Obligations

Disclosure of Commitments and Other Contractual Obligations
March 31, 2002

|                             |  |                        |        |        |  |           |       |           |  |         |        |       |  |   |       |  |  |   |     | 
|---------------------------- |  | ---------------------- | ------ | ------ |  | --------- | ----- | --------- |  | ------- | ------ | ----- |  | - | ----- |  |  | - | --- | 
|                             |  |                        |        |        |  | Less than |       | Within    |  | Within  |        | After
|                             |  | Total                  |        | 1 year |  | 1-3 years |       | 4-5 years |  | 5 years
|                             |  |                        |        |        |  |           |       |           |  |        
|                             |  | (Amounts in thousands)
|Long-term debt:              |  |                        |        |        |  |           |       |           |  |         |        |       |  |   |       |  |  |   |     | 
|Working capital borrowings   |  | $                      | 130    |        |  | $         | 0     |           |  | $       | 130    |       |  | $ | 0     |  |  | $ | 0   | 
|Long-term debt Senior        |  |                        | 12,000 |        |  |           | 0     |           |  |         | 12,000 |       |  |   | 0     |  |  |   | 0   | 
|Long-term debt Junior        |  |                        | 27,334 |        |  |           | 0     |           |  |         | 27,334 |       |  |   | 0     |  |  |   | 0   | 
|Debt discount*               |  |                        | 3,512  |        |  |           | 3,512 |           |  |         | 0      |       |  |   | 0     |  |  |   | 0   | 
|Other:                       |  |                        | 4,436  |        |  |           | 948   |           |  |         | 1,626  |       |  |   | 1,442 |  |  |   | 420 | 
|Acquisition earn-out payment |  |                        | 708    |        |  |           | 708   |           |  |         | 0      |       |  |   | 0     |  |  |   | 0   | 



---

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




Item 7(a).  Quantitative and Qualitative Disclosures About Market Risk

The Companys major market risk exposure arises from changes in interest
Rates and its impact on variable rate debt instruments. In addition, the
Company has interest rate risk associated with fixed rate debt at maturity. The
Company objectives in interest rate risk management are to limit the impact of
interest rate changes on earnings and cash flows, and to lower overall
borrowing costs. To achieve its objectives, the Company borrows at fixed rates
when it believes it is in its best interests to do so, and may enter into
derivative financial instruments, such as interest rate swaps and caps, in
order to limit its exposure to interest rate fluctuations. The Company does not
enter into derivative or interest rate transactions for speculative purposes.
There were no derivative contracts in effect at March 31, 2002.

28

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The following table summarizes information related to the Companys market
risk sensitive debt instruments as of March 31, 2002:

Expected Maturity Date
Fiscal Year Ending March 31, 2002

|                               |  |                        |       |      |  |      |       |            |  |       |        |            |  |  |   |  |  |  |        |   |  |  |        |    
|------------------------------ |  | ---------------------- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ------ | ---------- |  |  | - |  |  |  | ------ | - |  |  | ------ | ---
|                               |  | 2002                   |       | 2003 |  | 2004 |       | Thereafter |  | Total |        | Fair Value
|                               |  |                        |       |      |  |      |       |            |  |       |        |           
|                               |  | (Dollars in thousands)
|Fixed rate debt(1)             |  |                        | 0     |      |  |      | 0     |            |  |       | 27,335 |            |  |  | 0 |  |  |  | 27,335 |   |  |  | 27,335 | (3)
|Average interest rate          |  |                        | 10.00 | %    |  |      | 10.00 | %          |  |       | 10.00  | %          |  |  |   |  |  |  | 10.00  | % |  |  |        |    
|Variable interest rate debt(2) |  |                        | 0     |      |  |      | 0     |            |  |       | 12,130 |            |  |  | 0 |  |  |  | 12,130 |   |  |  | 12,130 |    
|Average interest rate          |  |                        | 6.75  | %    |  |      | 6.75  | %          |  |       | 6.75   | %          |  |  |   |  |  |  | 6.75   | % |  |  |        |    



---

|(1) |  | Interest on fixed rate debt is 10%                                                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Interest on variable rate debt is based on the lenders prime rate, plus 2%                                                                             
|   
|(3) |  | The Company believes the carrying amount of the fixed rate debt approximates fair value due to the proximity to the maturity date of September 30, 2003.




Item 8.  Financial Statements and Supplementary Data

The Report of Independent Public Accountants, the Consolidated Financial
Statements, Financial Notes to Consolidated Financial Statements and Statement
Schedule that appear on pages F-1 through F-28 and S-1 of this Form 10-K are
incorporated herein by reference.




Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Previous Independent Accountants

Firearms Training Systems, Inc. dismissed Arthur Andersen LLP as its
independent accountants effective April 17, 2002. Firearms Training Systems,
Inc.s Audit Committee and Board of Directors participated in and approved the
decision to change independent accountants. Arthur Andersen LLPs audit reports
on the Firearms Training Systems, Inc.s financial statements for the two
fiscal years ending March 31, 2001 did not contain an adverse opinion or
disclaimer of opinion and no such report was qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with its
audits for Firearms Training Systems, Incs two fiscal years ending March 31,
2001 and through April 17, 2002, there were no disagreements between Firearms
Training Systems, Inc. and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Arthur
Andersen LLP would have caused them to make reference thereto in their report
on the financial statements for such years. During the Companys two fiscal
years ending March 31, 2001 and through April 17, 2002, there have been no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Firearms
Training Systems, Inc. requested Arthur Andersen LLP to furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agrees with the above statements made by the Company. A copy of such letter,
dated April 30, 2002, was filed as Exhibit 16.1 to Firearms Training Systems,
Inc.s Current Report on Form 8-K/A, dated as of April 30, 2002.

New Independent Accountants

Firearms Training Systems, Inc. engaged PricewaterhouseCoopers LLP as its
new independent accountants as of April 17, 2002. During the two fiscal years
ending March 31, 2001 and the interim period from April 1, 2002 through April
17, 2002, Firearms Training Systems, Inc. did not consult with
PricewaterhouseCoopers LLP regarding any of the matters or events set forth in
Item 304(a)(2) of Regulation S-K.

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PART III




Item 10.  Directors and Executive Officers of the Company

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

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

|                   |  |     |    |          |  |                                                                         
|------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Ronavan Mohling(1) |  |     | 60 |          |  | Chairman of the Board of Directors, Chief Executive
Officer and Director
|William J. Bratton |  |     | 54 |          |  | Director                                                                
|Mary Ann Gilleece  |  |     | 61 |          |  | Director                                                                
|Randy Sugarman(1)  |  |     | 60 |          |  | Director                                                                
|Scott Perekslis    |  |     | 34 |          |  | Director                                                                
|R. C. Whitaker     |  |     | 54 |          |  | Director                                                                
|David W. McGrane   |  |     | 51 |          |  | Chief Operating Officer                                                 
|John A. Morelli    |  |     | 53 |          |  | Vice President, Chief Financial Officer and Treasurer                   



---

|(1) |  | Mr. Mohling, a Director of the Company, was elected Chairman of the Board of Directors
and Chief Executive Officer on August 9, 2002. Mr. Sugarman ceased to be an officer of
the Company on that date in connection with the conclusion of the Companys engagement of
Sugarman Company LLP.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The information contained under the heading Executive Officers of the
Registrant in Part 1 hereof is incorporated herein by reference.

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

Scott Perekslis

Managing Director


Centre Partners Management LLC


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

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R.C. WhitakerPresident and CEOStrategic Distribution

R. C. Whitaker, age 54, was named as a Director of the Company in October
2000 to fill a vacancy that was due to resignation of a director following the
Restructure Transaction in fiscal year 2001. Mr. Whitaker has been with
Strategic Distribution Inc. since September 2000. Prior to joining SDI, he was
an Operating Partner with Pegasus Investors (a private equity funds group) from
1999 to 2000. Previous operational positions were President and CEO of Johnson
Worldwide Associates (a sporting goods manufacturer) from 1996 to 1999,
President and CEO of EWI, Inc. (an automotive tier 1 supplier) from 1995 to
1996, Chairman, President and CEO of Colts 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 and Precision Navigation, Inc., as well as a member of the
Board of Trustees for The College of Wooster. Mr. Whitaker is a member of the
Audit Committee of the Board of Directors.

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

William J. BrattonPresidentThe Bratton Group LLC

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

Ronavan MohlingPartner and PrincipalCapitol Places, LLC

Ronavan Mohling, age 60, was named as a Director of the Company in October
2000. Mr. Mohling was elected Chairman of the Board of Directors and Chief
Executive Officer on August 9, 2002. 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.

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

Mary Ann Gilleece, J.D., L.L.M.Attorney, Managing DirectorVan Scoyoc Kelly PLLC

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

Randy Sugarman, CPAManaging PartnerSugarman Company, LLP

Randy Sugarman, age 60, was named a Director of the Company in October
2000. Mr. Sugarman is the managing partner of Sugarman Company LLP (Financial
Consultants), which he founded in 1977. Mr. Sugarman served as Chairman of the
Board of Directors of the Company from October 2000 until August 9, 2002, as
interim President and Chief Executive Officer from May 2001 until August 9,
2002 and as interim Chief Operating Officer from May 2002 to July 2002. Mr.
Sugarman ceased to be an officer of the Company on August 9, 2002, in
connection with the conclusion of the Companys engagement of Sugarman Company
LLP.

Section 16(a) Beneficial Ownership Reporting Compliance:

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




Item 11.  Executive Compensation

Directors Compensation

Each director of the Company who is not an officer 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.

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Summary Compensation Table

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

|                                    |                                                                              |      |                     |      |            |     |            |            |       |             |            |              |       |  |                        |        |     |  |   |        |  |  |         |         |    
|----------------------------------- | ---------------------------------------------------------------------------- | ---- | ------------------- | ---- | ---------- | --- | ---------- | ---------- | ----- | ----------- | ---------- | ------------ | ----- |  | ---------------------- | ------ | --- |  | - | ------ |  |  | ------- | ------- | ---
|                                    |                                                                              |      |                     |      |            |     |            |            |       |             |            |              |       |  | Long Term Compensation |        |     |  |  
|                                    |                                                                              |      | Annual Compensation |      |            |     |            |            |      
|                                    |                                                                              |      |                     |      | Restricted |     | Securities |            | All  
|                                    |                                                                              |      | Fiscal              |      | Salary     |     | Bonus      |            | Stock |             | Underlying |              | Other
|Officer Name and Principal Position |                                                                              | Year |                     | ($)  |            | ($) |            | Awards ($) |       | Options (#) |            | Compensation
|                                    |                                                                              |      |                     |      |            |     |            |            |       |             |            |             
|Randy Sugarman                      |                                                                              |      | 2002                |      |            |     | 0          |            |       |             | 0          |              |       |  | 0                      |        |     |  | 0 |        |  |  | 390,000 | (1)    
|                                    | Chairman of the Board, Interim                                               |      |                     | 2001 |            |     |            | 0          |       |             |            | 0            |       |  |                        | 0      |     |  |   | 0      |  |  |         | 221,000 | (1)
|                                    | President and Chief Executive Officer
and Interim Chief Operating
Officer(1) |      |                     |      |            |     |            |            |       |             |            |              |       |  |                        |        |     |  |   |        |  |  |         |         |    
|Robert F. Mecredy                   |                                                                              |      | 2002                |      |            |     | 76,274     |            |       |             | 0          |              |       |  | 0                      |        |     |  | 0 |        |  |  | 239,786 | (3)(4) 
|                                    | President and Chief                                                          |      |                     | 2001 |            |     |            | 200,000    |       |             |            | 50,000       |       |  |                        | 0      |     |  |   | 0      |  |  |         | 5,998   | (3)
|                                    | Executive Officer(2)                                                         |      |                     | 2000 |            |     |            | 160,000    |       |             |            | 0            |       |  |                        | 0      |     |  |   | 0      |  |  |         | 5,049   | (3)
|John A. Morelli                     |                                                                              |      | 2002                |      |            |     | 125,000    |            |       |             | 50,000     |              |       |  | 0                      |        |     |  | 0 |        |  |  | 2,423   | (3)    
|                                    | Vice President, Chief Financial                                              |      |                     | 2001 |            |     |            | 125,000    |       |             |            | 35,000       |       |  |                        | 0      |     |  |   | 0      |  |  |         | 3,089   | (3)
|                                    | Officer Treasurer(5)                                                         |      |                     | 2000 |            |     |            | 105,000    |       |             |            | 0            |       |  |                        | 18,750 | (6) |  |   | 90,000 |  |  |         | 5,689   | (3)



---

|(1) |  | Mr. Sugarman ceased to be an officer of the Company on August 9, 2002, in the connection with the conclusion of the engagement of Sugarman Company LLP. The amounts set forth in the table consist of consulting fees for Mr.
Sugarmans services received by Sugarman Company LLP, a company in which Mr. Sugarman is managing general partner and has an 80% ownership interest. See Certain Relationships and Related Transactions Compensation Committee
Interlocks and Insider Participation.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Mecredy became the Companys President and Chief Executive Officer on October 1, 1999. He resigned effective May 16, 2001.                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) |  | Matching contributions made by the Company to its 401(k) plan.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) |  | Mr. Mecredys All Other Compensation includes severance payments of $237,500. See Employment and Related Matters.                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) |  | Mr. Morelli also served as Chief Operating Officer from October 2000 to May 2002.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) |  | Mr. Morelli was granted 30,000 restricted shares of common stock priced at $0.625 per share during fiscal 2000. The restrictions on these shares lapsed on September 30, 2000 and March 31, 2001, respectively.                                                                                                                                                                                                                                                                                   

Fiscal Year-End Option Values

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

|                  |  |                      |         |                       |  |             |         |               |  |   |       |  |  |   |       | 
|----------------- |  | -------------------- | ------- | --------------------- |  | ----------- | ------- | ------------- |  | - | ----- |  |  | - | ----- | 
|                  |  | Number of Securities |         |                       |  |             |         |               |  |  
|                  |  | Underlying           |         | Value of Unexercised 
|                  |  | Unexercised Options  |         | in-the-Money Options 
|                  |  | at Fiscal Year-End   |         | at Fiscal Year-End(1)
|                  |  |                      |         |                      
|Officer Name      |  | Exercisable          |         | Unexercisable         |  | Exercisable |         | Unexercisable
|                  |  |                      |         |                       |  |             |         |              
|Robert F. Mecredy |  |                      | 160,000 |                       |  |             | 320,000 |               |  | $ | 3,200 |  |  | $ | 6,400 | 
|John A. Morelli   |  |                      | 209,915 |                       |  |             | 326,045 |               |  | $ | 2,570 |  |  | $ | 6,430 | 



---

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

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Employment and Related Matters

On May 18, 2001, Robert F. Mecredy tendered his resignation from his
positions of President, Chief Executive Officer, and Director of the Company.
Under the terms of his Separation Agreement, Mr. Mecredy continued in the
Companys employment until July 15, 2001 to assist in the transition of the new
management team for an aggregate compensation of $12,500. In addition, the
Company agreed to pay him a performance bonus of $50,000 for fiscal year 2001,
$61,854.26 for accrued and unused vacation and an aggregate amount of $200,000
in bi-weekly installments during the 24 month period following termination of
his employment and a further amount of $37,500. The Company also amended Series
F and Series H stock option agreements, each in the amount of 240,000 shares of
common stock so that (1) the Series F Options (i) will continue vesting and
remain exercisable until the second anniversary of termination of employment,
and (ii) are terminable for breach of certain provisions of the Separation
Agreement rather than his existing agreements and (2) the Series H Options (i)
expire on the third rather than the seventh anniversary of the Option date,
(ii) continue to be exercisable after termination of his employment and (iii)
are terminable for breach of certain provisions of the Separation Agreement
rather than his existing agreements.

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

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




Item 12.  Security Ownership of Certain Beneficial Owners and Management

Ownership of Stock by Directors, Executive Officers and Principal Stockholders

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

34

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|                                                            |  |              |            |      |  |  |      |  
|----------------------------------------------------------- |  | ------------ | ---------- | ---- |  |  | ---- | -
|                                                            |  | Number of    |            |      |  | 
|                                                            |  | Shares of    |            |      |  | 
|                                                            |  | Common Stock |            |      |  | 
|                                                            |  | Beneficially |            |      |  | 
|Name of Beneficial Owner                                    |  | Owned        |            | %(6)
|                                                            |  |              |            |     
|Bank of America Corporation(1)                              |  |              | 12,757,426 |      |  |  | 18.2 | %
|Dominion Resources, Inc. c/o First Source Financial, LLP(2) |  |              | 9,467,188  |      |  |  | 13.5 | %
|U.S. Bank National Association (First Bank, N.A.)(3)        |  |              | 4,260,375  |      |  |  | 6.1  | %
|Centre Capital Investors II, LP(4)(5)                       |  |              | 26,339,374 |      |  |  | 35.7 | %
|Centre Capital Tax-Exempt Investors II LP(4)(5)             |  |              | 2,944,422  |      |  |  | 4.2  | %
|Centre Capital Offshore Investors II, LP(4)(5)              |  |              | 5,219,372  |      |  |  | 7.4  | %
|Centre Partners Coinvestment LP(4)(5)                       |  |              | 3,822,535  |      |  |  | 5.4  | %
|Centre Partners II LP(4)(5)                                 |  |              | 34,503,168 |      |  |  | 46.1 | %
|Centre Partners II LLC(4)(5)                                |  |              | 38,954,015 |      |  |  | 51.7 | %
|Centre Partners Management LLC(4)(5)                        |  |              | 39,060,715 |      |  |  | 51.8 | %
|Robert F. Mecredy(7)                                        |  |              | 207,785    |      |  |  | *    |  
|John A. Morelli(7)                                          |  |              | 248,672    |      |  |  | *    |  
|William J. Bratton                                          |  |              | 21,100     |      |  |  | *    |  
|Scott Perekslis(8)                                          |  |              | 24,643     |      |  |  | *    |  
|All current directors and executive officers as a group     |  |              | 502,200    |      |  |  | 0.7  | %

---



---

|(1) |  | The address of Bank of America Corporation is 100 North Tryon Street, Charlotte, North
Carolina. Bank of America is the parent of NB Holdings Corporation, which is the parent
company of Bank of America, N.A. Information regarding ownership of Common Stock
included herein is in reliance on information set forth in a Form 3 filed on September
6, 2000 with the Securities Exchange Commission (the Commission), reflecting ownership
as of August 25, 2000, as well as information set forth in Schedule 13D filed on
September 6, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The address of Dominion Resources, Inc. is 120 Tredegear Street, Richmond, Virginia
23219. Dominion Resources is a holding company and its subsidiaries include Dominion
Capital, Inc., whose subsidiaries include Virginia Financial Ventures, Inc. and N.H.
Capital, Inc., the general partners of First Source Financial, LLP. Information
regarding ownership of Common Stock included herein is in reliance on information set
forth in a Schedule 13D filed on September 6, 2000 with the Commission, reflecting
ownership as of August 25, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) |  | The address of U.S. Bank National Association is U.S. Bank Place, 601 Second Avenue
South, Minneapolis, Minnesota. Information regarding ownership of Common Stock included
herein in reliance on information set forth in a Schedule 13D filed on September 6,
2000 with the Commission, reflecting ownership as of August 25, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) |  | Centre Partners II, LP is the general partner of Centre Capital Investors II, LP,
Centre Capital Tax-Exempt Investors II, LP and Centre Capital Offshore Investors II, LP
and has shared voting and investment authority with those entities. Centre Partners II,
LLC is the general partner of Centre Partners Coinvestment II, LP and Centre Partners
II, LP and has shared voting and investment authority with those entities, also, Centre
Partners II, LLC has been delegated voting and investment authority with respect to an
additional 571,181 shares of Common Stock and 57,131 warrants. Centre Partners
Management, LLC has a management agreement with Centre Partners II, LP and Centre
Partners II, LLC through which Centre Partners Management, LLC obtained shared voting
and investment authority with those entities, in addition, Centre Partners Management,
LLC has sole voting and investment authority for 106,700 shares of Common Stock. All of
these entities are referred to herein as the Centre Entities.
|   
|(5) |  | The address of the Centre Entities is 30 Rockefeller Plaza, New York, New York 10020,
except that the address of Centre Capital Offshore Investors II, L.P. is c/o Reid
Management, Cedar House, 41 Cedar Avenue, Box HM 1179, Hamilton, Bermuda. Information
regarding ownership of Common Stock included herein is in reliance on information set
forth in a Schedule 13D/ A filed on May 16, 2002 with the Commission reflecting
ownership as of May 13, 2002 and on information provided by Centre Management. On May
13, 2002, certain of the Centre Entities acquired 7,100,391 shares of Common Stock from
PB Capital Corporation, whose parent company is Deutsche Postbank AG whose address is
Friedrich-Ebert-Allee 114-126, 53113 Bonn, Germany, as follows: Centre Capital
Investors II, L.P.: 4,870,385 shares; Centre Capital Tax-Exempt: 544,472 shares; Centre
Capital Offshore Investors II, L.P.: 965,071 shares and Centre Partners Coinvestment
L.P.: 720,463 shares.                                                 
|   
|(6) |  | Based on 70,153,139 shares of Common Stock outstanding on September 23, 2002.
Calculation of percentage of beneficial ownership assumes the exercise of all options
exercisable within 60 days of September 23, 2002 only by the respective named
shareholder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(7) |  | Messrs. Mecredy and Morellis beneficial ownership includes exercisable options for
160,000 shares and 209,915 shares, respectively. In addition, Messrs. Mecredy and
Morellis beneficial ownership includes 17,075 shares and 8,757 shares, respectively,
held in a 401(k) plan for the benefit of each person as of September 23, 2002, over
which each such person has been delegated voting and investment power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(8) |  | Includes 21,965 shares of Common Stock and 2,678 warrants 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

35

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Equity Compensation Plan Information

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

Equity Compensation Plan Information

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




Item 13.  Certain Relationships and Related Transactions

Certain Transactions

The institutions named in the table under the caption Ownership of Stock by
Directors, Executive Officers and Principal Stockholders on page 35 of this
Annual Report on Form 10-K/A (the Lenders) are parties to certain of the
Companys financing arrangements. These financing arrangements were amended on
December 31, 2001, March 29, 2002 and July 10, 2002. The principal purpose and
effect of the amendments was to provide additional financial flexibility to the
Company through the provision of a $2,200,000 support letter of credit, the
elimination of certain quarterly limitations on capital expenditures and the
continuation of certain interest payments through the issuance of additional
notes payable. Additional provisions of the amendments provide that the support
letter of credit be cash collateralized, the interest rate be raised on the
pre-existing revolver from prime plus 1% to prime plus 2%, and the Company be
required to pay an unused commitment fee of 0.5% on the unused portion of the
support letter of credit commitment. In connection with these amendments, the
Company paid fees totaling $250,455 to the Lenders, allocated among them as
specified by the terms of the documents governing such amendments.

Compensation Committee Interlocks and Insider Participation

Messrs. Bratton, Perekslis, and Sugarman served as members of the
Companys Compensation Committee during the 2002 fiscal year. Mr. Sugarman
served as interim Chief Executive Officer and President from May 16, 2001 until
August 9, 2002 and interim Chief Operating Officer from May 20, 2002 until
August 9, 2002. Mr. Perekslis was a Vice President of the Company through July
18, 1997.

The Company entered into a consulting agreement, dated October 4, 2000,
with Sugarman Company, LLP, a company in which Randy Sugarman is the managing
partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
were performed on an hourly basis, plus out-of-pocket expenses, and the Company
was billed accordingly. From May 16, 2001 until August 9, 2002, Mr. Sugarman
served as Interim Chief Executive Officer and President of the Company. Mr.
Sugarman ceased to be an officer of the Company on August 9, 2002, in
connection with the conclusion of the Companys engagement of Sugarman Company
LLP. The Company incurred consulting fees of $390,000 and $221,000, plus
expenses of $72,000 and $51,000, for consulting services under the agreement
for the fiscal years 2002 and 2001, respectively.

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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

|                                                                                                                    |  |  |     | 
|------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Public Accountants                                                                            |  |  | F-1 | 
|Report of previous Independent Public Accountants                                                                   |  |  | F-2 | 
|Consolidated Balance Sheets as of March 31, 2002 and 2001                                                           |  |  | F-3 | 
|Consolidated Statements of Operations for the Fiscal Years Ended March 31, 2002, 2001, and 2000                     |  |  | F-4 | 
|Consolidated Statements of Changes in Stockholders Deficit for the Fiscal Years Ended March 31, 2002, 2001 and 2000 |  |  | F-5 | 
|Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2002, 2001 and 2000                      |  |  | F-6 | 
|Notes to Consolidated Financial Statements                                                                          |  |  | F-7 | 

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:

|        |  |                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                              
|Number  |  | Description of Exhibits                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                              
|3.01    |  | By-laws of the Company. (Filed as Exhibit 3.06 to the Companys Registration Statement No. 333-13105)                                                                                                                                                                                                                        
|3.02    |  | Restated Certificate of Incorporation of the Company, dated December 23, 1996. (Filed as Exhibit
3.03 to the Companys Quarterly Report on Form 10-Q for the Fiscal Quarter ended December 31, 1996)                                                                                                                         
|3.03    |  | Certificate of Designation of Series A Preferred Stock of the Company setting forth the powers,
Preferences, rights, Qualification, limitations and Restrictions of the series dated November 13,
1998. (Filed as exhibit 3.03 to the Companys Quarterly Report on Form 10-Q for the Fiscal Quarter
ended December 31, 1998)
|3.04    |  | Certificate of Amendment to the Certificate of Incorporation of the Company dated (and Filed with
the Office of the Secretary of State of Delaware on August 25,
2000)                                                                                                                                                       
|3.05    |  | Certificate of Designations of Series B Preferred Stock of the Company setting forth the powers,
Preferences, rights, qualifications, limitations and Restrictions of the series dated August 24,
2000 (Filed with the office of the Secretary of State of Delaware on August 25, 2000)                                      
|9.01    |  | Voting and Stock Restriction Agreement dated as of April 1, 2000 among the financial institutions
listed on the signature pages thereof and Bank of America, (Filed as Exhibit 9.01 to the Companys
report on Form 10-K405/A for the Fiscal Year ended March 31, 2000)                                                      

37

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|         |  |                                                                                                                                                                                                                                                                                                                                                                           
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                                           
|Number   |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                                                                                                                           
|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
(Filed as Exhibit 9.02 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 2000)                                                                                                
|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 (Filed as
Exhibit 10.01-01 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 2000)
|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 (Filed as
Exhibit 10.01-02 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 2000)                                                                                                      
|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    |  | Borrowers 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    |  | Parents 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)                                                                                                                                                                                   

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|         |  |                                                                                                                                                                                                                                                                                                           
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                           
|Number   |  | Description of Exhibits                                                                                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                                                           
|10.12-01 |  | Schedule identifying Stock Option Agreements Series A
substantially identical in all material respects to
Exhibit 10.12. (Filed as Exhibit 10.12-01 to the
Companys report on Form 10-K for the Fiscal Year ended
March 31, 1998)                                                                        
|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. (Filed as Exhibit 10.13-01 to the
Companys report on Form 10-K for the Fiscal Year ended
March 31, 1998)                                                                        
|10.14    |  | Stock Option Agreement Series C, dated as of September
18, 1996 between the Company and William J. Bratton.
(Filed as Exhibit 10.16 to the Companys Registration
Statement No. 333-13105)                                                                                                                
|10.14-01 |  | Schedule identifying Stock Option Agreements Series C
substantially identical in all material respects to
Exhibit 10.14. (Filed as Exhibit 10.16.01 to the
Companys Registration Statement No. 333-13105)                                                                                                
|10.14-02 |  | Form of Restricted Stock Award Agreement issued to Mr.
Morelli under Item 11, Executive Compensation, Herein
(Filed as Exhibit 10.14-02 to the Companys report on
Form 10-K405/A for the Fiscal Year ended March 31,
2000)                                                                               
|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
(Filed as Exhibit 10.16 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 2000)                                                                                      
|10.17    |  | Firearms Training Systems, Inc. Executive Severance
Benefit Plan. (Filed as Exhibit 10.19 to the Companys
Registration Statement No. 333-13105)                                                                                                                                                          
|10.18    |  | Employment Agreement, dated as of September 18, 1996,
between the Company and Peter A. Marino. (Filed as
Exhibit 10.20 to the Companys Registration Statement
No. 333-13105)                                                                                                                             
|10.18-01 |  | 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)                                                                          

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|         |  |                                                                                                                                                                                                                                                                                                        
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                        
|Number   |  | Description of Exhibits                                                                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                                        
|10.22    |  | Form of Amended Warrant to Purchase Common Stock of
(Filed as Exhibit 10.22 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 2000)                                                                                                                                        
|10.23    |  | Form of Warrant to Purchase Common Stock of the (Filed
as Exhibit 10.23 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 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
(Filed as Exhibit 10.27 to the Companys report on Form
10-K405/A for the Fiscal Year ended March 31, 2000)                                                                                  
|10.28    |  | First Amendment and Waiver to the Second Amended and
Restated Credit Agreement and Partial Exchange
(Previously filed with the Companys Annual Report on
Form 10-K for the Fiscal Year ended March 31, 2002.)                                                                                         
|10.28-01 |  | Second Amendment to the Second Amended and Restated
Credit Agreement and Partial Exchange Agreement dated
(Previously filed with the Companys Annual Report on
Form 10-K for the Fiscal Year ended March 31, 2002.)                                                                                   
|10.29    |  | Employment Agreement dated as of April 1, 1999, between
the Company and John A. Morelli. (Filed as Exhibit
10.26 to the Companys Annual Report on Form 10-K for
the Fiscal Year ended March 31, 1999)                                                                                                 
|10.29-01 |  | Amended Employment Agreement dated as of February 18,
2000, between the Company and John A. Morelli. (Filed
as Exhibit 10.29-01 to the Companys Quarterly Report
on Form 10-Q for the Fiscal Quarter ended September 30,
2000)                                                                        
|10.29-02 |  | Form of Series F stock option agreement dated as of
April 1, 2000 between the Company and John A. Morelli.
(Filed as Exhibit 10.29-02 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended
September 30, 2000)                                                                  
|10.29-03 |  | Form of Series G stock option agreement dated as of
April 1, 2000 between the Company and John A. Morelli.
(Filed as Exhibit 10.29-03 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended
September 30, 2000)                                                                  
|10.29-04 |  | Form of Series H stock option agreement dated as of
April 1, 2000 between the Company and John A. Morelli.
(Filed as Exhibit 10.29-04 to the Companys Quarterly
Report on Form 10-Q for the Fiscal Quarter ended
September 30, 2000)                                                                  
|10.31    |  | Employment agreement dated as of November 1, 2000
between the Company and Robert F. Mecredy. (Filed as
Exhibit 10.31 to the Companys Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 2000)                                                                                   
|10.31-01 |  | Form of Series F stock option agreement dated as of
April 1, 2000 between the Company and Robert F.
Mecredy. (Filed as Exhibit 10.31-01 to the Companys
Quarterly Report on Form 10-Q for the Fiscal Quarter
ended September 30, 2000)                                                                

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|         |  |                                                                                                                                                                                                                                                                                                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                            
|Number   |  | Description of Exhibits                                                                                                                                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                                            
|10.31-02 |  | Form of Series G stock option agreement dated as of April 1, 2000 between the Company and Robert F. Mecredy. (Filed
as Exhibit 10.31-02 to the Companys Quarterly Report on Form 10-Q for the Fiscal Quarter ended September 30, 2000)                                                                    
|10.31-03 |  | Form of Series H stock option agreement dated as of April 1, 2000 between the Company and Robert F. Mecredy. (Filed
as Exhibit 10.31-03 to the Companys Quarterly Report on Form 10-Q for the Fiscal Quarter ended September 30, 2000)                                                                    
|10.31-04 |  | Separation and General Release Agreement, dated as of May 16, 2001, between the Company and Robert F. Mecredy
including form of amendments to Series F and Series H options agreements. (Filed as Exhibit 10.31-04 to the Companys
Quarterly Report on Form 10-K for the Fiscal Year ended March 31, 2001)
|21.01    |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                               
|23.02    |  | Consent of PricewaterhouseCoopers LLP, dated November 5, 2002                                                                                                                                                                                                                                              
|24.01    |  | Power of Attorney (set forth on page V-1)                                                                                                                                                                                                                                                                  
|99.1     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                     
|99.2     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                     

(b)  Reports on Form 8-K:

None

(c)  Exhibits.

See (a) (3) above.

See (a) (2) above.

41

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Firearms Training Systems, Inc.:

In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, shareholders equity and cash flows
present fairly, in all material respects, the financial position of Firearms
Training Systems, Inc. and its subsidiaries at March 31, 2002, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule as of and for the
year ended March 31, 2002 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

Atlanta, Georgia
July 12, 2002, except Note 12, which is dated August 12, 2002

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




REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS

To Firearms Training Systems, Inc.:

We have audited the accompanying consolidated balance sheets of FIREARMS
TRAINING SYSTEMS, INC. (a Delaware corporation) AND
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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |   |         |   | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | -------- | - | -------------- | ------ | -------- | - | ------- | - | 
|                                              |                                                                                                                                                      |  |                                             |          |   | March 31      
|                                              |                                                                                                                                                      |  |                                             |          |   |               
|                                              |                                                                                                                                                      |  |                                             |          |   | 2002           |        | 2001    
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |         
|                                              |                                                                                                                                                      |  |                                             |          |   | (In thousands)
|ASSETS                                        |                                                                                                                                                      |  |                                             |          |   |                |        |         
|Current assets:                               |                                                                                                                                                      |  |                                             |          |   |                |        |         
|                                              | Cash and cash equivalents                                                                                                                            |  | $                                           | 4,252    |   |                | $      | 1,864    |  
|                                              | Restricted cash                                                                                                                                      |  |                                             | 1,434    |   |                |        | 628      |  
|                                              | Accounts receivable, net of allowance of $352 and $359 in 2002 and 2001, respectively                                                                |  |                                             | 10,500   |   |                |        | 8,591    |  
|                                              | Income taxes receivable                                                                                                                              |  |                                             | 4,488    |   |                |        | 809      |  
|                                              | Costs and estimated earnings in excess of billings on uncompleted contracts                                                                          |  |                                             | 1,816    |   |                |        | 1,480    |  
|                                              | Unbilled receivables                                                                                                                                 |  |                                             | 1,378    |   |                |        | 1,355    |  
|                                              | Inventories, net                                                                                                                                     |  |                                             | 9,434    |   |                |        | 12,526   |  
|                                              | Prepaid expenses and other current assets                                                                                                            |  |                                             | 1,444    |   |                |        | 1,117    |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|                                              |                                                                                                                                                      |  | Total current assets                        |          |   | 34,746         |        |          |   | 28,370  |  
|                                              | Property and equipment, net                                                                                                                          |  |                                             | 1,579    |   |                |        | 2,647    |  
|                                              | Other noncurrent assets                                                                                                                              |  |                                             | 26       |   |                |        |          |  
|                                              | Goodwill, net of accumulated amortization of $3,958 in 2001                                                                                          |  |                                             |          |   |                |        | 1,156    |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|                                              |                                                                                                                                                      |  | Total assets                                |          | $ | 36,351         |        |          | $ | 32,173  |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT         |                                                                                                                                                      |  |                                             |          |   |                |        |         
|Current liabilities:                          |                                                                                                                                                      |  |                                             |          |   |                |        |         
|                                              | Accounts payable                                                                                                                                     |  | $                                           | 4,430    |   |                | $      | 2,902    |  
|                                              | Accrued liabilities                                                                                                                                  |  |                                             | 5,053    |   |                |        | 3,895    |  
|                                              | Accrued interest                                                                                                                                     |  |                                             | 861      |   |                |        | 954      |  
|                                              | Billings in excess of costs and estimated earnings on uncompleted contracts                                                                          |  |                                             | 285      |   |                |        | 277      |  
|                                              | Deferred revenue                                                                                                                                     |  |                                             | 902      |   |                |        | 1,633    |  
|                                              | Warranty and contracts cost provision reserve Current                                                                                                |  |                                             | 2,258    |   |                |        | 2,816    |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|                                              |                                                                                                                                                      |  | Total current liabilities                   |          |   | 13,789         |        |          |   | 12,477  |  
|                                              | Long-term debt                                                                                                                                       |  |                                             | 42,977   |   |                |        | 43,990   |  
|                                              | Deferred income taxes                                                                                                                                |  |                                             | 22       |   |                |        | 223      |  
|                                              | Warranty and contracts cost provision reserve Noncurrent                                                                                             |  |                                             | 1,467    |   |                |        | 1,724    |  
|                                              | Other noncurrent liabilities                                                                                                                         |  |                                             | 579      |   |                |        | 796      |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|                                              |                                                                                                                                                      |  | Total liabilities                           |          |   | 58,834         |        |          |   | 59,210  |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|Commitments and contingencies (Note 10)       |                                                                                                                                                      |  |                                             |          |   |                |        |         
|Mandatory redeemable preferred stock (Note 4) |                                                                                                                                                      |  | 27,319                                      |          |   |                | 27,049 |         
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|Stockholders Deficit:                        |                                                                                                                                                      |  |                                             |          |   |                |        |         
|                                              | Class A common stock, $0.000006 par value; 100,000 shares authorized, 70,153 and 70,084
shares issued and outstanding in 2002 and 2001, respectively |  |                                             |          |   |                |        |          |  
|                                              | Additional paid-in capital                                                                                                                           |  |                                             | 122,314  |   |                |        | 122,273  |  
|                                              | Stock warrants                                                                                                                                       |  |                                             | 613      |   |                |        | 613      |  
|                                              | Accumulated deficit                                                                                                                                  |  |                                             | (172,350 | ) |                |        | (176,686 | )
|                                              | Cumulative foreign currency translation adjustment                                                                                                   |  |                                             | (379     | ) |                |        | (286     | )
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|                                              |                                                                                                                                                      |  | Total stockholders deficit                 |          |   | (49,802        | )      |          |   | (54,086 | )
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  
|                                              |                                                                                                                                                      |  | Total liabilities and stockholders deficit |          | $ | 36,351         |        |          | $ | 32,173  |  
|                                              |                                                                                                                                                      |  |                                             |          |   |                |        |          |  

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
March 31, 2002, 2001, and 2000

|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |        |        |  
|--------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                    |                                              |                                   |        | 2002                                  |        | 2001 |         | 2000  
|                                                    |                                              |                                   |        |                                       |        |      |         |       
|                                                    |                                              |                                   |        | (In thousands, except per share data)
|Revenues                                            |                                              | $                                 | 59,057 |                                       |        | $    | 41,501  |        |        | $ | 38,889  |       
|Cost of revenues                                    |                                              |                                   | 41,607 |                                       |        |      | 35,026  |        |        |   | 30,689  |       
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|Gross margin                                        |                                              |                                   | 17,450 |                                       |        |      | 6,475   |        |        |   | 8,200   |       
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|Operating expenses:                                 |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|                                                    | Selling, general, and administrative expense |                                   |        | 11,065                                |        |      |         | 10,119 |        |   |         | 10,974 |       
|                                                    | Research and development expenses            |                                   |        | 4,083                                 |        |      |         | 4,747  |        |   |         | 3,992  |       
|                                                    | Depreciation and amortization                |                                   |        | 1,776                                 |        |      |         | 2,293  |        |   |         | 2,508  |       
|                                                    | Restructuring charge (Note 2)                |                                   |        |                                       |        |      |         |        |        |   |         | (143   | )     
|                                                    | Impairment of assets                         |                                   |        | 971                                   |        |      |         | 1,244  |        |   |         | 1,944  |       
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|                                                    |                                              | Total operating expenses          |        |                                       | 17,895 |      |         |        | 18,403 |   |         |        | 19,275 |  
|Operating loss                                      |                                              |                                   | (445   | )                                     |        |      | (11,928 | )      |        |   | (11,075 | )     
|Other income (expense), net                         |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|                                                    | Interest income                              |                                   |        | 243                                   |        |      |         | 247    |        |   |         |        |       
|                                                    | Interest expense                             |                                   |        | (23                                   | )      |      |         | (4,691 | )      |   |         | (8,056 | )     
|                                                    | Other expense, net                           |                                   |        | (61                                   | )      |      |         | (257   | )      |   |         | (325   | )     
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|                                                    |                                              | Total other income (expense), net |        |                                       | 159    |      |         |        | (4,701 | ) |         |        | (8,381 | )
|Loss before benefit for income taxes                |                                              |                                   | (286   | )                                     |        |      | (16,629 | )      |        |   | (19,456 | )     
|Benefit for income taxes                            |                                              |                                   | (4,892 | )                                     |        |      | (1,052  | )      |        |   | (808    | )     
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|Income (loss) before accretion of preferred stock   |                                              |                                   | 4,606  |                                       |        |      | (15,577 | )      |        |   | (18,648 | )     
|Accretion of preferred stock                        |                                              |                                   | (270   | )                                     |        |      | (260    | )      |        |   | (254    | )     
|Gain on extinguishment of preferred stock           |                                              |                                   |        |                                       |        |      | 1,729   |        |        |   |         |       
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|Net income (loss) applicable to common shareholders |                                              | $                                 | 4,336  |                                       |        | $    | (14,108 | )      |        | $ | (18,902 | )     
|                                                    |                                              |                                   |        |                                       |        |      |         |        |        |   |         |       
|Basic income (loss) per share                       |                                              | $                                 | 0.06   |                                       |        | $    | (0.26   | )      |        | $ | (0.91   | )     
|Diluted income (loss) per share                     |                                              | $                                 | 0.06   |                                       |        | $    | (0.26   | )      |        | $ | (0.91   | )     
|Weighted average common shares outstanding basic    |                                              |                                   | 70,152 |                                       |        |      | 53,643  |        |        |   | 20,760  |       
|Weighted average common shares outstanding diluted  |                                              |                                   | 70,829 |                                       |        |      | 53,643  |        |        |   | 20,760  |       

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED CHANGES IN STOCKHOLDERS DEFICIT
For the Years Ended March 31, 2002, 2001, and 2000



|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |      |  
|----------------------- | ------------------------------------------------------------------------------ | - | ------------------------------------ | ------- | ------ |  | ---------- | ---------- | ----------------- | - | ------ | - | ----- |  | --------- | ---------- | ------------ | - | - | - |  | - | ------- | ----- |  | - | --- | --- |  |  | ---- | ---- | -
|                        |                                                                                |   |                                      |         |        |  | Class A    |            | Class B Nonvoting |   |        |   |       |  |           |            |              |   |   |   | 
|                        |                                                                                |   | Comprehensive                        |         | Common |  | Common     |            |                   |   |        |   |       |  |           |            |              |   |  
|                        |                                                                                |   | Income                               |         |        |  |            |            |                   |   |        |   | Stock |  | Unearned 
|                        |                                                                                |   | (Loss)                               |         | Shares |  | Amount     |            | Shares            |   | Amount |   | APIC  |  | Warrants  |            | Compensation
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |             
|                        |                                                                                |   | (In thousands, except share amounts)
|Balance, March 31, 1999 |                                                                                | $ | (3,336                               | )       |        |  | 19,020,213 |            |                   |   | 0      |   |       |  | 1,694,569 |            |              |   | 0 |   |  |   | 114,324 |       |  |   | 0   |     |  |  | 0    |     
|                        | Net loss                                                                       |   |                                      | (18,902 | )      |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        | Common stock issued to
Company Employee
Stock 401(k) Plan                      |   |                                      | 0       |        |  |            | 101,734    |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 84    |  |   |     | 0   |  |  |      | 0    |  
|                        | Issuance of restricted
stock                                                   |   |                                      | 0       |        |  |            | 272,500    |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 184   |  |   |     | 0   |  |  |      | (184 | )
|                        | Amortization of
deferred stock-based
compensation                              |   |                                      | 0       |        |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 7    |  
|                        | Foreign currency
translation
adjustment                                        |   |                                      | 243     |        |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |     
|Balance, March 31, 2000 |                                                                                | $ | (18,659                              | )       |        |  | 19,394,447 |            |                   |   | 0      |   |       |  | 1,694,569 |            |              |   | 0 |   |  |   | 114,592 |       |  |   | 0   |     |  |  | (177 | )   
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |     
|                        | Net loss                                                                       |   |                                      | (14,108 | )      |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        | Common stock
issued to Company
Employee Stock
401(k) Plan                      |   |                                      | 0       |        |  |            | 332,875    |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 72    |  |   |     | 0   |  |  |      | 0    |  
|                        | Forfeiture of
restricted stock                                                 |   |                                      | 0       |        |  |            | (32,500    | )                 |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        | Common stock
issued in
conjunction with
debt restructuring                     |   |                                      | 0       |        |  |            | 48,695,212 |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 7,609 |  |   |     | 0   |  |  |      | 0    |  
|                        | Exchange of Class
B Nonvoting
Shares for Class A
Voting shares
Centre Entities |   |                                      | 0       |        |  |            | 1,694,569  |                   |   |        | 0 |       |  |           | (1,694,569 | )            |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        | Stock warrants
issued in exchange
for Series A
preferred stock                 |   |                                      | 0       |        |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 613 |  |  |      | 0    |  
|                        | Amortization of
deferred
stock-based
compensation                              |   |                                      | 0       |        |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 177  |  
|                        | Foreign currency
translation
adjustment                                        |   |                                      | (248    | )      |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |     
|Balance, March 31, 2001 |                                                                                | $ | (14,356                              | )       |        |  | 70,084,603 |            |                   |   | 0      |   |       |  | 0         |            |              |   | 0 |   |  |   | 122,273 |       |  |   | 613 |     |  |  | 0    |     
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |     
|                        | Net income                                                                     |   |                                      | 4,336   |        |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        | Common stock
issued to
Company
Employee Stock
401(k) Plan                      |   |                                      | 0       |        |  |            | 68,536     |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 41    |  |   |     | 0   |  |  |      | 0    |  
|                        | Foreign currency
translation
adjustment                                        |   |                                      | (93     | )      |  |            | 0          |                   |   |        | 0 |       |  |           | 0          |              |   |   | 0 |  |   |         | 0     |  |   |     | 0   |  |  |      | 0    |  
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |     
|Balance, March 31, 2002 |                                                                                | $ | 4,243                                |         |        |  | 70,153,139 |            |                   | $ | 0      |   |       |  | 0         |            |              | $ | 0 |   |  | $ | 122,314 |       |  | $ | 613 |     |  |  | 0    |     
|                        |                                                                                |   |                                      |         |        |  |            |            |                   |   |        |   |       |  |           |            |              |   |   |   |  |   |         |       |  |   |     |     |  |  |      |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                        |                                                                                |   |                                      |         |             |   |            |      |   |   |         |         |  
|----------------------- | ------------------------------------------------------------------------------ | - | ------------------------------------ | ------- | ----------- | - | ---------- | ---- | - | - | ------- | ------- | -
|                        |                                                                                |   |                                      |         |             |   | Cumulative |      |   |   |        
|                        |                                                                                |   | Accumulated                          |         | Translation |   |            |      |  
|                        |                                                                                |   | Deficit                              |         | Adjustment  |   | Total     
|                        |                                                                                |   |                                      |         |             |   |           
|                        |                                                                                |   | (In thousands, except share amounts)
|Balance, March 31, 1999 |                                                                                |   | (143,676                             | )       |             |   | (281       | )    |   |   | (29,633 | )      
|                        | Net loss                                                                       |   |                                      | (18,902 | )           |   |            | 0    |   |   |         | (18,902 | )
|                        | Common stock issued to
Company Employee
Stock 401(k) Plan                      |   |                                      | 0       |             |   |            | 0    |   |   |         | 84      |  
|                        | Issuance of restricted
stock                                                   |   |                                      | 0       |             |   |            | 0    |   |   |         | 0       |  
|                        | Amortization of
deferred stock-based
compensation                              |   |                                      | 0       |             |   |            | 0    |   |   |         | 7       |  
|                        | Foreign currency
translation
adjustment                                        |   |                                      | 0       |             |   |            | 243  |   |   |         | 243     |  
|                        |                                                                                |   |                                      |         |             |   |            |      |   |   |         |        
|Balance, March 31, 2000 |                                                                                |   | (162,578                             | )       |             |   | (38        | )    |   |   | (48,201 | )      
|                        | Net loss                                                                       |   |                                      | (14,108 | )           |   |            | 0    |   |   |         | (14,108 | )
|                        | Common stock
issued to Company
Employee Stock
401(k) Plan                      |   |                                      | 0       |             |   |            | 0    |   |   |         | 72      |  
|                        | Forfeiture of
restricted stock                                                 |   |                                      | 0       |             |   |            | 0    |   |   |         | 0       |  
|                        | Common stock
issued in
conjunction with
debt restructuring                     |   |                                      | 0       |             |   |            | 0    |   |   |         | 7,609   |  
|                        | Exchange of Class
B Nonvoting
Shares for Class A
Voting shares
Centre Entities |   |                                      | 0       |             |   |            | 0    |   |   |         | 0       |  
|                        | Stock warrants
issued in exchange
for Series A
preferred stock                 |   |                                      | 0       |             |   |            | 0    |   |   |         | 613     |  
|                        | Amortization of
deferred
stock-based
compensation                              |   |                                      | 0       |             |   |            | 0    |   |   |         | 177     |  
|                        | Foreign currency
translation
adjustment                                        |   |                                      | 0       |             |   |            | (248 | ) |   |         | (248    |  
|                        |                                                                                |   |                                      |         |             |   |            |      |   |   |         |        
|Balance, March 31, 2001 |                                                                                |   | (176,686                             | )       |             |   | (286       | )    |   |   | (54,086 | )      
|                        |                                                                                |   |                                      |         |             |   |            |      |   |   |         |        
|                        | Net income                                                                     |   |                                      | 4,336   |             |   |            | 0    |   |   |         | 4,336   |  
|                        | Common stock
issued to
Company
Employee Stock
401(k) Plan                      |   |                                      | 0       |             |   |            | 0    |   |   |         | 41      |  
|                        | Foreign currency
translation
adjustment                                        |   |                                      | 0       |             |   |            | (93  | ) |   |         | (93     | )
|                        |                                                                                |   |                                      |         |             |   |            |      |   |   |         |        
|Balance, March 31, 2002 |                                                                                | $ | (172,350                             | )       |             | $ | (379       | )    |   | $ | (49,802 | )      
|                        |                                                                                |   |                                      |         |             |   |            |      |   |   |         |        

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

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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31, 2002, 2001, and 2000

|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |         |       |        |        |  
|------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ------ | -------------- | ------ | ------- | ------ | ------ | ------ | ------- | ----- | ------ | ------ | -
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        | 2002           |        | 2001    |        | 2000  
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |       
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        | (In thousands)
|Operating activities:                                               |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    | Net income (loss)                                                                         |                                                         | $                                                                           | 4,336                                               |        |                | $      | (14,108 | )      |        | $      | (18,902 | )    
|                                                                    | Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |         |      
|                                                                    |                                                                                           | Employee stock compensation plan 401(k)                 |                                                                             |                                                     | 7      |                |        |         | 72     |        |        |         | 84    |       
|                                                                    |                                                                                           | Employee compensation other                             |                                                                             |                                                     | 10     |                |        |         | 0      |        |        |         | 0     |       
|                                                                    |                                                                                           | Gain on extinguishment of preferred stock               |                                                                             |                                                     | 0      |                |        |         | (1,729 | )      |        |         | 0     |       
|                                                                    |                                                                                           | Noncash reduction of debt restructuring liability       |                                                                             |                                                     | (3,512 | )              |        |         | (2,049 | )      |        |         | 0     |       
|                                                                    |                                                                                           | Noncash refinancing cost                                |                                                                             |                                                     | 0      |                |        |         | 250    |        |        |         | 0     |       
|                                                                    |                                                                                           | Amortization of deferred stock-based compensation       |                                                                             |                                                     | 0      |                |        |         | 177    |        |        |         | 7     |       
|                                                                    |                                                                                           | Accretion of mandatory redeemable preferred stock, net  |                                                                             |                                                     | 270    |                |        |         | 260    |        |        |         | 254   |       
|                                                                    |                                                                                           | Depreciation                                            |                                                                             |                                                     | 1,591  |                |        |         | 2,042  |        |        |         | 1,991 |       
|                                                                    |                                                                                           | Loss on impairment of long-lived assets                 |                                                                             |                                                     | 971    |                |        |         | 1,244  |        |        |         | 1,944 |       
|                                                                    |                                                                                           | Change in inventory reserve                             |                                                                             |                                                     | 2,482  |                |        |         | 4      |        |        |         | 0     |       
|                                                                    |                                                                                           | Change in warranty and contracts cost provision reserve |                                                                             |                                                     | (642   | )              |        |         | 3,885  |        |        |         | 0     |       
|                                                                    |                                                                                           | Amortization of goodwill                                |                                                                             |                                                     | 185    |                |        |         | 251    |        |        |         | 517   |       
|                                                                    |                                                                                           | Amortization of loan costs                              |                                                                             |                                                     | 0      |                |        |         | 332    |        |        |         | 910   |       
|                                                                    |                                                                                           | (Gain) loss on sale of assets                           |                                                                             |                                                     | (56    | )              |        |         | 178    |        |        |         | 10    |       
|                                                                    |                                                                                           | Deferred income taxes                                   |                                                                             |                                                     | (201   | )              |        |         | (96    | )      |        |         | 2,651 |       
|                                                                    |                                                                                           | Changes in assets and liabilities:                      |                                                                             |                                                     |        |                |        |         |        |        |        |         |       |       
|                                                                    |                                                                                           |                                                         | Accounts receivable, net                                                    |                                                     |        | (1,909         | )      |         |        | (1,937 | )      |         |       | 12,594 |       
|                                                                    |                                                                                           |                                                         | Unbilled receivables                                                        |                                                     |        | (47            | )      |         |        | 1,427  |        |         |       | 472    |       
|                                                                    |                                                                                           |                                                         | Costs and estimated earnings in excess of billings on uncompleted contracts |                                                     |        | (302           | )      |         |        | 0      |        |         |       | 0      |       
|                                                                    |                                                                                           |                                                         | Inventories                                                                 |                                                     |        | 844            |        |         |        | 3,816  |        |         |       | 1,495  |       
|                                                                    |                                                                                           |                                                         | Prepaid expenses and other current assets                                   |                                                     |        | (327           | )      |         |        | (493   | )      |         |       | 79     |       
|                                                                    |                                                                                           |                                                         | Accounts payable                                                            |                                                     |        | 1,525          |        |         |        | 504    |        |         |       | (3,047 | )     
|                                                                    |                                                                                           |                                                         | Accrued liabilities                                                         |                                                     |        | 3,934          |        |         |        | 4,605  |        |         |       | 439    |       
|                                                                    |                                                                                           |                                                         | Income taxes payable/(receivable)                                           |                                                     |        | (3,734         | )      |         |        | 364    |        |         |       | (1,527 | )     
|                                                                    |                                                                                           |                                                         | Deferred revenue                                                            |                                                     |        | (730           | )      |         |        | (23    | )      |         |       | 338    |       
|                                                                    |                                                                                           |                                                         | Billings in excess of costs and estimated earnings on uncompleted contracts |                                                     |        | 13             |        |         |        | 1,203  |        |         |       | 0      |       
|                                                                    |                                                                                           |                                                         | Noncurrent liabilities                                                      |                                                     |        | (294           | )      |         |        | (390   | )      |         |       | 316    | )     
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |         |      
|                                                                    |                                                                                           |                                                         |                                                                             | Total adjustments                                   |        |                | 78     |         |        |        | 13,897 |         |       |        | 19,527 |  
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    |                                                                                           |                                                         |                                                                             | Net cash provided by (used in) operating activities |        |                | 4,414  |         |        |        | (211   | )       |       |        | 625    |  
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|Investing activities:                                               |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    | (Increase) decrease in restricted cash                                                    |                                                         |                                                                             | (806                                                | )      |                |        | 714     |        |        |        | (1,342  | )    
|                                                                    | Purchase of property and equipment                                                        |                                                         |                                                                             | (758                                                | )      |                |        | (736    | )      |        |        | (1,494  | )    
|                                                                    | Proceeds from disposal of property and equipment                                          |                                                         |                                                                             | 59                                                  |        |                |        | 52      |        |        |        | (315    | )    
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    |                                                                                           |                                                         |                                                                             | Net cash (used in) provided by investing activities |        |                | (1,505 | )       |        |        | 30     |         |       |        | (2,836 | )
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|Financing Activities:                                               |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    | Proceeds from borrowings of long-term debt                                                |                                                         |                                                                             | 0                                                   |        |                |        | 200     |        |        |        | 43,372  |      
|                                                                    | Repayments of long-term debt                                                              |                                                         |                                                                             | (70                                                 | )      |                |        | 0       |        |        |        | (41,800 | )    
|                                                                    | Deferred financing costs                                                                  |                                                         |                                                                             | 0                                                   |        |                |        | 0       |        |        |        | (315    | )    
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    |                                                                                           |                                                         |                                                                             | Net cash (used in) provided by financing activities |        |                | (78    | )       |        |        | 200    |         |       |        | 1,257  |  
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|Effect of change in foreign exchange rates                          |                                                                                           |                                                         | (174                                                                        | )                                                   |        |                | (41    | )       |        |        | 35     |        
|                                                                    | Net increase (decrease) in cash and cash equivalents                                      |                                                         |                                                                             | 2,388                                               |        |                |        | (22     | )      |        |        | (919    | )    
|                                                                    | Cash and cash equivalents, beginning of year                                              |                                                         |                                                                             | 1,864                                               |        |                |        | 1,886   |        |        |        | 2,805   |      
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    | Cash and cash equivalents, end of year                                                    |                                                         | $                                                                           | 4,252                                               |        |                | $      | 1,864   |        |        | $      | 1,886   |      
|                                                                    |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|Supplemental disclosure of cash paid (received) for:                |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|                                                                    | Interest                                                                                  |                                                         | $                                                                           | 965                                                 |        |                | $      | 1,010   |        |        | $      | 4,695   |      
|                                                                    | Income taxes                                                                              |                                                         | $                                                                           | (1,030                                              | )      |                | $      | (1,327  | )      |        | $      | 433     |      
|Noncash transactions:                                               |                                                                                           |                                                         |                                                                             |                                                     |        |                |        |         |        |        |        |        
|Interest payments made through issuance of additional debt (Note 3) |                                                                                           | $                                                       | 2,569                                                                       |                                                     |        | $              |        |         |        | $      |        |        

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

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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002, 2001 and, 2000

1.     Organization and Nature of Business

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

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

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

The Companys 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 entered into a restructured Credit
Agreement in August 2000 as discussed above under Restructure Transaction. The
Company amended the restructured Credit Agreement in December and March 2002 to
provide additional working capital through a new $2.2 million letter of credit
commitment and the extension of the Companys option to pay interest on the
Companys junior secured loans through the issuance of additional junior
secured loans. In addition, the Company received a $4.9 million federal income
tax refund in April 2002 as a result of recent changes in the tax laws. The
amendments and federal tax refund received have provided additional working
capital for the Company in the near term. However, the Companys primary source
of liquidity and capital resources continues to be cash generated from its
operating activities. The Companys future operations will be constrained
unless it can continue to increase revenues and reduce costs improving
operating margins and generating adequate cash flow to finance working capital
needs.

The Company is subject to several business and market risks. The Company
must continue to achieve its revenue targets and cost reduction objectives in
the current fiscal year in order to generate adequate cash flow to fund working
capital needs and to service debt requirements; the Company must receive new
contracts for production to be delivered in the current fiscal year to meet its
revenue targets and to replenish existing backlog to sustain the revenue
targets in future periods; the Company must continue to negotiate favourable
repayment terms under the Credit Agreement which is currently scheduled to
mature in September 2003.

As a result of the business and market risks noted above, the Companys
continuation as a going concern is dependent on achieving the following
business objectives: (a) continue production work on existing contracts; (b)
obtain new contracts for delivery in the current period and future periods; 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 assure operations are conducted
at the lowest cost possible; (2) remain focused on revenue maximization of
standard products and continue to seek out new contracts with higher margin
potentials and more favourable payment terms, primarily within the
international and military segments of the market; (3) minimize capital
expenditures in non-strategic areas; (4) continue to improve inventory turns
and lower inventory investment and; (5) continue to negotiate favourable
repayment terms with its lenders.

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

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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Summary of Significant Accounting Policies

Reclassification

Certain balances in the prior fiscal year have been reclassified to
conform to the presentation adopted in the current fiscal year.

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

A significant amount of the Companys revenue is derived from the sale of
small and supporting arms training simulators and accessories. Revenue from
sales to commercial customers and governmental agencies is primarily recognized
upon shipment when title passes; as all material commitments have been
fulfilled, the sales price is fixed and determinable and collectibility is
reasonably assured.

A large portion of the Companys small and supporting arms training
simulator revenue is derived from contracts with large governmental agencies.
Governmental contracts that involve high volume purchases of the Companys
standard systems and related accessories are accounted for as multiple-element
arrangements. These contracts require little or no modifications to the
existing proprietary platform, specify pricing terms by product and billings
generally correspond to the underlying shipment schedule. Revenue under these
contracts is recognized upon delivery. Advanced billings related to these
contracts are recorded as deferred revenue and are recognized ratably as units
are delivered.

Other governmental contracts require significant customization of the
Companys existing proprietary platform or require the development of new
systems to meet required customer specifications. These contracts are accounted
for under the percentage of completion method, measured by the percentage of
cost incurred to date to the total costs for each contract. Contract costs
include all direct material, direct labor and other costs directly related to
the contract. Selling, general, and administrative costs are charged to expense
as incurred. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.

Provisions for estimated losses on uncompleted contracts accounted for
under both methods described above are made in the period in which such losses
are determined.

Revenue from extended warranty sales and customer logistics support sales
are recorded as deferred revenue and are recognized ratably as income over the
lives of the related service agreements, which generally range from one to
three years. Costs associated with these sales are recorded in the period
incurred.

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##### Table of Contents



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Cash

Restricted cash represents escrow accounts at two financial institutions,
which have been established to collateralize letters of credit to ensure
contract performance by the Company under certain contracts. The cash is
invested in certificates of deposit yielding 1.25% with maturity dates ranging
from June 30, 2002 to September 18, 2002, unless otherwise extended.

Inventories

Inventories consist primarily of simulators, computer hardware,
projectors, and component parts. Inventories are valued at the lower of cost on
a moving weighted average basis or market. Cost includes materials, labor, and
factory overhead. Market is defined as net realizable value. During the fiscal
year ended March 31, 2002, the Company increased its reserve for excess and
obsolete inventory, based on its analysis of existing inventory in conjunction
with future estimated sales demand, by $3.5 million.

Inventories consist of the following (in thousands):

|                |                    |                  |        |           |       |      |        |        |        | 
|--------------- | ------------------ | ---------------- | ------ | --------- | ----- | ---- | ------ | ------ | ------ | 
|                |                    |                  |        | March 31,
|                |                    |                  |        |          
|                |                    |                  |        | 2002      |       | 2001
|                |                    |                  |        |           |       |     
|Raw materials   |                    | $                | 8,874  |           |       | $    | 7,997  |       
|Work in process |                    |                  | 2,668  |           |       |      | 3,998  |       
|Finished goods  |                    |                  | 1,412  |           |       |      | 1,559  |       
|                |                    |                  |        |           |       |      |        |       
|                | Inventories, gross |                  |        | 12,954    |       |      |        | 13,554 |       
|Less reserves   |                    |                  | (3,520 | )         |       |      | (1,028 | )     
|                |                    |                  |        |           |       |      |        |       
|                |                    | Inventories, net |        | $         | 9,434 |      |        | $      | 12,526 | 
|                |                    |                  |        |           |       |      |        |       

Long-Term Contracts

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

|                                        |  |           |         |           |  |   |        |  
|--------------------------------------- |  | --------- | ------- | --------- |  | - | ------ | -
|                                        |  | March 31, |         | March 31,
|                                        |  | 2002      |         | 2001     
|                                        |  |           |         |          
|Costs incurred on uncompleted contracts |  | $         | 14,305  |           |  | $ | 2,459  |  
|Estimated earnings                      |  |           | 6,536   |           |  |   | 1,568  |  
|                                        |  |           |         |           |  |   |        |  
|                                        |  | $         | 20,841  |           |  | $ | 4,027  |  
|Less: billings to date                  |  |           | (19,310 | )         |  |   | (2,824 | )
|                                        |  |           |         |           |  |   |        |  
|                                        |  | $         | 1,531   |           |  | $ | 1,203  |  
|                                        |  |           |         |           |  |   |        |  

Such amounts are included in the following accounts (in thousands):

|                                                                            |  |           |       |           |  |   |       |  
|--------------------------------------------------------------------------- |  | --------- | ----- | --------- |  | - | ----- | -
|                                                                            |  | March 31, |       | March 31,
|                                                                            |  | 2002      |       | 2001     
|                                                                            |  |           |       |          
|Costs and estimated earnings in excess of billings on uncompleted contracts |  | $         | 1,816 |           |  | $ | 1,480 |  
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |           | (285  | )         |  |   | (277  | )
|                                                                            |  |           |       |           |  |   |       |  
|                                                                            |  | $         | 1,531 |           |  | $ | 1,203 |  
|                                                                            |  |           |       |           |  |   |       |  

Property and Equipment

Property and equipment are stated at cost. Major property additions,
replacements, and improvements are capitalized, while maintenance and repairs
that do not extend the useful lives of these assets are expensed

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

currently. Depreciation is provided using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Estimated service lives of the principal items of property and equipment range
from three to five years. Total depreciation expense for the years ended March
31, 2002, 2001, and 2000 was $1,591,000, $2,042,000, and $1,991,000,
respectively.

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

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

Impairment of 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 compares the
estimated future undiscounted cash flows expected to result from the use of the
asset, and the proceeds from its eventual disposition, with the assets carrying
value. In the event the assets carrying value exceeds the estimated future
undiscounted cash flows, an impairment loss is recorded for the difference.
During fiscal years 2002, 2001 and 2000, the Company recorded impairment losses
of $971,000, $1,244,000 and $1,944,000, respectively, which is discussed in the
following paragraphs. 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.

Throughout fiscal year 2002, the Company assessed the carrying value of
its goodwill recorded upon acquisition of certain assets from SBS Technologies
during fiscal year 1998 and determined it to have no value in the quarter ended
March 31, 2002. The Company recorded an impairment loss of $971,000. The
impairment loss is included in operating expenses in the accompanying
statements of operations for the fiscal year ended March 31, 2002.

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 and the strategic repositioning plan for Simtran.
Management assessed 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 recorded an impairment loss of $1,244,000, comprised of $608,000 of
certain fixed assets and $636,000 of unamortized goodwill. The impairment loss
is included in operating expenses in the accompanying statements of operations
for the fiscal year ended March 31, 2001.

During the fourth quarter of fiscal year 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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

as an event occurred that may indicate that the carrying amount of the goodwill
may not be recoverable. The Company estimated the future undiscounted cash
flows expected to result from future Dart operations and determined that the
entire amount of the unamortized goodwill at March 31, 2000, which was
associated with this subsidiary, had no value. An impairment charge of
$1,944,000 equal to the unamortized goodwill was recorded the impairment loss
is included in operating expenses in the accompanying statement of operations
for the fiscal year ended March 31, 2000.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

|                                                     |                           |   |           |       |      |   |       |       | 
|---------------------------------------------------- | ------------------------- | - | --------- | ----- | ---- | - | ----- | ----- | 
|                                                     |                           |   | March 31,
|                                                     |                           |   |          
|                                                     |                           |   | 2002      |       | 2001
|                                                     |                           |   |           |       |     
|Sales commissions, bonuses, and agents commissions |                           | $ | 554       |       |      | $ | 843   |      
|Accrued salaries and related expenses                |                           |   | 1,237     |       |      |   | 894   |      
|Professional fees                                    |                           |   | 994       |       |      |   | 414   |      
|Accrued severance costs                              |                           |   | 116       |       |      |   | 23    |      
|Other                                                |                           |   | 2,152     |       |      |   | 1,721 |      
|                                                     |                           |   |           |       |      |   |       |      
|                                                     | Total accrued liabilities |   | $         | 5,053 |      |   | $     | 3,895 | 
|                                                     |                           |   |           |       |      |   |       |      

Warranty and Contracts Cost Provision Reserve

The warranty and contract cost provision reserve is comprised of the
following (in thousands):

|                                |  |           |        |           |  |   |        |  
|------------------------------- |  | --------- | ------ | --------- |  | - | ------ | -
|                                |  | March 31, |        | March 31,
|                                |  | 2002      |        | 2001     
|                                |  |           |        |          
|Contract cost provision reserve |  | $         | 3,175  |           |  | $ | 4,013  |  
|Warranty provision reserve      |  |           | 550    |           |  |   | 527    |  
|                                |  |           |        |           |  |   |        |  
|                                |  | $         | 3,725  |           |  | $ | 4,540  |  
|Less: current portion           |  |           | (2,258 | )         |  |   | (2,816 | )
|                                |  |           |        |           |  |   |        |  
|                                |  | $         | 1,467  |           |  | $ | 1,724  |  
|                                |  |           |        |           |  |   |        |  

During the fiscal year ended March 31, 2001, the Company recorded accruals
of approximately $4.2 million associated with the costs to complete the
warranty provisions of certain contracts as well as to accrue for anticipated
losses on existing contracts. These were primarily due to 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 was no longer expected to offset the anticipated
expenses. Therefore, an accrual for this loss contingency was made when the
loss was determined and when it was reasonably estimable. During the fiscal
year ended March 31, 2002, $1.5 million of this accrual was consumed leaving a
balance of $2.7 million as of March 31, 2002. During fiscal 2002, the Company
recorded $0.5 million for warranty cost provisions of certain contracts and to
accrue for losses on existing contracts.

Stock-Based Compensation Plans

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

adopted. 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, 2002 and 2001. In managements opinion, the carrying amounts of these
financial instruments, with the exception of the long-term debt, approximate
their fair values due to the immediate or short-term maturity of these
financial instruments at March 31, 2001 and 2000. A portion of long-term debt
bears interest at a fluctuating rate based on the prime rate. The Company
therefore believes that the carrying amount of fluctuating rate debt
approximates fair value. The remaining portion of the Companys long-term debt
is fixed at 10%. The Company believes the carrying amount of the fixed rate
debt approximates fair value due to the close proximity to the maturity date of
September 30, 2003.

|                                |  |                |        |                |  |          |        |       |  |  |        |  |  |  |        | 
|------------------------------- |  | -------------- | ------ | -------------- |  | -------- | ------ | ----- |  |  | ------ |  |  |  | ------ | 
|                                |  | March 31, 2002 |        | March 31, 2001
|                                |  |                |        |               
|                                |  | Carrying       |        | Fair           |  | Carrying |        | Fair 
|                                |  | Amount         |        | Value          |  | Amount   |        | Value
|                                |  |                |        |                |  |          |        |      
|Cash and cash equivalents       |  |                | 4,252  |                |  |          | 4,252  |       |  |  | 1,864  |  |  |  | 1,864  | 
|Restricted cash                 |  |                | 1,434  |                |  |          | 1,434  |       |  |  | 628    |  |  |  | 628    | 
|Accounts receivable             |  |                | 10,500 |                |  |          | 10,500 |       |  |  | 8,591  |  |  |  | 8,591  | 
|Accounts payable                |  |                | 4,430  |                |  |          | 4,430  |       |  |  | 2,902  |  |  |  | 2,902  | 
|Long-term debt fluctuating rate |  |                | 12,130 |                |  |          | 12,130 |       |  |  | 12,200 |  |  |  | 12,200 | 
|Long-term debt fixed rate       |  |                | 27,335 |                |  |          | 27,335 |       |  |  | 24,765 |  |  |  | 27,335 | 

Class B to Class A Common Shares Exchange

On April 24, 1998, 1,694,569 shares of the Companys voting Common Stock
were exchanged by a group of major shareholders managed by Centre Partners
Management, LLC (the Centre Entities) for an equal amount of nonvoting Class B
common stock. In connection with the exchange, the Centre Entities agreed not
to convert the shares of Class B common stock to shares of Common Stock if, as
a result of such conversion, the Centre Entities would hold, of record or
beneficially with power to vote, more than 50% of the shares of Common Stock
outstanding immediately following such conversion, unless concurrently with
such conversion the shares of Common Stock are transferred to an unaffiliated
person. As discussed in Note 4, the Company entered into a Securities Exchange
and Release Agreement with the Centre Entities, which resulted in the release
of the restrictions on the conversion of the Class B to Common Stock. The
Centre Entities then converted all of its shares of Class B common stock to
Common Stock during fiscal year 2001.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes

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

New Accounting Pronouncements

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

SFAS No. 141 addresses financial accounting and reporting for business
combinations. This statement requires the purchase method of accounting to be
used for all business combinations, and prohibits the pooling-of-interests
method of accounting. This statement is effective for all business combinations
initiated after June 30, 2001 and supercedes APB Opinion No. 16, Business
Combinations as well as FASB Statement of Financial Accounting Standards No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises. This
statement is not expected to have a material effect on the Companys financial
position or results of operations.

SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill
to be periodically reviewed for impairment rather than amortized, for fiscal
years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets. During fiscal year 2002, the Company analyzed its
remaining balance of goodwill and determined it was fully-impaired. The Company
recorded an impairment loss of $971,000 million relating to goodwill that had
been recorded upon acquisition of certain assets from SBS Technologies during
fiscal year 1998 that is included in operating expenses in the accompanying
statements of operations. The Company will adopt this standard in the first
quarter of fiscal year 2003 and is not expected to have a material effect on
the Companys financial position or results of operations, as there is no
remaining goodwill on the Companys balance sheet as of March 31, 2002.

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

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Use of Estimates and Accruals

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

Restructuring Charge

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

Employee Benefit Plan

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

Shipping and Handling Expenses

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

3.     Long-Term Debt

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

|                           |       |   |        |        |      |   |        |        | 
|-------------------------- | ----- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                           |       |   | 2002   |        | 2001
|                           |       |   |        |        |     
|Working capital borrowings |       | $ | 130    |        |      | $ | 200    |       
|Long-term debt senior      |       |   | 12,000 |        |      |   | 12,000 |       
|Long-term debt junior      |       |   | 27,335 |        |      |   | 24,765 |       
|Debt discount              |       |   | 3,512  |        |      |   | 7,025  |       
|                           |       |   |        |        |      |   |        |       
|                           | Total |   | $      | 42,977 |      |   | $      | 43,990 | 
|                           |       |   |        |        |      |   |        |       

In August 2000, the Company entered into a Second Amended and Restated
Credit Agreement (the New Credit Agreement) and Partial Exchange Agreement with
Bank of America, N.A. and other lenders. The New Credit Agreement replaced the
Companys previous credit facility, including the Tranche A and B loans and
Revolving credit facility. In accordance with the New Credit Agreement, the
unpaid principal of approximately $70,772,000 and accrued interest of
approximately $5,312,000 under the old facility was converted to 40,235,548
shares of Common Stock, 20,463,716 shares of Series B mandatory redeemable
preferred stock, approximately $11,496,000 in Senior Secured Loans, and
approximately $22,034,000 of Junior Secured Loans. The New Credit Agreement
also provides for a New Revolving Credit Commitment comprised of available
Revolving Loans and Letters of Credit. Aggregate borrowings under the New
Revolving Credit Commitment are limited to $882,000, with borrowings under the
Letters of Credit subject to a sub limit of $828,000. As of March 31, 2002,
outstanding Revolving Loans totalled $130,000 and outstanding Letters of Credit
totalled $548,000, with $204,000 in available unused funds.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The exchange of the old credit facility and note for the new loans,
preferred stock, and common stock was accounted for as a troubled debt
restructuring in accordance with Statement of Financial Accounting Standards
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings
(SFAS 15). Under SFAS 15, in a troubled debt restructuring involving partial
settlement of a payable through the issuance of equity interests, the new
obligation should be recorded at the carrying amount of the prior obligation at
the time of the restructuring, less the fair value of equity interest received,
unless the net carrying amount exceeds the total future undiscounted cash
payments specified by the new terms. Thus, the common stock issued was recorded
at the market value at the time of issuance. The carrying value of the old
credit facility and note, including accrued interest and unamortized debt
issuance costs, less the value of the common stock received and face values of
the new debt and preferred stock, resulted in a debt restructuring liability of
approximately $14.6 million. The liability was allocated to the new debt and
mandatory redeemable preferred stock based on the relative face values of the
instruments. As a result, the Company will record future interest expense and
accretion of preferred stock on a discounted basis. As of March 31, 2002,
approximately $3,512,000 and $2,299,000 of the liability remained and is
included in long-term debt and mandatory redeemable preferred stock,
respectively, on the accompanying balance sheet. The reduction in the liability
allocated to long-term debt and corresponding reduction in interest expense is
shown as noncash reduction of debt restructuring liability on the accompanying
statements of cash flows. Expenses relating to the restructuring, including the
$250,000 funding fee related to the Revolving promissory note, totaled
approximately $656,000 and are included in interest expense in the accompanying
statement of operations for the year ended March 31, 2001.

During the quarter ended September 30, 2001, the Companys capital
expenditures, on a quarterly and year to date basis, exceeded the amount
allowable under the new credit agreement. As a result, the Company was not in
compliance with the covenants of the new credit agreement. On November 14, 2001
the Company obtained a waiver from the lenders for the covenant violation.

During the quarter ended December 31, 2001, the Companys capital
expenditures, on a year-to-date basis, exceeded the amount allowable under the
New Credit Agreement. As a result, the Company was not in compliance with the
covenants of the New Credit Agreement. On December 31, 2001 the Company
obtained a waiver from the lenders for the covenant violation and in
conjunction with the waiver, amended the New Credit Agreement as follows:



| |  |  | The quarterly limitations on capital expenditures were removed, but
the full year limitation on capital expenditures for the Company
remains at an amount equal to 20% of the Companys EBITDA for such
fiscal year.                                                                                                                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The requirement of the Credit Agreement calling for payment of
interest in cash on the Junior Secured Loans for the interest periods
ending on March 31, 2001, June 30, 2001, September 30, 2001, December
31, 2001 and March 31, 2002 was waived and it was provided that
interest due on the Junior Secured Loans for such interest periods
would be payable in kind by the delivery to each of the lenders of
additional Junior Secured Loans.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



| |  |  | Certain of the lenders agreed to provide a $2,200,000 Support Letter of Credit Facility. This new facility has first out rights in the Collateral.                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The lenders agreed to continue to receive interest payments on the Junior Secured Loans after March 31, 2002 by payment in kind by the delivery
to each of the lenders of additional Junior Secured Loans. The amendment requires that the Support Letters of Credit Facility be
cash-collateralized at 105%.                                                       
|
| |  |  | The amendment further provides that if EBITDA exceeds 120% of the amount necessary for payment of interest on the Loans (other than the Junior
Secured Loans) plus the quarterly amount necessary to cash-collateralize the Support Letters of Credit, the interest on the Junior Secured Loans
will be paid, to the extent of such excess, in cash and not in kind.
|
| |  |  | The negative pledge contained in the Credit Agreement was amended to allow the Company to deposit up to $2,310,000 in a cash collateral account
to secure the Support Letter of Credit.                                                                                                                                                                             
|
| |  |  | The maturity date of the Senior Secured Loans, Junior Secured Loans and New Revolving Loans was extended from March 31, 2003 to September 30,
2003.                                                                                                                                                                                                                 
|
| |  |  | The interest rate on New Revolving Loans was raised to Prime Rate plus 2% from Prime Rate plus 1%.                                                                                                                                                                                                                                                                  
|
| |  |  | The Credit Agreement was amended to provide that the Company pay an unused commitment fee with respect to the unused portion of the New Revolving
Credit Commitment of 0.5% per annum.                                                                                                                                                                              
|
| |  |  | The Company shall pay a non-refundable fronting fee for each New Letter of Credit issued in an amount equal to 0.25% of the amount of such New
Letter of Credit; an annual non-refundable letter of credit commission for each New Letter of Credit equal to 1.25% of the average daily
aggregate amount of all New Letter of Credits outstanding.                  

All borrowings under the amended agreements mature on September 30, 2003.
The New Credit Agreement, as amended, provides an option, at the Companys
discretion if no default events then exist, to extend the maturity date of the
Senior and the Junior Secured Loans to March 31, 2004 for a fee equal to 1% of
the outstanding principal balance of the Senior and Junior Secured Loans at the
time of the extension. The Senior Secured Loans bear interest at prime plus 2%,
(6.75% at March 31, 2002), payable quarterly in cash or by delivery of
additional Junior Secured Loans. The Junior Secured Loans bear interest at 10%,
payable quarterly in notes with the same terms or in cash if the Companys
EBITDA exceeds 120% of the amount necessary for payment of interest on the
loans, excluding the Junior Secured Loans. During the year ended March 31, 2002
the Company issued additional Junior Secured Loans as payment in kind of junior
interest totalling $3,634,335. The additional Junior Secured Loans issued are
included in the total Junior Secured Loan amount above. The Revolving Loans and
support Letters of Credit bear interest at the Prime Rate plus 2% (6.75% at
March 31, 2002), payable quarterly in cash. As of March 31, 2002, the effective
future interest rate on all borrowings under the new credit agreement was
approximately 0.2%.

The borrowings under the old agreement and the New Credit Agreement are
secured by substantially all of the Companys assets, a pledge of all of the
common shares of the operating subsidiary, and a pledge of 65% of the capital
stock of the Companys foreign subsidiaries. The New Credit Agreement also
contains restrictive covenants, which, among other things, limit borrowings and
capital expenditures and require certain interest coverage ratios, as defined,
to be maintained. At March 31, 2002, the Companys capital expenditures, on a
year-to-date basis, exceeded the amount allowable under the New Credit
Agreement, as amended on December 31, 2001. As a result, the Company was not in
compliance with the covenants of the New Credit Agreement. On July 10, 2002,
the Company obtained a waiver from the lenders for the covenant violation.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.     Mandatory Redeemable Preferred Stock

Series A Preferred Stock

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

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

Series B Preferred Stock

In August 2000, the board of directors approved an amendment to the
articles of incorporation to change the number of authorized shares of
preferred stock to 100,000. The board of directors then created a new class of
Series B preferred stock 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
latest maturity date (September 30, 2003) of the senior secured debt (Note 3)
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 3). Accretion related to dividends earned during the year
ended March 31, 2002 totalled approximately $2,353,000. As discussed in Note 3,
this amount was offset by the reduction of approximately $2,083,000 in the debt
restructuring liability allocated to the preferred stock, resulting in net
accretion of approximately $270,000 for the year ended March 31, 2002.

5.     Stock-Based Compensation Plans

Stock Option Plan

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

Series A Options

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Series B Options

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

Series C Options

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

Series D Options

Options under this series are available for grant to officers and other
employees. During the year ended March 31, 2002, no Series D options were
issued. The options are generally exercisable one-third per year on a
cumulative basis beginning on the 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
vested on the effective date of the optionees termination. In the event of
termination of the optionees employment for cause, all of the optionees
outstanding options shall be forfeited.

Series E Options

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

Series F Options

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Series G Options

Options under this series are available for grant to executive officers.
The options are exercisable 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 vested on the
effective date of the optionees termination. In the event of termination of
the optionees employment for cause, all of the optionees outstanding options
shall be forfeited.

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

Series H Options

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

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

|                                   |           |  |           |           |                |   |                |           |  |   |                  |      | 
|---------------------------------- | --------- |  | --------- | --------- | -------------- | - | -------------- | --------- |  | - | ---------------- | ---- | 
|                                   |           |  |           |           |                |   |                |           |  |   | Weighted Average
|                                   |           |  | Options   |           | Exercise Price |   | Exercise Price
|                                   |           |  |           |           |                |   |               
|Outstanding, March 31, 1999        |           |  | 2,221,152 |           |                | $ | 0.6914.00      |           |  | $ | 3.65             |     
|                                   | Granted   |  |           | 673,400   |                |   |                | 0.501.00  |  |   |                  | 0.69 | 
|                                   | Cancelled |  |           | (679,698  | )              |   |                | 0.5614.00 |  |   |                  | 3.86 | 
|                                   |           |  |           |           |                |   |                |           |  |   |                  |     
|Outstanding, March 31, 2000        |           |  | 2,214,854 |           |                | $ | 0.5012.00      |           |  | $ | 2.82             |     
|                                   | Granted   |  |           | 1,206,900 |                |   |                | 0.010.69  |  |   |                  | 0.35 | 
|                                   | Cancelled |  |           | (425,069  | )              |   |                | 0.5612.00 |  |   |                  | 3.21 | 
|                                   |           |  |           |           |                |   |                |           |  |   |                  |     
|Outstanding, March 31, 2001        |           |  | 2,996,685 |           |                | $ | 0.0112.00      |           |  | $ | 1.77             |     
|                                   | Granted   |  |           | 0         |                |   |                | 0.000.00  |  |   |                  | 0    | 
|                                   | Cancelled |  |           | (477,108  | )              |   |                | 0.1912.00 |  |   |                  | 2.21 | 
|                                   |           |  |           |           |                |   |                |           |  |   |                  |     
|Outstanding, March 31, 2002        |           |  | 2,519,577 |           |                | $ | 0.0112.00      |           |  | $ | 1.68             |     
|                                   |           |  |           |           |                |   |                |           |  |   |                  |     
|Shares available for future grants |           |  | 4,977,744 |           |                |   |                |           |  |   |                  |     
|                                   |           |  |           |           |                |   |                |           |  |   |                  |     

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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 using the Black-Scholes option pricing model
as prescribed by SFAS No. 123 using the following assumptions:

|                          |  |                      |     |      |  |      |        |   |  |  |        |  
|------------------------- |  | -------------------- | --- | ---- |  | ---- | ------ | - |  |  | ------ | -
|                          |  | Year Ended March 31,
|                          |  |                     
|                          |  | 2002                 |     | 2001 |  | 2000
|                          |  |                      |     |      |  |     
|                          |  | (In thousands)      
|Risk-free interest rate   |  |                      | N/A |      |  |      | 5.00   | % |  |  | 5.00   | %
|Expected dividend yield   |  |                      | N/A |      |  |      | 0      |   |  |  | 4.0    |  
|Expected lives (in years) |  |                      | N/A |      |  |      | 4.0    |   |  |  | 4.0    |  
|Expected volatility       |  |                      | N/A |      |  |      | 150.00 | % |  |  | 153.20 | %

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

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

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

|                         |       |            |   |                  |  |                |                     |            |                     |                |          |     |             |   |          |       |  |  |           |           |  |   |      |       | 
|------------------------ | ----- | ---------- | - | ---------------- |  | -------------- | ------------------- | ---------- | ------------------- | -------------- | -------- | --- | ----------- | - | -------- | ----- |  |  | --------- | --------- |  | - | ---- | ----- | 
|                         |       |            |   |                  |  |                | Options Outstanding |            | Options Exercisable
|                         |       |            |   |                  |  |                |                     |            |                    
|                         |       |            |   |                  |  |                |                     |            |                     |                | Weighted |     |             |   |          |       |  |  |           |           |  |   |     
|                         |       |            |   |                  |  |                | Outstanding         |            | Average             |                | Weighted |     | Exercisable |   | Weighted
|                         |       |            |   |                  |  |                | as of               |            | Remaining           |                | Average  |     | as of       |   | Average 
|Range of Exercise Prices |       | 03/31/2002 |   | Contractual Life |  | Exercise Price |                     | 03/31/2002 |                     | Exercise Price
|                         |       |            |   |                  |  |                |                     |            |                     |               
|$                        | 0.01  |            | $ | 1.43             |  |                |                     | 1,654,300  |                     |                |          | 7.6 |             |   | $        | 0.49  |  |  |           | 1,007,667 |  |   | $    | 0.67  | 
|                         | 1.44  |            |   | 2.85             |  |                |                     | 46,583     |                     |                |          | 6.1 |             |   |          | 1.79  |  |  |           | 46,583    |  |   |      | 1.79  | 
|                         | 2.86  |            |   | 4.28             |  |                |                     | 693,427    |                     |                |          | 3.0 |             |   |          | 3.25  |  |  |           | 635,391   |  |   |      | 3.25  | 
|                         | 4.29  |            |   | 5.70             |  |                |                     | 16,600     |                     |                |          | 2.8 |             |   |          | 5.19  |  |  |           | 16,600    |  |   |      | 5.19  | 
|                         | 5.71  |            |   | 7.13             |  |                |                     | 3,000      |                     |                |          | 2.4 |             |   |          | 7.13  |  |  |           | 3,000     |  |   |      | 7.13  | 
|                         | 7.14  |            |   | 8.55             |  |                |                     | 59,733     |                     |                |          | 4.4 |             |   |          | 7.54  |  |  |           | 59,733    |  |   |      | 7.54  | 
|                         | 8.56  |            |   | 9.98             |  |                |                     | 100        |                     |                |          | 3.0 |             |   |          | 9.00  |  |  |           | 100       |  |   |      | 9.00  | 
|                         | 11.40 |            |   | 12.00            |  |                |                     | 45,834     |                     |                |          | 4.3 |             |   |          | 11.78 |  |  |           | 45,834    |  |   |      | 11.78 | 
|                         |       |            |   |                  |  |                |                     |            |                     |                |          |     |             |   |          |       |  |  |           |           |  |   |      |      
|                         |       |            |   |                  |  |                | 2,519,577           |            |                     |                | 6.1      |     |             | $ | 1.68     |       |  |  | 1,814,908 |           |  | $ | 2.16 |      

Stock Compensation Plan

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2002, 2001, and 2000, the Company issued 68,536, 332,875, and 101,734 shares,
respectively, of Common Stock to the 401(k) Profit Sharing Plan as matching
contributions.

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.

6.     Income Taxes

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

|         |                               |   |                      |       |      |   |        |      |   |   |      |        |  
|-------- | ----------------------------- | - | -------------------- | ----- | ---- | - | ------ | ---- | - | - | ---- | ------ | -
|         |                               |   | Year Ended March 31,
|         |                               |   |                     
|         |                               |   | 2002                 |       | 2001 |   | 2000  
|         |                               |   |                      |       |      |   |       
|Current: |                               |   |                      |       |      |   |        |      |   |   |      |       
|         | Federal income tax benefit    |   | $                    | 4,877 |      |   | $      | (999 | ) |   | $    | (3,751 | )
|         | Foreign income tax expense    |   |                      | 186   |      |   |        | 43   |   |   |      | 292    |  
|         | State income tax expense      |   |                      | 0     |      |   |        | 0    |   |   |      | 0      |  
|         | Deferred income tax (benefit) |   |                      | (201  | )    |   |        | (96  | ) |   |      | 2,651  |  
|         |                               |   |                      |       |      |   |        |      |   |   |      |        |  
|         |                               | $ | (4,892               | )     |      | $ | (1,052 | )    |   | $ | (808 | )     
|         |                               |   |                      |       |      |   |        |      |   |   |      |        |  

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

|                                           |       |   |                      |        |      |   |        |        |   |   |        |      |  
|------------------------------------------ | ----- | - | -------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ---- | -
|                                           |       |   | Year Ended March 31,
|                                           |       |   |                     
|                                           |       |   | 2002                 |        | 2001 |   | 2000  
|                                           |       |   |                      |        |      |   |       
|Tax at statutory rate                      |       | $ | (97                  | )      |      | $ | (5,654 | )      |   | $ | (6,631 | )   
|State taxes, net of federal benefit        |       |   | (7                   | )      |      |   |        |        |   |   |        |     
|Nondeductible goodwill                     |       |   |                      |        |      |   | 22     |        |   |   | 83     |     
|Research and development tax credit        |       |   |                      |        |      |   | 0      |        |   |   | (679   | )   
|Foreign sales corporation benefit          |       |   |                      |        |      |   | 0      |        |   |   | (188   | )   
|Impairment of nondeductible goodwill       |       |   |                      |        |      |   | 216    |        |   |   | 661    |     
|Taxable discount of accretion              |       |   | 105                  |        |      |   | 393    |        |   |   | 0      |     
|Increase (decrease) in valuation allowance |       |   | (5,047               | )      |      |   | 3,904  |        |   |   | 6,207  |     
|Other                                      |       |   | 154                  |        |      |   | 67     |        |   |   | (261   | )   
|                                           |       |   |                      |        |      |   |        |        |   |   |        |     
|                                           | Total |   | $                    | (4,892 | )    |   | $      | (1,052 | ) |   | $      | (808 | )
|                                           |       |   |                      |        |      |   |        |        |   |   |        |     

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

|                             |                                              |                                          |     |           |      |      |      |         |       |  
|---------------------------- | -------------------------------------------- | ---------------------------------------- | --- | --------- | ---- | ---- | ---- | ------- | ----- | -
|                             |                                              |                                          |     | March 31,
|                             |                                              |                                          |     |          
|                             |                                              |                                          |     | 2002      |      | 2001
|                             |                                              |                                          |     |           |      |     
|Deferred Tax Assets:         |                                              |                                          |     |           |      |      |      |        
|                             | Inventory reserves                           |                                          | $   | 1,242     |      |      | $    | 350     |      
|                             | Accrued Liabilities                          |                                          |     | 270       |      |      |      | 193     |      
|                             | Warranty and contract costs reserve          |                                          |     | 1,989     |      |      |      | 1,640   |      
|                             | Deferred revenue                             |                                          |     |           |      |      |      | 412     |      
|                             | Deferred gain on restructuring               |                                          |     | 1,366     |      |      |      | 3,992   |      
|                             | Loss on impairment of property and equipment |                                          |     | 139       |      |      |      | 319     |      
|                             | Net Domestic operating loss carryforwards    |                                          |     | 2,583     |      |      |      | 4,873   |      
|                             | Other                                        |                                          |     | 664       |      |      |      | 227     |      
|                             | Valuation allowance                          |                                          |     | (7,722    | )    |      |      | (10,621 | )    
|                             |                                              |                                          |     |           |      |      |      |        
|                             |                                              | Total Gross Deferred Tax Assets          |     | $         | 531  |      |      | $       | 1,385 |  
|                             |                                              |                                          |     |           |      |      |      |        
|Deferred Tax Liabilities:    |                                              |                                          |     |           |      |      |      |        
|                             | Accelerated Depreciation                     |                                          |     |           |      |      |      | 36      |      
|                             | Inventory basis differences                  |                                          |     | (485      | )    |      |      | 1,155   |      
|                             | Other                                        |                                          |     | (68       | )    |      |      | 417     |      
|                             |                                              |                                          |     |           |      |      |      |        
|                             |                                              | Total Gross Deferred Tax Liabilities     |     |           | (553 | )    |      |         | 1,608 |  
|                             |                                              |                                          |     |           |      |      |      |        
|Net Deferred Tax liabilities |                                              |                                          | (22 | )         |      |      | (223 | )      
|                             | Less: Current Deferred Tax Assets            |                                          |     |           |      |      |      | 0       |      
|                             |                                              |                                          |     |           |      |      |      |        
|                             |                                              | Non-current Net Deferred Tax Liabilities |     | $         | (22  | )    |      | $       | (223  | )
|                             |                                              |                                          |     |           |      |      |      |        

The debt restructuring completed by the Company in August 2000 resulted in
a gain for tax purposes. However, due to the fact that the sum of all future
principal and interest payments due under the new agreements exceeded the
carrying value of the old debt, no gain was recognized on the transaction for
book purposes in accordance with SFAS 15. The excess of the carrying amount of
the old borrowings exceeded the fair value of the new borrowings, common stock,
and mandatory redeemable preferred stock by approximately $14.6 million and was
allocated proportionately to the new debt and preferred stock based on their
relative carrying values. During the year ended March 31, 2001, the excess
amount allocated to debt was reduced by approximately $3,512,000, resulting in
a corresponding reduction of interest expense. The excess amount allocated to
preferred stock was reduced by approximately $2,083,000, 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 $2,083,000.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As of March 31, 2002, the Company has available domestic federal operating
loss carryforwards of approximately $182,000 and domestic state operating loss
carryforwards of approximately $42,000,000. 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.

7.     Concentration of Revenues

For the years ended March 31, 2002, 2001, and 2000, the Companys five
largest customers accounted for approximately 50.5%, 34.9% and 58.2% of the
Companys total revenues, respectively. For any period, a major customer is
defined as a customer from whom the Company generated more than 10% of its
revenues for that period. For the fiscal year ended March 31, 2002, four
customers accounted for more than 10% of the Companys revenues. The following
table summarizes information about the Companys major customers for the year
ended March 31, 2002, 2001 and 2000:

|     |  |                                                       |  |           |        |          |  |  |      |  
|---- |  | ----------------------------------------------------- |  | --------- | ------ | -------- |  |  | ---- | -
|     |  |                                                       |  | Aggregate |        | Percent 
|     |  |                                                       |  | Revenues  |        | of Total
|Year |  | Major Customers                                       |  | (000s)    |        | Revenues
|     |  |                                                       |  |           |        |         
|2002 |  | Public Works and Government Services Center of Canada |  | $         | 8,392  |          |  |  | 14.2 | %
|     |  | United States Marine Corps                            |  |           | 7,121  |          |  |  | 12.1 | %
|     |  | United States Air Force                               |  |           | 6,188  |          |  |  | 10.5 | %
|     |  | Defense Threat Reduction Agency                       |  |           | 5,990  |          |  |  | 10.1 | %
|2001 |  | None                                                  |  |           | 0      |          |  |  | 0.0  | %
|2000 |  | Canadian Department of National Defence               |  | $         | 10,791 |          |  |  | 27.7 | %
|     |  | The Australian Army                                   |  |           | 5,295  |          |  |  | 13.6 | %

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

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

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A significant portion of the Companys sales is made to customers located
outside the U.S., primarily in Canada, Europe and Asia. In fiscal 2002, 2001,
and 2000, 40.3%, 52.7%, and 70.5%, respectively, of the Companys revenues were
derived from sales to customers located outside the United States. The Company
expects that its international customers will continue to account for a
substantial portion of its revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations and changes in
import/export regulations and tariff rates. In addition, various forms of
protectionist trade legislation have been, and in the future may be, proposed
in the U.S. and certain other countries. Any resulting changes in current
tariff structures or other trade and monetary policies could adversely affect
the Companys sales to international customers. The Company with respect to
certain of the markets in which it competes has identified political and
economic factors. There can be no assurance that these factors will not result
in defaults by customers in making payments due to the Company, in reductions
in the purchases of the Companys products by international customers or in
foreign currency exchange losses. In certain cases, the Company has reduced
certain of the risks associated with international contracts by obtaining bank
letters of credit to support the payment obligations of its customers and/or by
providing in its contracts for payment in U.S. dollars.

8.     Net Income (Loss) Per Common Share

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

|         |                                                                                                |                  |   |                |        |                |   |                |        |   |   |         |        |  
|-------- | ---------------------------------------------------------------------------------------------- | ---------------- | - | -------------- | ------ | -------------- | - | -------------- | ------ | - | - | ------- | ------ | -
|         |                                                                                                |                  |   | Twelve Months  |        | Twelve Months  |   | Twelve Months 
|         |                                                                                                |                  |   | Ended          |        | Ended          |   | Ended         
|         |                                                                                                |                  |   | March 31, 2002 |        | March 31, 2001 |   | March 31, 2000
|         |                                                                                                |                  |   |                |        |                |   |               
|Basic:   |                                                                                                |                  |   |                |        |                |   |                |        |   |   |        
|         | Net income (loss) attributable to common shareholders                                          |                  | $ | 4,336          |        |                | $ | (14,108        | )      |   | $ | (18,902 | )     
|         | Weighted average common shares outstanding                                                     |                  |   | 70,152         |        |                |   | 53,643         |        |   |   | 20,760  |       
|         |                                                                                                |                  |   |                |        |                |   |                |        |   |   |         |       
|         |                                                                                                | Per share amount |   | $              | 0.06   |                |   | $              | (0.26  | ) |   | $       | (0.91  | )
|         |                                                                                                |                  |   |                |        |                |   |                |        |   |   |         |       
|Diluted: |                                                                                                |                  |   |                |        |                |   |                |        |   |   |        
|         | Net income (loss) attributable to common shareholders                                          |                  | $ | 4,336          |        |                | $ | (14,108        | )      |   | $ | (18,902 | )     
|         | Weighted average common shares outstanding                                                     |                  |   | 70,152         |        |                |   | 53,643         |        |   |   | 20,760  |       
|         | Shares assumed issued upon exercise of dilutive stock
options using the treasury stock method  |                  |   | 81             |        |                |   | 0              |        |   |   | 0       |       
|         | Shares assumed issued upon exercise of dilutive stock
warrants using the treasury stock method |                  |   | 596            |        |                |   | 0              |        |   |   | 0       |       
|         |                                                                                                |                  |   |                |        |                |   |                |        |   |   |         |       
|         |                                                                                                | Total            |   |                | 70,829 |                |   |                | 53,643 |   |   |         | 20,760 |  
|         |                                                                                                |                  |   |                |        |                |   |                |        |   |   |         |       
|         |                                                                                                | Per share amount |   | $              | 0.06   |                |   | $              | (0.26  | ) |   | $       | (0.91  | )
|         |                                                                                                |                  |   |                |        |                |   |                |        |   |   |         |       

The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the period,
as if exercised, by the average common share market price during the period.
The average common share market price used in the above calculation was $0.31
for the year ended March 31, 2002.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Options to purchase 2,122,877 shares of common stock and warrants to
purchase 3,246,164 shares of common stock were outstanding as of March 31, 2002
but were not included in the computation of the 2002 diluted EPS because the
exercise price of the options and warrants was greater than the average market
value of the common shares.

Options to purchase 2,606,085 shares of common stock and warrants to
purchase 5,246,164 shares of common stock were outstanding as of March 31, 2001
but were not included in the computation of the 2001 diluted EPS because the
effect would be anti-dilutive.

Options to purchase 2,214,854 shares of common stock and warrants to
purchase 3,246,164 shares of common stock were outstanding as of March 31, 2000
but were not included in the computation of the 2000 diluted EPS because the
effect would be anti-dilutive.

9.     Related Party Transactions

The Company entered into a consulting agreement, dated October 4, 2000,
with Sugarman Company, LLP, a company in which Randy Sugarman is the managing
partner and has an 80% ownership interest. Under the agreement and in
accordance with the terms of the Companys restructuring in fiscal year 2001,
Mr. Sugarman was engaged by the Company to evaluate its financial position and
operations and make recommendations to senior management regarding changes that
need to be made to improve profitability and liquidity. Mr. Sugarmans services
were performed on an hourly basis, plus out-of-pocket expenses, and the Company
was billed accordingly. From May 16, 2001 until August 9, 2002, Mr. Sugarman
served as Interim Chief Executive Officer and President of the Company. Mr.
Sugarman ceased to be an officer of the Company on August 9, 2002, in
connection with the conclusion of the Companys engagement of Sugarman Company
LLP. The Company incurred consulting fees of $390,000 and $221,000, plus
expenses of $72,000 and $51,000, for consulting services under the agreement
for the fiscal years 2002 and 2001, respectively. As of March 31, 2002,
approximately $49,000 is due to the consulting company and is included in
accrued liabilities of the accompanying balance sheet.

A group of entities affiliated with Centre Partners Management LLC (the
Centre Entities) are among the Companys largest shareholders. The Centre
Entities hold a seat on the Companys Board of Directors. In addition, the
Centre Entities, and other institutional lenders who are also major
shareholders as a result of the restructuring transaction (See Part I, Item 1,
Restructure Transaction), were party to the debt restructuring further
discussed in Note 3 to the Companys March 31, 2002 financial statements. These
entities continue to be the Companys primary lenders. As a result of the share
ownership of the Centre Entities and their representation on the Board of
Directors, the Centre Entities have the ability to influence the operations of
the Company.

10.     Commitments and Contingencies

Operating Leases

The Company leases its manufacturing and operating facilities and office
equipment under operating leases with terms in excess of one year. Rental
expense under noncancellable operating leases was approximately $967,000,
$1,001,000, and $942,000 for the years ended March 31, 2002, 2001, and 2000,
respectively. The leases have expiration dates varying from August 2002
thorough December 2008. All but one of the leases for the Companys buildings
have terms that require renegotiation at the end of the lease term; the
remaining lease self-renews annually, unless otherwise negotiated. Leases
relating to operating equipment require the Company to negotiate the renewal at
the end of the lease term.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Government Agency Review

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

Employment Agreements

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

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

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

Legal

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

During fiscal year 2002, the Company reserved $0.3 million for legal fees
regarding claims made by certain customers of the Companys former subsidiary,
Dart International concerning the DVD component of the electronic archery
system. The Company successfully mitigated these claims and all were either
settled for a total amount within the reserve or the charges were dropped
altogether. In the opinion of management, these proceedings did not have a
material adverse effect on the Companys financial position, liquidity or
results of operations.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

See 12. Subsequent Events.

11.     Industry Segment and Geographic Information

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

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

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

12.     Subsequent Events

Pursuant to applicable ATF regulations, the Company recently advised the
ATF that approximately 33 weapons that the Company believed were at customer
locations could not be accounted for after the Company conducted a physical
inventory of its weapons. The ATF responded that the Company should confirm the
number of missing weapons and file the formal report required by ATF
regulations. The Company conducted an investigation into this matter and
concluded that the number of weapons missing is 41. The Company has filed the
formal report with the ATF and local law enforcement authorities. The Company
anticipates that it will have further communication with the ATF and it is too
early to determine whether this matter will have a material adverse effect upon
the Company.

In August 2002, the Company successfully negotiated a reduction in the
earn-out payment due under an asset purchase agreement executed in fiscal year
1998 from $708,000, which was included in accrued liabilities at March 31,
2002, to $450,000.

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.     Quarterly Financial Data

Quarterly Results of Operations

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

|                                                    |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      | 
|--------------------------------------------------- | ------- | - | ------------------------------------- | ---- | ---------------- | - | ---------- | ---- | ------ | - | ------- | ---- | ------- | - | ------ | ---- | ------ | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ---- | 
|                                                    |         |   | Quarter Ended                        
|                                                    |         |   | Fiscal Year 2002                      |      | Fiscal Year 2001
|                                                    |         |   |                                       |      |                 
|                                                    |         |   | (Restated)                            |      | (Restated)       |   | (Restated) |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |       
|                                                    |         |   | June 30                               |      | Sept 30          |   | Dec 31     |      | Mar 31 |   | June 30 |      | Sept 30 |   | Dec 31 |      | Mar 31
|                                                    |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |       
|                                                    |         |   | (In thousands, except per share data)
|Revenues                                            |         | $ | 11,639                                |      |                  | $ | 16,897     |      |        | $ | 15,396  |      |         | $ | 15,125 |      |        | $ | 10,271 |       |   | $ | 7,368  |       |   | $ | 9,109  |       |   | $ | 14,753 |     
|Gross Margin                                        |         |   | 4,480                                 |      |                  |   | 4,687      |      |        |   | 4,652   |      |         |   | 3,631  |      |        |   | 2,987  |       |   |   | (2,163 | )     |   |   | 758    |       |   |   | 5,225  |     
|Gross Margin %                                      |         |   | 38                                    | %    |                  |   | 28         | %    |        |   | 30      | %    |         |   | 24     | %    |        |   | 29     | %     |   |   | (29    | )%    |   |   | 8      | %     |   |   | 35     | %   
|Operating Expense                                   |         | $ | 4,139                                 |      |                  | $ | 4,073      |      |        | $ | 4,267   |      |         | $ | 5,416  |      |        | $ | 3,944  |       |   | $ | 3,780  |       |   | $ | 5,805  |       |   | $ | 5,206  |     
|                                                    |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Operating Income (Loss)                             |         |   | 341                                   |      |                  |   | 614        |      |        |   | 385     |      |         |   | (1,785 | )    |        |   | (957   | )     |   |   | (5,943 | )     |   |   | (5,047 | )     |   |   | 19     |     
|Interest (Income) Expense, Net                      |         |   | (145                                  | )    |                  |   | 1          |      |        |   | 67      |      |         |   | (143   | )    |        |   | 2,346  |       |   |   | 2,225  |       |   |   | 64     |       |   |   | (191   | )   
|Other (Income) Expense                              |         |   | (33                                   | )    |                  |   | 64         |      |        |   | 31      |      |         |   | (1     | )    |        |   | 22     |       |   |   | 284    |       |   |   | (6     | )     |   |   | (43    | )   
|                                                    |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Pre-Tax Income (Loss)                               |         |   | 519                                   |      |                  |   | 549        |      |        |   | 287     |      |         |   | (1,641 | )    |        |   | (3,325 | )     |   |   | (8,452 | )     |   |   | (5,105 | )     |   |   | 253    |     
|Tax Provision (Benefit)                             |         |   | 296                                   |      |                  |   | 186        |      |        |   | 63      |      |         |   | (5,437 | )    |        |   | (116   | )     |   |   | 54     |       |   |   | 54     |       |   |   | (1,044 | )   
|                                                    |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Net Income (Loss)                                   |         |   | 223                                   |      |                  |   | 363        |      |        |   | 224     |      |         |   | 3,796  |      |        |   | (3,209 | )     |   |   | (8,506 | )     |   |   | (5,159 | )     |   |   | 1,297  |     
|Accretion of Preferred Stock                        |         |   | 65                                    |      |                  |   | 67         |      |        |   | 68      |      |         |   | 70     |      |        |   | 66     |       |   |   | 74     |       |   |   | 57     |       |   |   | 63     |     
|Gain on extinguishment of
Preferred Stock           |         |   | 0                                     |      |                  |   | 0          |      |        |   | 0       |      |         |   | 0      |      |        |   | 0      |       |   |   | (1,729 | )     |   |   | 0      |       |   |   | 0      |     
|                                                    |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|Net Income (Loss) applicable to
common stockholders |         |   | 158                                   |      |                  |   | 296        |      |        |   | 156     |      |         |   | 3,726  |      |        |   | (3,275 | )     |   |   | (6,851 | )     |   |   | (5,216 | )     |   |   | 1,234  |     
|Earnings per common share                           |         |   |                                       |      |                  |   |            |      |        |   |         |      |         |   |        |      |        |   |        |       |   |   |        |       |   |   |        |       |   |   |        |     
|                                                    | Basic   |   |                                       | 0.00 |                  |   |            | 0.00 |        |   |         | 0.00 |         |   |        | 0.05 |        |   |        | (0.16 | ) |   |        | (0.13 | ) |   |        | (0.07 | ) |   |        | 0.02 | 
|                                                    | Diluted |   |                                       | 0.00 |                  |   |            | 0.00 |        |   |         | 0.00 |         |   |        | 0.05 |        |   |        | (0.16 | ) |   |        | (0.13 | ) |   |        | (0.07 | ) |   |        | 0.02 | 

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VALUATION AND QUALIFYING ACCOUNTS
March 31, 2002, 2001, and 2000

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



---

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

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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 November 6, 2002.

|                                                                                                                      |  |                    
|--------------------------------------------------------------------------------------------------------------------- |  | -------------------
|FIREARMS TRAINING SYSTEMS, INC.                                                                                      
|                                                                                                                      |  |                    
|                                                                                                                      |  |                    
|By:                                                                                                                   |  | /s/ RONAVAN MOHLING
|                                                                                                                     
|Ronavan MohlingChairman of the Board of Directors,
Chief Executive Officer and Director
(Principal Executive Officer)

POWER OF ATTORNEY AND SIGNATURES

Each person whose signature appears below constitutes and appoints Ronavan
Mohling 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.

|                                         |  |                                                                                    |  |                 
|---------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------
|Signature                                |  | Title                                                                              |  | Date            
|                                         |  |                                                                                    |  |                 
|                                        
|/s/ Ronavan MohlingRonavan Mohling       |  | Chairman of the Board of Directors,
Chief Executive Officer and Director           |  | November 6, 2002
|                                        
|/s/ John A. MorelliJohn A. Morelli       |  | Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |  | November 6, 2002
|                                        
|/s/ William J. BrattonWilliam J. Bratton |  | Director                                                                           |  | November 6, 2002
|                                        
|/s/ Mary Ann GilleeceMary Ann Gilleece   |  | Director                                                                           |  | November 6, 2002
|                                        
|/s/ Scott PerekslisScott Perekslis       |  | Director                                                                           |  | November 6, 2002
|                                        
|Randy Sugarman                           |  | Director                                                                           |  |                 
|                                        
|/s/ Ron WhitakerRon Whitaker             |  | Director                                                                           |  | November 6, 2002

V-1



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##### Table of Contents



CERTIFICATION

I, Ronavan Mohling, Chief Executive Officer of Firearms Training Systems,
Inc., certify that:

1      I have reviewed this annual report on Form 10-K/A (Amendment Number 2) of
Firearms Training Systems, Inc.;

2      Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and

3      Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

Date:  November 6, 2002

| |  |  |  |     |  |                                        
| |  |  |  | --- |  | ---------------------------------------
|
| |  |  |  |     |  |                                        
| |  |  |  | By: |  | /s/ RONAVAN MOHLING                    
| |  |  |  |     |  |                                        
| |  |  |  |     |  | Ronavan Mohling
Chief Executive Officer





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##### Table of Contents



CERTIFICATION

I, John A. Morelli, Chief Financial Officer of Firearms Training Systems,
Inc., certify that:



|1. |  | I have reviewed this annual report on Form 10-K/A (Amendment Number
2) of Firearms Training Systems, Inc.;                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.                       

Date:  November 6, 2002

| |  |  |  |     |  |                                        
| |  |  |  | --- |  | ---------------------------------------
|
| |  |  |  | By: |  | /s/ JOHN A. MORELLI                    
| |  |  |  |     |  |                                        
| |  |  |  |     |  | John A. Morelli
Chief Financial Officer