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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549




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FORM 10-K/A

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

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

Name of exchange on which registered:

None

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

Class A Common Stock, $0.000006 par value per share

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

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.  þ

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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EXPLANATORY NOTE

The Companys annual report on Form 10-K was
previously filed with unaudited financial statements in lieu of
audited financial statements because the registrant dismissed
its prior public accountants, Arthur Andersen LLP, in April
2002. The Company appointed PricewaterhouseCoopers LLP as its
new independent accountants and the audit has been completed.
The Company is amending its annual report on Form 10-K to
include audited financial statements as of and for the year
ended March 31, 2002.



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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. Managements Discussion and Analysis of

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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 | %






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Form 13-Ds 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

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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

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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.

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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

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 Companys 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
Managements 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

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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.

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 |  | New York City Police Department                    |  | Public Works and Government Services Center Canada
|United States Air Force         |  | Connecticut Peace Officers Standards
    Training |  | Canadian Department of National Defense           
|Air National Guard              |  | R.C.M.P.  Edmonton                                |  | British Army                                      
|United States Marine Corps      |  |                                                    |  |                                                   

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 Companys five largest
customers accounted for approximately 34.9% of the
Companys revenues, with no

7



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Research and Development

The Company engages in the research and development
(R&D) of new and enhanced simulation and
training technology using internally generated funds. Software
and hardware R&D expenditures totaled $4.1 million,
$4.8 million and $4.0 million in fiscal 2002, 2001,
and 2000, respectively. The Companys R&D efforts are
divided into four separate disciplines: electronics, mechanical,
training, and audio-visual. The continued success of the Company
will depend on its ability to incorporate in its products
changing technologies in such areas and to develop and introduce
new technology that meets the increasingly sophisticated
training needs of the Companys customers. Although the
Company continuously pursues research and development, there can
be no assurance that it will be successful in adapting
technology in a timely fashion.

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

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

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

Training R&D focuses on the interpretation and translation
of customer training requirements into quantifiable objectives
and the development of simulation programs to meet those
objectives. The 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 R&D focuses on the production of specialized
audio-visual programs and a range of media support activities,
from full production of training programs to customer assistance
in user-produced programs. The Companys audio-visual
technology is very important for creating a life-like training
environment. The

8



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

Weapons manufacturing involves the production of simulated
firearms and non-lethal simulators by either modifying actual
firearms and other devices into simulators or assembling
simulators from kits manufactured to the Companys
specifications by a variety of outside sources. The assembly
process encompasses the fitting of modified weapons or kits with
the Companys pneumatic and electrical components, followed
by the functional testing of the completed assembly. The
combined 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 Companys headquarters, and
the Companys U.K., Netherlands, Singapore and Australian
subsidiaries, maintains an inventory of repair parts, tools,
test equipment, and trained technicians to respond to customer
requirements. Simtran maintains a fully equipped service
department to support its individual product lines and is
equipped and trained to support the full Company product line in
Canada. Technical assistance is available through the FATS
Helpdesk hotline. The Company seeks to provide customer service
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

9



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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.

10



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##### 





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

11



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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

12



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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.

13



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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 Managements Discussion
and Analysis of Financial Condition and Results of
Operations set forth below and the financial statements of
the Company included elsewhere in this Report and referred to in
the Index to Financial Statements (together with the
notes and other reports relating to such financial statements).

14



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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

15



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##### 





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.

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 LLP, in 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.

16



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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, R&D costs, bid
and proposal expenses, plus depreciation and amortization.
Selling, general and administrative expenses consist primarily
of salaries, wages, benefits, international agents
commissions, and marketing expenses. R&D expenses are
largely comprised of salaries, wages, benefits, prototype
equipment and project supplies. The Company expenses all R&D
costs in the period in which they are incurred.

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 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 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 the 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.

17



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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.

18



---



##### 



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 (SG&A)
expenses increased $0.9 million, or 9.3%. This increase in
SG&A 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.

19



---



##### 





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 were entered into. The
Company estimates that the related revenue from these programs
is no longer expected to offset the anticipated expenses.
Therefore, an accrual for this loss contingency was made when
the loss was determined and when it was reasonably estimable. As
a result of the foregoing, gross margin decreased
$0.8 million, or (9.2%) to $7.4 million, or 17.8% of
revenues, for fiscal 2001 as compared to $8.2 million, or
21.1% of revenues, for fiscal 2000.

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

During the third quarter of fiscal year 2001, management began
an evaluation of the operations of Simtran in response to
Simtrans declining customer order backlog. As a result of
the strategic repositioning plan for Simtran, management
performed an evaluation of the recoverability of the assets of
Simtran by

20



---



##### 





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.

21



---



##### 



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 | 

22



---



##### 



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   | 

23



---



##### 



|                                      |  |               |        |               |  |  |        | 
|------------------------------------- |  | ------------- | ------ | ------------- |  |  | ------ | 
|                                      |  |              
|                                      |  | 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.

24



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

25



---



##### 



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.

26



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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 assets 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 market place. 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

27



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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.

29



---



##### 



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.

30



---



##### 



R.C. Whitaker

President and CEO


Strategic 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 Colts Manufacturing Company (a designer and
producer of military firearms) from 1992 to 1995, and President
& CEO of Wheelabrator Corporation (an industrial equipment
manufacturer). In addition to Strategic Distribution Inc., he
serves on the Board of Directors of Weirton Steel Corporation
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. Bratton

President


The 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 Mohling

Partner and Principal


Capitol 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.

31



---



##### 



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 Director


Van 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 Stock Options Sub-Committee
of the Board of Directors.

Randy Sugarman, CPA

Managing Partner


Sugarman & 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.
Mr. Sugarman is a member of the Compensation Committee.

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.

Pursuant to the Securities Purchase Agreement dated
November 13, 1998 with Centre Capital Investors II, L.P.,
Centre Partners Coinvestment, L.P., Centre Capital Tax-Exempt
Investors II, L.P., and Centre Capital Offshore Investors II,
L.P., three former directors of the Company who resigned in
connection with the Restructure, and Mr. Perekslis, who
remains a director, all of whom are affiliated with the Centre
Partnerships, agreed to receive in lieu of annual
directors fees of $20,000 for each director, options to
purchase at $1.03125 per share an aggregate of 106,700 shares of
Common Stock, exercisable in equal quarterly installments
beginning December 31, 1998 which such directors assigned
to Centre Partners Management LLC. As of July 10, 2002,
106,700 shares of Common Stock are exercisable from this grant.

32



---



##### 



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
|                  |  |                      |         |                       |  |             |         |              
|Randy Sugarman    |  |                      | 0       |                       |  |             | 0       |               |  | $ | 0      |  |  | $ | 0       | 
|                 
|                 
|                 
|                 
|Robert F. Mecredy |  |                      | 289,617 |                       |  |             | 402,983 |               |  | $ | 81,600 |  |  | $ | 163,200 | 
|                 
|                 
|                 
|                 
|John A. Morelli   |  |                      | 209,915 |                       |  |             | 326,045 |               |  | $ | 65,426 |  |  | $ | 163,974 | 






|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

33



---



##### 



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) 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

34



---



##### 





|                                                                |  |              |            |   |  |  |       | 
|--------------------------------------------------------------- |  | ------------ | ---------- | - |  |  | ----- | 
|                                                                |  | Number of    |            |  
|                                                                |  | Shares of    |            |  
|                                                                |  | Common Stock |            |  
|                                                                |  | Beneficially |            |  
|Name of Beneficial Owner(1)                                     |  | 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)                              |  |              | 26,339,374 |   |  |  | 35.7% | 
|                                                               
|                                                               
|                                                               
|                                                               
|Centre Partners Coinvestment LP(4)                              |  |              | 3,822,535  |   |  |  | 5.4%  | 
|                                                               
|                                                               
|                                                               
|                                                               
|Centre Capital Offshore Investors II, LP(4)                     |  |              | 5,219,372  |   |  |  | 7.4%  | 
|                                                               
|                                                               
|                                                               
|                                                               
|Centre Capital Tax-Exempt(4)                                    |  |              | 2,944,422  |   |  |  | 4.2%  | 
|                                                               
|                                                               
|                                                               
|                                                               
|Centre Partners Management LLC(5)                               |  |              | 34,503,168 |   |  |  | 46.0% | 
|                                                               
|                                                               
|                                                               
|                                                               
|Centre Partners II LLC(6)                                       |  |              | 38,954,015 |   |  |  | 51.7% | 
|                                                               
|                                                               
|                                                               
|                                                               
|Robert F. Mecredy  Resigned(8)                                 |  |              | 207,785    |   |  |  | *     | 
|                                                               
|                                                               
|                                                               
|                                                               
|John A. Morelli(8)                                              |  |              | 248,672    |   |  |  | *     | 
|                                                               
|                                                               
|                                                               
|                                                               
|William J. Bratton(8)                                           |  |              | 21,100     |   |  |  | *     | 
|                                                               
|                                                               
|                                                               
|                                                               
|Scott Perekslis(9)                                              |  |              | 9,005      |   |  |  | *     | 
|                                                               
|                                                               
|                                                               
|                                                               
|All current directors and executive officers as a
    group     |  |              | 486,562    |   |  |  | 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 13-D 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 13-D 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 13-D
    filed on September 6, 2000 with the Commission, reflecting
    ownership as of August 25, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(4) | The address of Centre Capital Investors II, L.P., (together
    with Centre Partners Coinvestment, L.P., Centre Capital
    Tax-exempt Investors II, L.P. and Centre Capital
    Offshore Investors II, L.P., the Centre
    Partnerships), Centre Partners Management LLC
    (Centre Management) and Centre
    Partners II, LLC (together with the Centre
    Partnerships, 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 13-D/A filed on May 16, 2002 with the
    Securities Exchange Commission (the Commission),
    reflecting ownership as of May 13, 2002. On May 13,
    2002, 7,100,391 shares of Common Stock were acquired from
    PB Capital Corporation, whose parent company is Deutsche
    Postbank AG whose address is Friedrich-Ebert-Allee 114-126,
    53113 Bonn, Germany, by the following: 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.

35



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Based on 70,153,139 shares of Common Stock outstanding on
    July 10, 2002. Calculation of percentage of beneficial
    ownership assumes the exercise of all options exercisable within
    60 days of July 10, 2002 only by the respective named
    shareholder.                                                                                                                                                                                                                                                                                                                                           
|(6) | Information regarding ownership of Common Stock by the Centre
    Entities is included herein in reliance on information provided
    by Centre Management. Pursuant to a Management Agreement, Centre
    Capital Investors II, L.P., Centre Partners Offshore
    Investors II, L.P. and Centre Capital Tax-exempt
    Investors II, L.P. have delegated voting and
    investment power with respect to the Common Stock beneficially
    owned by them to Centre Management; accordingly, the aggregate
    security ownership of those Centre Partnerships is reflected for
    Centre Management as well.
|(7) | Centre Partners II LLC (Centre Partners), as general
    partner of the Centre Partnerships, is reflected as beneficially
    owning the Common Stock owned by the Centre Partnerships. In
    addition, pursuant to certain co-investment arrangements, Centre
    Partners has been delegated voting and investment power with
    respect to an additional 571,181 shares of Common Stock and
    57,131 warrants. Included within the shares of Common Stock
    are 5,246,164 warrants currently exercisable into shares of
    Common Stock.                                                           
|(8) | Messrs. Mecredy and Morellis beneficial ownership
    includes exercisable options for 0 shares, 0 shares,
    160,000 and 209,420 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
    July 10, 2002, over which each such person has been
    delegated voting and investment power.                                                                                                                                                      
|(9) | Includes 9,005 shares of Common Stock held in a 401(k) plan for
    the benefit of Mr. Perekslis over which Mr. Perekslis
    has delegated voting and investment authority to Centre Partners
    pursuant to certain co-investment arrangements.                                                                                                                                                                                                                                                                                                                                                             

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 |   |                     |           |                            
|                                                               |                         | to be Issued Upon    |   |                     |           | Number of Securities       
|                                                               |                         | Exercise of          |   | Weighted-Average    |           | Remaining Available for    
|                                                               |                         | Outstanding          |   | 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

On December 31, 2001, the Company and its lenders entered
into 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.

36



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 entered into
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.                                                                                                                                                                                                                            
|
| |  | 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.                  

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 has been serving as interim Chief
Executive Officer and President since May 16, 2001 and
interim Chief Operating Officer since May 20, 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.

37



---



##### 





|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K

(a) 1. Financial Statements

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

Index to Financial Statements

|                                                                                                                             |  |  |     | 
|---------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|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)                                                      

38



---



##### 



|        |          |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -------- |  |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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    |  |  |                        |  | Borrowers Consent and Agreement dated as of
    October 15, 1997 between FATS, Inc. and NationsBank N.A.
    (South). (Filed as Exhibit 10.01 to the Companys
    Quarterly Report on Form 10-Q for the Fiscal Quarter ended
    September 30, 1997)                                                                                                                                            
|        | 10.06    |  |  |                        |  | Pledge Agreement dated as of January 1, 1997
    between the Company and NationsBank N.A. (South). (Filed as
    Exhibit 10.03 to the Companys Annual Report on Form
    10-K for the Fiscal Year ended March 31, 1997)                                                                                                                                                                          
|        | 10.07    |  |  |                        |  | Parents Consent dated as of
    October 15, 1997 between the Company and NationsBank N.A.
    (South). (Filed as Exhibit 10.01 to the Companys
    Quarterly Report on Form 10-Q for the Fiscal Quarter ended
    September 30, 1997)                                                                                                                                                           
|        | 10.09-01 |  |  |                        |  | Lease, dated May 4, 1993, between the
    Company and Technology Park/Atlanta, Inc. (Filed as
    Exhibit 10.09 to the Companys Registration Statement
    No. 333-13105)                                                                                                                                                                                                                        
|        | 10.09-02 |  |  |                        |  | First Amendment to Lease Agreement, dated
    December 21,1993, between the Company and Technology
    Park/Atlanta, Inc. (Filed as Exhibit 10.09 to the
    Companys Registration Statement No. 333-13105)                                                                                                                                                                                      
|        | 10.09-03 |  |  |                        |  | Second Amendment to Lease Agreement, dated
    December 21, 1995, between the Company and Schneider
    Atlanta, L.P. (Filed as Exhibit 10.10 to the Companys
    Registration Statement No. 333-13105)                                                                                                                                                                                          
|        | 10.10    |  |  |                        |  | Management Shares Agreement, dated as of
    September 18, 1996, between the Company and Peter A.
    Marino, Robert F. Mecredy, Juan de Ledebur and certain
    other Individuals. (Filed as Exhibit 10.12 to the
    Companys Registration Statement No. 333-13105)                                                                                                                            
|        | 10.11    |  |  |                        |  | Firearms Training Systems, Inc. Stock Option
    Plan. (Filed as Exhibit 10.13 to the Companys
    Registration Statement No. 333-13105)                                                                                                                                                                                                                                                         
|        | 10.12    |  |  |                        |  | Stock Option Agreement Series A, dated as of
    September 18, 1996 between the Company and Peter A.
    Marino. (Filed as Exhibit 10.14 to the Companys
    Registration Statement No. 333-13105)                                                                                                                                                                                               

39



---



##### 



|        |          |  |  |                         |  |                                                                                                                                                                                                                                                                                                                               
|------- | -------- |  |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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)                                                                              

40



---



##### 



|        |          |  |  |                         |  |                                                                                                                                                                                                                                                                                                                        
|------- | -------- |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)                                                                

41



---



##### 



|        |          |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                
|------- | -------- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 August 13, 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.

42



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders



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



F-1



---



##### 



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



F-2



---



##### 



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.

F-3



---



##### 



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.

F-4



---



##### 



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.

F-5



---



##### 



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.

F-6



---



##### 



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 Companys products include
simulators for the military, law enforcement, sport shooting,
and hunter education. The Companys customers include
military and law enforcement agencies primarily throughout the
United States (U.S.), Canada, Europe and Asia.

The Company has one wholly owned subsidiary, FATS, Inc., which
is the operating subsidiary (the Operating
Subsidiary). As of March 31, 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.

F-7



---



##### 



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.

F-8



---



##### 



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

F-9



---



##### 



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

F-10



---



##### 



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 
|                                                        |                           |           |       |      
|Sales commissions, bonuses, and agents
    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 were 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

F-11



---



##### 



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

F-12



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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
Companys 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.

F-13



---



##### 



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

F-14



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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.

F-15



---



##### 



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.

F-16



---



##### 



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

F-17



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

than cause (as defined in the Plan) prior to the third
anniversary of the option date, 16.7% of the options shall be
exercisable for each anniversary of the option date prior to the
optionees termination date. In the event of termination of
the optionees employment for cause, all of the
optionees outstanding options shall be forfeited.

Series B Options

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

F-18



---



##### 



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 |                |   | $                | 0.69  $14.00 |               |  | $ | 3.65 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Granted   |         |           | 673,400        |   |                  |               | 0.50    1.00 |  |   |      | 0.69 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Cancelled |         |           | (679,698       | ) |                  |               | 0.56   14.00 |  |   |      | 3.86 | 
|                                   |           |         |           |                |   |                  |               |               |  |   |      |     
|Outstanding, March 31, 2000        |           |         | 2,214,854 |                |   | $                | 0.50  $12.00 |               |  | $ | 2.82 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Granted   |         |           | 1,206,900      |   |                  |               | 0.01    0.69 |  |   |      | 0.35 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Cancelled |         |           | (425,069       | ) |                  |               | 0.56   12.00 |  |   |      | 3.21 | 
|                                   |           |         |           |                |   |                  |               |               |  |   |      |     
|Outstanding, March 31, 2001        |           |         | 2,996,685 |                |   | $                | 0.01  $12.00 |               |  | $ | 1.77 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Granted   |         |           | 0              |   |                  |               | 0.00    0.00 |  |   |      | 0.00 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Cancelled |         |           | (477,108       | ) |                  |               | 0.19   12.00 |  |   |      | 2.21 | 
|                                   |           |         |           |                |   |                  |               |               |  |   |      |     
|Outstanding, March 31, 2002        |           |         | 2,519,577 |                |   | $                | 0.01  $12.00 |               |  | $ | 1.68 |     
|                                   |           |         |           |                |   |                  |               |               |  |   |      |     
|Shares available for future grants |           |         | 4,977,744 |                |   |                  |               |               |  |   |      |     
|                                   |           |         |           |                |   |                  |               |               |  |   |      |     

F-19



---



##### 



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,

F-20



---



##### 



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 | )     
|         |                               |                      |        |       |   |      |        |      |   |   |      |       

F-21



---



##### 



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

F-22



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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

F-23



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

A significant portion of the Companys sales is made to
customers located outside the U.S., primarily in Canada, Europe
and Asia. In fiscal 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

F-24



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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. 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. 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.

Due to the Restructure Transaction completed in August 2000, the
Companys lenders, consisting of the Centre Entities and
various financial institutions, owned approximately 85.3% of the
outstanding common stock as of March 31, 2002. As a result,
both the Centre Entities and various financial institutions
maintain a seat on the Board of Directors and have the ability
to influence the day-to-day operation 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.

F-25



---



##### 



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

F-26



---



##### 



FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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.

F-27



---



##### 



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 | 

F-28



---



##### 



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

S-1



---



##### 



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 August 14, 2002.



| |                                
| | -------------------------------
| | FIREARMS TRAINING SYSTEMS, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ RONAVAN MOHLING

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

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

|                    |  |                                                                                        |  |      |                 |  |  | 
|------------------- |  | -------------------------------------------------------------------------------------- |  | ---- | --------------- |  |  | 
|                    |  |                                                                                        |  |     
|Signature           |  | Title                                                                                  |  | Date
|                    |  |                                                                                        |  |     
|                   
|                   
|*Ronavan Mohling    |  | Chairman of the Board of Directors, Chief
    Executive Officer and Director           |  |      | August 14, 2002 | 
|                   
|                   
|*John A. Morelli    |  | Chief Financial Officer and Treasurer (Principal
    Financial and Accounting Officer) |  |      | August 14, 2002 | 
|                   
|*William J. Bratton |  | Director                                                                               |  |      | August 14, 2002 | 
|                   
|*Mary Ann Gilleece  |  | Director                                                                               |  |      | August 14, 2002 | 
|                   
|*Scott Perekslis    |  | Director                                                                               |  |      | August 14, 2002 | 

V-1



---



##### 



|               |  |          |  |      |                 |  |  | 
|-------------- |  | -------- |  | ---- | --------------- |  |  | 
|               |  |          |  |     
|Signature      |  | Title    |  | Date
|               |  |          |  |     
|              
|Randy Sugarman |  | Director |  |      |                 | 
|              
|*Ron Whitaker  |  | Director |  |      | August 14, 2002 | 

V-2