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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2003

OR

Commission File Number 333-13105

Firearms Training Systems, Inc.

(Exact name of registrant as specified in its charter)

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

Name of exchange on which registered:

None

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

Class A Common Stock, $0.000006 par value per share

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of the 9,853,598 shares of Common Stock held by non-affiliates of the registrant computed by reference to the last sale price on the Over-The-Counter Bulletin Board as of September 30, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter) was $5,123,870.

As of June 25, 2003, there were issued and outstanding 70,153,139 shares of Common Stock, par value $0.000006 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Part III—The Registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders’ presently scheduled to be held in August 2003, is incorporated by reference in Part III to the extent described therein.

PART I

This Annual Report modifies and supersedes documents filed prior to this Annual Report. The SEC allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this Annual Report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this Annual Report.

You should carefully review the information contained in this Annual Report, and should particularly consider any risks and other factors that we set forth in this Annual Report and in other reports or documents that we file from time to time with the SEC. In this Annual Report, we state our expectations as to future events and our future financial performance. In some cases, you can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those words and other comparable words. You should be aware that those statements are only our predictions, which are being made as of the date hereof. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks outlined below. Those factors may cause our actual results to differ materially from any of our forward-looking statements. We undertake no obligation to update any forward looking statements, whether as a result of new information, future events or otherwise.

Factors that may cause our actual results to differ materially from any of our forward-looking statements presented in this Annual Report include, but are not limited to:

Item 1.     Business

Company Overview

Over its 19-year history, FATS^® has developed over 300 variations of simulated weapons, manufactured and delivered over 35,000 simulated weapons, developed over 1,000 training scenarios, and delivered over 5,200 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,

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training and equipment available to both law enforcement and military communities. Examples include the provision of simulators and courseware to support indirect fire, less than lethal weapon applications, and multiple room engagements. Every system features embedded capabilities to support customer authoring of scenarios and comprehensive performance evaluation. Keeping pace with national and international concerns, FATS has added improvements to courseware and software that focus on situations that require extraordinary judgment including operations in peace keeping/making, crowd control and hostage negotiations. Additional emphasis has been placed on night operations in all environments in most cases allowing the customers to utilize their organic night vision equipment.

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

FATS uses a unique approach to sales and marketing that utilizes subject matter experts (“SMEs”). SMEs are ex-military and/or law enforcement professional trainers and weapons specialists with expertise in developing weapons training systems requirements and customizing hardware, software, and weapon designs to meet specific customer training requirements. SMEs establish an interactive dialogue with decision-makers and system end-users who generally have comparable backgrounds and experiences, enabling the SMEs to communicate customer requirements to the Company’s design engineers. Through this interaction, the Company strives to ensure that training scenarios are realistic and that simulated weapons maintain the fit, form, and feel of live weapons. The average tenure of FATS’ seven SMEs is over eight years.

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

The firearms simulation training sector is comprised of simulation systems and weaponry that are used by domestic and international military and law enforcement organizations to hone a variety of skills, including individual marksmanship, squad tactical engagement, indirect fire and combined arms, and judgmental lethal and non-lethal use of force. Firearms simulation training is currently a small part of the overall worldwide training market. Within the overall training market, simulation training accounted for approximately $2.3 billion in 2001, of which U.S. Military forces accounted for approximately one half. The small and supporting arms category, which includes products offered by FATS, has an estimated value of approximately $450 million.

In light of the recent war in Iraq, the President has asked Congress for additional defense budget funding initiatives. This initial request calls for additional funds of $74.7 billion to subsidize the cost of both the war in Iraq and the continuing fight against terrorism.

In the aftermath of the attacks of September 11th, the U.S. government has demonstrated a significant commitment to homeland security in terms of financial and human resources. Current homeland security

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functions are being redefined, reorganized, and redeployed. Requirements for homeland security applications have not been finalized; however, the Company anticipates that future homeland security training will include judgmental, analytical, and situational training applications for law enforcement, first responders, firefighters, and security personnel. The Company can, however, provide no assurance the Company’s operations and financial position will benefit from anticipated increases in homeland security resources.

Military organizations have historically embraced simulation for larger weapon systems such as winged aircraft, helicopters, and tanks, but have traditionally depended on live firing ranges for small arms and supporting arms training. Over the last decade, military and law enforcement organizations have increasingly embraced firearms simulation training as an important supplement to live fire training. The Company believes the following factors favor the use of simulated firearms training systems:

Judgmental Training:  Homeland security assignments and the rising number of non-traditional law enforcement and military missions, such as joint-force peacekeeping, peacemaking actions, and urban warfare situations require a heightened level of judgment regarding the appropriate use of measured force. Training in simulation enables law enforcement and military organizations to test and hone judgment and demonstrate appropriate responses to simulated complex situations. In addition, simulated training systems are portable and mobile, which is a key advantage in serving peace-keeping operations that typically necessitate rapid deployment of troops to troubled regions around the globe.

The Company can, however, provide no assurance the Company’s operations and financial position will benefit from anticipated increased reliance on simulation training.

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 simulated battles to take place in virtual environments with computer-generated semi-automated forces.

Products

FATS developed and sold the first interactive small arms simulation system and strives to continue to set the standard for innovation, quality, and service within the simulated training marketplace.

FATS’ product offering represents a comprehensive set of training systems, weapons, and courseware. Technology advancements have enabled FATS to build on the basic fundamentals of marksmanship training. FATS technology and weapons enable military leaders to progress from basic weapons skills to directing entire

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units in virtual battle scenarios while a forward observer calls for and adjusts artillery, naval, and mortar fire. The combination of the ability to conduct tactical planning on digitized terrain databases that represent real world mission locations and the technically advanced features embedded in FATS training systems result in the opportunity for military organizations to conduct meaningful simulation training that leads to advanced readiness.

The Company’s technology strategy is based on creating training platforms designed around a combination of COTS and proprietary technologies that customers can easily customize to meet their distinctive specifications and requirements. Faster processors and smaller computer parts and chips are enabling FATS to create training devices that eliminate the current requirement that weapons be tethered to the system, affording personnel freedom of movement in the training space while retaining all current data feedback and system training features. As a result of these capabilities, we expect thatforce escalation, de-escalation training with various devices such as OC spray, simulated TASER^® stun guns, and firearms will be greatly improved as law enforcement personnel are able to move freely.

The following table illustrates the progression of the Company’s training platforms from its FATS I system developed in 1984 to the planned release of FATS V in FY2005.

Evolution of FATS^® Training Platforms

While the FATS V platform is scheduled for release in our 2005 fiscal year, we can currently give no assurance that that schedule will actually be accomplished or that it will incorporate all of the features identified above.

The following sections detail the Company’s product offering, which is divided into four major groups: simulators, weaponry, training software, and related products. The product offering detail is followed by a discussion of additional products and service opportunities.

Simulators

The Company’s simulators represent the core of FATS’ product set. Simulators are integrated training systems that combine COTS components and technologies, such as Intel Pentium^®-based computers running the Microsoft Windows^® operating system, 3D graphics, digital video encoding and decoding technologies, and LCD projectors, with FATS proprietary technologies such as hit detection cameras and software and computer hardware to create a versatile training solution. Each FATS IV-based simulator enables end-users to train using either computer generated imagery (“CGI”) or combined video and graphics scenarios. Instructors using the Instructor Control Station (“ICS”) have real-time control of scenario events and after-action review.

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The following table details the simulators offered within each of the Company’s target markets followed by a discussion of each of FATS’ simulation systems.

Simulator Product Offerings by Target Market

Small Arms Trainer (“SAT”):  The SAT, FATS’ principal product, enables customers to hone skills ranging from individual marksmanship to collective training incorporating weapons ranging from pistols to anti-tank missiles. The SAT is a versatile trainer offering individual, team, and leadership training for lethal force applications, less-than-lethal force applications (e.g., chemical spray, TASER^®, baton), and part-task training (e.g., safety, fire discipline, and fire coordination).

Indirect Fire Trainer (“IFT”):  Designed for artillery and mortar units, the IFT is designed to portray the call for fire procedures and effects of all artillery, mortars, naval gunfire, close air support, and attack helicopter supporting arms. These systems may be integrated into a combined arms battle space, including howitzer and mortar crews, while conducting direct fire engagements against simulated forces. In addition, the IFT provides capabilities for command post and fire direction center personnel to become full participants in an indirect fire scenario. FATS CGI (3D graphics) software can provide a combined arms collective training environment in a 3D virtual world, which allows small arms gunners, mortar gunners, and forward observers to be trained on the same system, in the same virtual battlefield, at the same time. This combined arms training capability is a unique feature offered only by FATS.

Live Fire Trainer (“LFT”):  The system enables an organization to employ its own service weapons in a wide variety of scenarios offering a complete spectrum of potential force responses. The system displays the impact point of live rounds on a specially designed, self-healing screen, and is capable of branching to different outcomes depending upon the student’s actions, reactions, and effectiveness.

Law Enforcement Trainer:  The Law Enforcement Trainer provides training for the individual patrolman, team and/or section, and SWAT teams through the entire force continuum. Weapons include small arms, semi-automatic weapons, shotguns, and non-lethal alternatives such as chemical spray, the simulated TASER^® stun gun, and batons. Law enforcement courseware spans the spectrum of conflicts that an officer may encounter, from basic marksmanship to hostage negotiations and rescue and domestic disturbances, in each case requiring judgment and measured response. Systems include complete diagnostics and data feedback.

Gunnery Crew Training:  FATS produces light armor vehicle and gunnery crew training systems, including a stand-alone classroom armored vehicle trainer, the Cougar Crew Gunnery Trainer, the TOW Video Interactive Gunnery Simulator, the Javelin Detachment Trainer, and an appended light armored vehicle crew trainer. The Company provides appended and stand-alone versions of these products, and is the sole-source provider of the embedded training software solutions for the U.S. Army STRYKER Program. In addition, FATS

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provides contract software development and programming services. Historically, FATS has not emphasized its armored vehicle simulation capabilities. Management, however, is exploring current demand for gunnery crew training systems.

Motion Integrated Training Systems (“MITS”):  The MITS provides a unique environment to develop the trainee’s ability to operate weapons on a motion platform replicating engagement conditions in a moving environment, such as on a ship. FATS first delivered a motion platform system to the Singapore Coast Guard in 1997. The motion is derived from an accurate mathematical motion cue model to produce a realistic sensation of motion for the student. The motion model can be easily adjusted to simulate the motion of a ship, land-based vehicle, or an aircraft.

Weaponry

FATS produces sophisticated and realistic simulated training weapons. FATS provides realistic weaponry by retrofitting real, live fire weapons with simulation technology to deliver the true form, fit, and feel of a live fire weapon. FATS offers a broad set of weapons, from small to supporting arms.

FATS simulated weapons offer a number of training advantages over live fire training. The Company’s weapons provide diagnostic information not available with live fire weapons, such as trigger pressure, barrel movement, weapon cant, and butt pressure, supplying instructors with a rich set of performance data. In addition, since FATS simulated weapons do not fire live rounds, they experience far less stress than live fire weapons and therefore have a life cycle that is significantly longer than weapons used for live fire training. For example, an actual M-16 has a field life of approximately 5,000 rounds before rebuild, while the FATS simulated M-16 is designed to fire 50,000 rounds before requiring service.

FATS weapons designers are able to replace firing elements from live weapons with pneumatics, electronics, lasers, and sensors without altering a weapon’s mechanical functions (safety switch, loading, etc.), center of gravity, balance, or weight.

Weapons are available with various levels of sensor diagnostics and can be custom-designed and manufactured for each customer’s specific installation. Additionally, the Company’s weapons are offered with radio frequency (“RF”) wireless capability, utilizing a backpack that contains electronics and compressed air containers to enable FATS weapons to function under system control and provide diagnostic capabilities. Currently the Company is developing wireless weapons using Bluetooth RF technology. The objective is to embed all components of the weapon system, including electronic circuits and compressed air containers, into the weapon itself. While the Bluetooth technology is currently under development, we can give no assurance that full integration of the technology will actually be accomplished.

The Company’s arsenal includes simulated revolvers; semi-automatic pistols; shotguns; bolt-action, semi-automatic, and automatic rifles; submachine and machine guns; anti-tank/anti-personnel rocket launchers; single-shot and automatic grenade launchers; automatic cannons; and mortars. FATS also provides a customer-installed weapons simulation conversion kit that enables customers to modify their own weapons to function like FATS simulated weapons. These kits, which are easily removed for live fire training, lower the total system cost to customers and represent the only simulated weapons conversion kit available in the industry.

Training Software

The Company’s training software provides interactive engagements to meet specific training objectives using real-world imagery or CGI. FATS’ scenario library includes terrain scenes derived from National Imagery and Mapping Agency (“NIMA”) data sets; realistic targets (both friendly and threatening); realistic human images; and various time of day, weather, and lighting conditions.

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FATS has developed thousands of customized scenario programs. The Company offers a comprehensive set of scenarios covering basic and advanced marksmanship, judgmental/measured response, collective and combined arms training, and numerous other training requirements. The following table provides a list of selected scenarios and courseware developed by FATS.

Training Software

Related Products and Services

FATS offers additional products that enhance the basic platform capability, including a video authoring station, which enables customers to develop, edit, modify, and/or customize their own training video scenarios; a hostile fire return simulator that propels simulated ammunition in the direction of a trainee, reinforcing proper cover techniques; selected military and law enforcement equipment such as a remote trigger device, flashlight, night vision filters for customer-owned devices, simulated binoculars for use during indirect fire training, simulated laser range finders used during forward air controller training, and a MILES^™ shoot-back device that trains military personnel to react to hostile fire simulated by an electronic laser.

FATS has developed other products that have not yet penetrated the market, such as the Company’s Motion Integrated Training System, which combines FATS core firearms simulation technology with a dynamic motion platform to simulate numerous air-based and sea-borne weapons at a considerably reduced cost. This system is currently in use by a limited number of the Company’s customers, but management believes that focused marketing efforts may stimulate demand for future installations of the motion platform product.

Management is exploring opportunities to provide turnkey training services to military and law enforcement organizations worldwide. Expanding the Company’s turnkey training services would provide a recurring revenue stream for FATS.

Management is also exploring opportunities to provide operator refresher training and advanced system operator training. FATS recently instituted a five-day, in-plant, operator and instructor course, and courses are scheduled throughout the upcoming fiscal year.

Additionally, as the Company’s customer base increases, so does the potential for additional revenue from the sale of extended maintenance and service contracts.

The Company can, however, provide no assurance the Company’s operations and financial position will benefit from any of the anticipated products or services.

Target Markets

The Company currently targets three principal market components: (i) international which includes military and law enforcement authorities outside the U.S. or its territories; (ii) U.S. military; and (iii) U.S. law

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enforcement. 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.

International.

The Company has sold FATS systems to customers in more than 50 countries across six continents.

The international firearms simulation marketplace is comprised of national military organizations and police organizations of foreign nations. International law enforcement organizations have a broader, more militaristic scope than domestic law enforcement organizations, are structured comparably to military organizations, and in many countries are organized within the same structure as the military. International military and law enforcement organizations therefore both demand applications that mirror those of domestic military markets. International customers typically utilize small arms trainers, judgmental trainers, and indirect fire trainers. The same forces that impact the U.S. military and law enforcement markets drive global military and law enforcement trends.

International military organizations have procurement structures similar to that of domestic military organizations. Most international law enforcement organizations are national in nature, and therefore employ centralized procurement organizations, in contrast to the local procurement protocol of domestic law enforcement. In some foreign countries, law enforcement and military organizations share the same procurement structure.

Training requirements, procurement processes, and customers vary widely among countries. FATS has secured exclusive agreements with strategic sales agents to provide a local presence in markets in which such a presence is essential to the Company’s success.

For fiscal 2003, 48.6% 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.

Domestic Military.

The domestic military market consists of all U.S. active and reserve armed forces. Military organizations demand marksmanship-oriented simulation training applications that provide diagnostic feedback and comprehensive after-action review capability, as well as judgmental, indirect fire and combined arms, collective battle shooting, and other simulated training applications.

Domestic military customers recognize training simulation as a viable teaching method and means of preparation for live fire training. Simulation training’s inherent advantages in cost, flexibility, diagnostics, safety, and diminished environmental impact are recognized attributes by military organizations.

The two principal methods used by U.S. Military organizations to procure training equipment are purchasing programs defined in the U.S. Government’s budget and discretionary spending. The Company has a compelling track record of success on both large-scale competitive procurements and discretionary purchases.

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For fiscal 2003, 42.4% of the Company’s total revenues and 82.5% 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.

Domestic Law Enforcement.

FATS divides the domestic law enforcement segment into four principal categories:

There are over 17,000 law enforcement departments in the United States, and management estimates that approximately 3,600 of these organizations employ more than 25 officers. FATS has delivered approximately 1,100 systems to domestic law enforcement departments.

Law enforcement agencies use simulation training primarily for judgmental applications that address force escalation and de-escalation decision-making in high stress situations. Domestic law enforcement agencies have been early adopters of simulation training, given the need for more realistic means to teach these critical skills.

Federal agencies within the domestic law enforcement segment feature procurement processes that generally follow the centralized structures of domestic military organizations. The other three sub-segments of the domestic law enforcement market (state and local law enforcement, colleges and universities, and correctional facilities) represent a diverse collection of independent organizations with discrete procurement systems and unique training demands.

For fiscal 2003, 8.6% of the Company’s total revenues and 16.8% of the Company’s U.S. revenues were attributable to sales to U.S. law enforcement authorities. See Managements Discussion and Analysis of Financial Condition and Results of Operations.

Homeland Security

Homeland security is a sub-segment of both the domestic military and law enforcement markets. The President has proposed a homeland security budget which is expected to support increased training for law enforcement and military organizations responsible for domestic security. Management expects judgmental and small arms training to be integral components of this training, given the complex nature of homeland security assignments. FATS is the leading provider of judgmental use of force and small arms simulation training, and management believes it is well-positioned to capitalize on increasing training opportunities.

Gunnery Crew Training

FATS has recently won commitments for the embedded training system of the interim armored vehicle (“STRYKER IAV”), and has received indications that the Army will expand the order. In addition to working with GM Defense-Delco Systems (“GM Defense”) on the STRYKER program, FATS is also working as a subcontractor to Saab Bofors Dynamics on a light anti-tank weapon program. Management anticipates that the increased visibility of the Company’s gunnery crew trainers in these high-profile programs stimulate demand for its heavy weapons simulators.

The Company can, however, provide no assurance the Company’s operations and financial position will benefit from additional spending for either homeland security or gunnery crew training.

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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.

For fiscal 2003, 0.4% of the Company’s total revenues were attributable to sales in the hunter and sports training component of the market. See Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Sales and Marketing

FATS’ sales and marketing organization is structured around its customer segments, with separate sales forces for domestic military, international military and law enforcement, and domestic law enforcement.

FATS’ sales and marketing strategy includes identifying customer simulation training needs at an early stage and obtaining sole-source contracts with multi-year procurement potential by providing customized solutions. FATS’ SMEs, through their depth of experience and critical links to key customer contacts, bolster the Company’s sales and marketing efforts and reinforce the FATS^® brand in its end-markets. The average tenure of FATS’ seven SMEs is over eight years, reflecting a commitment to maintaining customer relationships and their intimate familiarity with the capabilities of FATS’ systems.

FATS’ longstanding history in military simulation training is a primary key to FATS’ success with domestic military organizations. Seasoned FATS managers, with significant experience in the markets they cover, oversee the Company’s domestic military sales and marketing efforts. FATS deploys three full-time sales managers to address the following market segments:

These three sales managers are supported by field sales representatives, the FATS engineering staff, a core staff of SMEs, and six program managers. This team is charged with maintaining a continuous customer dialogue to uncover potential sales leads and to ensure customer satisfaction. FATS’ field sales representatives visit potential domestic military customer locations to maintain close, on-the-ground contact with end-users and decision-makers. SMEs partner with FATS sales representatives and engineers to scope and design a customized, realistic product to meet the needs of particular customers. Additionally, SMEs collect customer feedback to ensure that future FATS installations meet or exceed customer expectations.

Program managers are charged with serving current FATS customers. Program managers provide a contact with each FATS customer to ensure that customers receive technical assistance, product maintenance support, and information about new FATS products. The Company’s program managers also probe for new training requirements and upcoming procurements to position the Company to provide upgrades and replacement training systems.

The Company approaches international markets with a single structure covering both foreign military forces and law enforcement organizations. FATS’ international sales effort is led by two sales managers and supported by the Company’s network of sales agents. These agents provide the Company with a critical local presence in international markets that have unique procurement processes, customs, and training requirements.

FATS’ relationships with its customers abroad are facilitated by exclusive international sales agents who represent the Company in local markets to uncover simulation training requirements and opportunities for FATS to provide system upgrades and maintenance services.

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FATS serves the domestic law enforcement market (including Canada) primarily on a regional basis. Because each domestic local and national law enforcement has discrete decision-making processes, budget cycles, and training requirements, the Company deploys seven dedicated in-house regional managers charged with developing relationships and creating opportunities within their respective territories. In addition, FATS has one in-house sales representative responsible for opportunities at Federal law enforcement agencies such as the FBI, DEA, Postal Service, and Government Services Administration Protective Service.

Management believes that its sales agents’ experience in the simulation industry, weapons and product expertise, and longstanding relationships with key law enforcement decision-makers in their territories enable the Company to maintain its market position. Each domestic law enforcement regional manager, including the Company’s federal account manager, is supported by a service technician who provides technical support and expertise to current and potential customers. Regional managers are equipped with digitized product catalogs, sophisticated solution pricing software, and vehicles outfitted with the latest FATS products to facilitate on-site demonstrations.

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 48.6% of the Company’s revenues for fiscal 2003 were attributable to sales to military and law enforcement authorities internationally, 42.4% were attributable to sales to military authorities in the U.S. and 8.6% 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.

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

In fiscal 2003, the Company’s five largest customers accounted for approximately 49.7% of the Company’s revenues, with two customers accounting for more than 10% of revenues. 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. Given the nature of the Company’s contracts, revenues attributable to specific customers are likely to vary from year to year, and a significant customer in one year may not be a significant customer in a subsequent year. In order to reach its growth objectives, the Company will be required to seek contracts from new domestic and international customers as well as orders from existing customers for additional types of simulated firearms or increased quantities of previously ordered systems and simulated weapons. A significant decrease in demand by or the loss of one or more significant customers could have a material adverse effect on the Company’s results of operations or financial condition. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 7 of Notes to Consolidated Financial Statements.

Research and Development

Research and development expenditures totaled approximately $6.8 million, $5.6 million and $5.4 million in fiscal 2003, 2002, and 2001, respectively. Of these amount, approximately $4.0 million, $1.5 million and $0.7 million was funded under customer contracts, resulting in net research and development expenses of $2.8 million, $4.1 million and $4.8 million in fiscal 2003, 2002, and 2001, respectively to the Company.

FATS has a proven track record of developing new technologies to create more realistic and effective simulated training environments. In addition, FATS makes a substantial investment in the continuous improvement of existing systems and products, which drive upgrades. Weapons expertise and customer

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understanding provided by SMEs are key ingredients in the Company’s research and development efforts. SMEs work with engineers to develop technology based on specific customer desires and needs.

In order to maintain its market position, the Company is engaging in research and development in the following areas:

The Company’s research and development efforts are divided into four separate disciplines: mechanical, electrical, training, and audio-visual.

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.

Systems Manufacturing

Systems manufacturing, the assembly of FATS’ simulator components, houses the manufacturing personnel to assemble approximately 30 primary simulation computers and other unique simulator components per month on a single-shift basis. As components are assembled and completed, testing is performed for both function and durability, and systems are subjected to a comprehensive ISO 9000 certified, quality assurance program.

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Weapons Manufacturing

Weapons manufacturing involves the production of simulated firearms and non-lethal simulators by either removing firing mechanisms and other devices from live weapons or assembling simulators from conversion kits. 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.

FATS’ combined weapons manufacturing operations in the United States and the United Kingdom have the capacity to exceed monthly production requirements on a single-shift basis.

Operational Improvements

Beginning in the fall of 2001, the Company undertook operational initiatives focused on implementing lean manufacturing and reorganizing manufacturing processes. FATS engaged outside consultants to review operational metrics and make recommendations on operational improvements.

Through its reorganizational efforts, FATS has moved from a traditional “batch” production process to a more efficient “pull” process. Systems manufacturing work cells have been streamlined, combining electrical assemblers with hardware technicians, thus creating the opportunity to deliver a complete simulator system in conjunction with the appropriate weapon simulator. A by-product of this process was a reduction in utilized physical space and an improvement in flow through the manufacturing area.

Operational improvements have also been made in the weapons assembly department through the combination of the hardware assembly and electrical wiring groups in one location. Personnel have been cross-trained to perform multiple tasks associated with weapons assembly.

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, maintain an inventory of repair parts, tools, test equipment, and trained technicians to respond to customer requirements. Simtran maintains a fully equipped service department to support its individual product lines and is equipped and trained to support the full Company product line in Canada. Technical assistance is available through the FATS Helpdesk hotline. The Company seeks to provide customer service quickly. In addition to its traditional service role, the Company’s service department administers a U.S. Government-owned inventory of spare components. As a result, in most instances, 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

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of the license has had no effect on the Company’s business operations or financial condition. The Company believes it has enough licensed copies of the OS-9 software in inventory to cover any future new sales or warranty replacements for existing customers. The Company believes that there are viable alternative sources for all of its raw materials. In addition, the Company has a sophisticated machine shop in which it can convert actual weapons into simulated weapons and produce certain weapon and simulator parts. This ability provides the Company with the flexibility to produce a large portion of its principal components if they become unavailable or it becomes economically advantageous to do so.

Backlog

As of March 31, 2003, the Company had a backlog of approximately $64.3 million compared with $59.6 million as of March 31, 2002. The Company’s backlog as of March 31, 2003 consisted of $50.7 million from international customers, $13.0 million from U.S. military customers and $0.6 million from U.S. law enforcement customers. Management expects that approximately $39.3 million of backlog will be delivered in fiscal 2004. 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.

A summary of changes in the Company’s backlog for the years ended March 31, 2003, 2002, and 2001 is as follows (in thousands):

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.

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.

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Employees

As of March 31, 2003, the Company and its subsidiaries employed 409 employees, of which 273 were employed at FATS, Inc., 50 were employed at Simtran, 51 were employed at FATS-Australia, and 35 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.

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

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

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

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

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

Item 2.    Properties

FATS’ Suwanee facility houses most of the Company’s manufacturing operations as well as its corporate headquarters. The Suwanee facility occupies a 98,100 square-foot building that resides on eight acres. The United Kingdom subsidiary has the ability to produce a broad range of FATS^® systems, giving FATS the ability to shift production based on capacity constraints in Suwanee. FATS’ heavy weapons systems are manufactured in the facility located in Montreal, Canada. Management believes that the Company has adequate manufacturing capacity to support projected growth, and that capacity can be increased with minimal capital expenditures. The Company’s subsidiaries located in the United Kingdom, the Netherlands, Australia, and Canada support sales, service, and training activities for FATS products.

The Company has a lease at its Netherlands based subsidiary, FATS B.V., which expires in August 2004; 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 April 2004. 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.

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Item 3.    Legal Proceedings

Pursuant to applicable Bureau of Alcohol, Tobacco and Firearms (BATF) regulations, during the quarter ended June 30, 2002, the Company advised the BATF 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 BATF responded that the Company should confirm the number of missing weapons and file the formal report required by BATF regulations. The Company conducted an investigation into this matter and concluded that the number of weapons missing is 41. The Company filed the formal report with the BATF and local law enforcement authorities. Continuing communications with the BATF indicate that the BATF intends to continue to monitor the related controls and procedures of the Company, and intended to conduct an inspection during the third quarter of the fiscal year ending March 31, 2003. Based on communications to date, and the fact that the BATF did not conduct the inspection during the third quarter, the Company does not currently expect the matter to have a material adverse effect on its financial position or results of operations.

The Company is occasionally involved in legal proceedings in the ordinary course of its business. Management is currently unaware of any litigation or potential claims against the Company that would have a materially adverse effect on the Company’s financial position, liquidity, or results of operation.

Item 4.    Submission of Matters to a Vote of Security Holders

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

Item 4A.    Executive Officers of the Registrant

Ronavan Mohling, age 61, 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, 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.

David W. McGrane, age 52, was named Chief Operating Officer of the Company in July 2002. Mr. McGrane previously served as Senior Vice President for ABB, Ltd., an international electrical engineering firm. He was employed by ABB, Ltd. from 1989 to 2002, where he served in various capacities ranging from General Manager to senior Vice President. From 1973 to 1989, Mr. McGrane served as General Manager and other managerial positions with Westinghouse Electric Corporation.

John A. Morelli, age 54, has served as Chief Financial Officer and Treasurer since March 1999. Mr. Morelli previously served as Chief Operating Officer from October 2000 to May 2002 and as Corporate Controller from September 1996 to March 1999. Prior to joining the Company, Mr. Morelli served as Financial Liaison from January 1996 to August 1996 with General Dynamics during its acquisition of Teledyne Continental Motors, a major weapons defense contractor. From April 1990 to December 1995, Mr. Morelli served as Division Controller with Sparton Electronics, Inc., an electronics-manufacturing firm in the defense industry. From 1979 to 1990, Mr. Morelli served as Controller for Fairchild-ASD, an aircraft manufacturing and modification company. From 1974 to 1979, Mr. Morelli served as Finance Manager with Fairchild-Republic, an aircraft manufacturing company.

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PART II

Item 5.    Market Common Equity and Related Stockholder Matters

The common stock of Firearms Training Systems, Inc. is traded on the Over-The-Counter Bulletin Board (OTC:BB) under the symbol FATS. As of June 25, 2003, there were 182 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 2002.

The table shows the high and low closing prices of the common stock during the period from April 1, 2001 through the year ended March 31, 2003:

Quarterly Stock Price Range

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.

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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).

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 this 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. Please refer to the discussion of forward looking statements included in Part I of this Annual Report.

Critical Accounting Policies and Estimates

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make

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judgments regarding estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We base our judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe our judgments and related estimates regarding the following accounting policies are critical in the preparation of our consolidated financial statements. Refer to Note 2 to our financial statements included in item 8 for a discussion of our accounting policies with respect to these and other items.

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.

Inventory Reserve

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

Contract Cost Provision Reserve

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

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.

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

Investors are unlikely to have any effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in these financial statements.

Arthur Andersen LLP, which audited our financial statements included in this report for the years ended March 31, 2000 and March 31, 2001, has informed us that on March 14, 2002 an indictment was unsealed charging it with federal obstruction of justice arising from the government’s investigation of Enron Corp. On June 15, 2002, Arthur Andersen was convicted of obstructing justice in connection with investigations of their former client Enron Corp. On August 31, 2002, Arthur Andersen LLP voluntarily ceased to audit public companies and is no longer licensed to practice public accounting.

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 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.

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 49.7%, 50.5% and 34.9% of the Company’s revenues in fiscal 2003, 2002, and 2001, 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 2003, 2002, and 2001, approximately 48.6%, 40.3% and 52.7%, respectively, of the Company’s revenues were derived from sales to international customers. The Company expects that sales to

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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.

Cost of revenues generally includes materials, direct labor, overhead, and other direct costs. Operating expenses include selling, general and administrative expenses, research and development (R&D) costs, bid and proposal expenses, and depreciation and amortization. Selling, general and administrative expenses consist primarily of salaries, wages, benefits, international agent’s 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 its largest shareholders (a group of entities affiliated with Centre Partners Management LLC (the Centre Entities) completed a restructuring transaction, which was accounted for as a troubled debt restructuring, and which reduced the Company’s outstanding indebtedness.

Certain of the financial institutions that participated in the restructuring transaction became holders of significant amounts of our common stock issued in exchange for indebtedness. For a further discussion of the relationship between the Company and its lenders see Item 13, Certain Relationships and Related Transactions which is incorporated by reference from our definitive Proxy Statement to be filed no later than July 29, 2003.

On December 31, 2001 and March 29, 2002, the Company and its lenders amended the Credit Agreement, and on June 26, 2003 the Company and its lenders agreed to an amendment to extend the maturity date of the Credit Agreement to October 15, 2004. See Liquidity and Capital Resources and Note 3 of Notes to Consolidated Financial Statements.

Related Party Transactions

The Company entered into a consulting agreement, dated October 4, 2000, with Sugarman Company, LLP, a company in which Randy Sugarman is the managing partner and has an 80% ownership interest. Under the agreement and in accordance with the terms of the Company’s restructuring in fiscal year 2001, Mr. Sugarman was engaged by the Company to evaluate its financial position and operations and make recommendations to senior management regarding changes that need to be made to improve profitability and liquidity. Mr. Sugarman’s services were performed on an hourly basis, plus out-of-pocket expenses, and the Company was billed accordingly. From May 16, 2001 until August 9, 2002, Mr. Sugarman served as Interim Chief Executive Officer and President of the Company. Mr. Sugarman ceased to be an officer of the Company on August 9, 2002, in connection with the conclusion of the Company’s engagement of Sugarman Company LLP. The Company incurred consulting fees of $211,000, $390,000 and $221,000, plus expenses of $47,000, $72,000 and $51,000, for consulting services under the agreement for the fiscal years 2003, 2002 and 2001, respectively.

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Results of Operations

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

FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Year Ended March 31, 2003 Compared to the Fiscal Year Ended March 31, 2002

Net Revenues.    Revenues increased $7.1 million, or 12.0%, to $66.1 million for the twelve months ended March 31, 2003 as compared to $59.1 million for the twelve months ended March 31, 2002. Sales to U.S. military customers for the twelve months ended March 31, 2003, increased slightly from $27.8 million to $28.0 million. Sales to U.S. law enforcement customers for the twelve months ended March 31, 2003 decreased $1.0 million or (14.2%) to $5.7 million due to increased competition in this market. Sales to international customers for the twelve months ended March 31, 2003 increased $8.3 million, or 34.8%, to $32.1 million. The increase in international sales was primarily due to substantial deliveries of orders that were included in the Company’s backlog as of March 31, 2002, as well as increased interest in the Company’s products in the international markets.

Cost of Revenue.    Cost of revenues increased $3.3 million, or 8.0% to $44.9 million or 68.0% of revenues for fiscal 2002 as compared to $41.6 million, or 70.4% of revenues, for fiscal 2002. Each of the Company’s primary lines of business showed improved margins for the twelve months ended March 31, 2003 as compared to

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the twelve months ended March 31, 2002. The decrease in cost of revenues as a percentage of revenues is attributable to several factors: (1) continued product standardization; (2) improved contract terms and conditions with specific product acceptance criteria; (3) a higher volume of catalog product sales; (4) greater efficiency in the manufacturing process; and (5) improved control over inventory obsolescence. The percentage reduction in cost of revenue reflects management’s efforts to emphasize higher margin contracts and improve efficiency in the manufacturing process.

Gross Margin.    As a result of the foregoing, gross margin increased $3.7 million, or 21.3% to $21.2 million, or 32.0% of revenues, for fiscal year 2003 as compared to $17.5 million, or 29.6% of revenues, for fiscal 2002.

Total Operating Expenses.    Total operating expenses decreased $3.2 million, or (17.9%) to $14.7 million for fiscal 2003 as compared to $17.9 million for fiscal 2002. As a percentage of revenues, total operating expenses decreased to 22.2% for the twelve months ended March 31, 2003 as compared to 30.3% for the twelve months ended March 31, 2002. Selling, general and administrative (SGA) expenses decreased slightly to $10.9 million, or 16.6% of revenue, from $11.0 million, or 18.7% of revenue. The 2002 reduction in SG&A largely reflects the fact that the 2001 period included certain non-recurring expenses related to the separation agreement with a former President and CEO of the Company and a reserve for legal fees regarding claims made by certain customers of the Company’s former subsidiary, Dart International, as well as an increased emphasis by management during the 2003 period to control excess overhead costs. Research and development expenses decreased $1.3 million, or (30.8%) to $2.8 million for 2003. While the portion of research and development expenses funded by the Company has been decreasing, the Company’s total research and development costs have increased from $5.6 million for 2002 to $6.8 million for 2003 or 21.4%, with the portion funded under contracts by customers increasing from $1.5 million in 2002 to $4.0 million in 2003. Depreciation and amortization expense decreased $0.9 million, or (47.9%), reflecting the elimination of amortization of goodwill, which was written-off prior to March 31, 2002.

Operating Income.    As a result of the foregoing, operating income increased $6.9 million to an operating income of $6.5 million, or 9.8% of revenues, for the twelve months ended March 31, 2003 as compared to an operating loss of $0.4 million, or (0.8%) of revenues, for the twelve months ended March 31, 2002.

Other Income (Expense), Net.    Net interest expense, which included $167,000 in amortization of deferred financing costs and was reduced by $3,512,000 in amortization of debt discount, totaled $114,000, or 0.2% of revenues for the twelve months ended March 31, 2003 as compared to interest income of $220,000, or 0.4% of revenues for the twelve months ended March 31, 2002, which included $38,000 in amortization of deferred financing costs and was increased by $3,513,000 in amortization of debt discount. The reduction in interest expense for the amortization of debt discount is attributable to the debt restructuring completed by the Company in August 2000. The debt discount was completely amortized as of March 31, 2003, and as a result, the Company will recognize interest expense at significantly increased levels over the remaining life of the debt.

Provision for Income Taxes.    The provision for (benefit from) income taxes was reduced by $4.0 million, or 82.3% to a benefit of $867,000 for the twelve months ended March 31, 2003 primarily due to a reduction in the Company’s valuation allowance for deferred tax assets and international tax rate differences. The Company has not recorded a tax benefit for a substantial portion of its operating losses due to the uncertainty of future realization through taxable income. 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 carryback of certain net operating losses, which was a result of a change in the tax law increasing the carryback period from three to five years.

Accretion of Preferred Stock.    The expense for the accretion of the preferred stock remained fairly constant at approximately $0.3 million for the twelve month periods ended March 31, 2003 and 2002. The accretion of preferred stock dividends has been reduced by amortization of the debt restructure liability allocated to the preferred stock during the restructure transaction in August 2000. As a result the net accretion of preferred stock

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dividends during the 2003 and 2002 fiscal years was reduced by approximately $2.3 and $2.1 million, respectively, of debt liability amortization. The debt restructure liability was completely amortized as of March 31, 2003, and as a result, the Company will recognize accretion of preferred stock dividends at significantly increased levels over the remaining life of the preferred stock.

Net Income Attributable to Common Shareholders.    The net income attributable to common shareholders increased $2.7 million to $7.0 million ($0.10 per share) or 10.3% of revenue as compared to $4.3 million ($0.06 per share) or 7.3% of revenue for the twelve months ended March 31, 2002.

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 which the Company accepted at below normal margins in order to build backlog and customer relationships, and a $0.5 million inventory write-off due to the Company’s decision to no longer promote sales of the FATS III Training Platform. 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.

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

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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 totaled $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 carryback of certain net operating losses, which was a result of a change in the tax law increasing the carryback period from three to five years.

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

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

Net Income Attributable to Common Shareholders.    The net income attributable 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

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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.

Quarterly Results of Operations

The following table presents certain unaudited quarterly statements of operations data for each of the eight quarters beginning April 1, 2001 and ending March 31, 2003. 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.

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 a substantial portion of its revenues upon shipment of its products to customers under multi-element arrangements, while the timing of a high percentage of the Company’s operating expenses, including personnel, rent and debt service, are relatively fixed. As a result, with 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

In August 2000, the Company entered into a Second Amended and Restated Credit Agreement (the New Credit Agreement) and Partial Exchange Agreement with its lenders. In accordance with the New Credit Agreement, the unpaid principal and accrued interest under the old facility was converted into shares of Common Stock, shares of Series B mandatory redeemable preferred stock, Senior Secured Loans, and Junior Secured

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Loans. The New Credit Agreement also provides for a New Revolving Credit Commitment comprised of available Revolving Loans and Letters of Credit. Aggregate borrowings under the New Revolving Credit Commitment are limited to $882,000, with borrowings under the Letters of Credit subject to a sub limit of $828,000. During March, 2002, the Company and its lenders further amended the New Credit Agreement to, among other amendments, provide a $2,200,000 Support Letter of Credit Facility and extend the maturity date of the Senior Secured Loans, Junior Secured Loans and New Revolving Loans from March 31, 2003 to September 30, 2003. As of March 31, 2003, outstanding Revolving Loans totaled $130,000 and outstanding Letters of Credit totaled $2,884,000, with $68,000 in available unused funds.

On June 26, 2003, the Company and its lenders agreed to amend the New Credit Agreement extending the maturity date of the Senior and Junior Secured Loans and the Revolving Loans and Letters of Credit from September 30, 2003 to October 15, 2004, and eliminating further extension options. The extension also extends to October 15, 2004, the date on which the Company’s mandatorily redeemable preferred stock becomes redeemable by the holders.

Under the terms of the amendment, the Company will pay an amendment fee of approximately $409,000 in July, 2003 and will reduce the outstanding balance of the Senior Secured Loans by approximately $400,000 on December 31, 2003, and by an additional amount of approximately $1,100,000 on June 30, 2004. The interest rate on the Senior Secured Loans will increase from prime plus 1% to prime plus 2.5% for the period from June 2, 2003 through December 31, 2003 and then to prime plus 3.5% for the period from January 1, 2004 until the maturity date. The interest rate on the Junior Secured Loans will increase from 10% to 15% for the period from June 2, 2003 through the maturity date, with 10% payable in cash and 5% payable in additional notes with the same terms. All other terms and conditions of the New Credit Agreement remain unchanged.

Accordingly, a total of approximately $39,740,000 under the New Credit Agreement has been classified as long-term debt in the Company’s Consolidated Balance Sheet as of March 31, 2003.

As of March 31, 2003, the Company had working capital of $24.0 million compared to $21.0 million as of March 31, 2002. The net $3.0 million increase in working capital is primarily due to an $8.0 million increase in accounts receivable which was substantially offset by increases in accounts payable, billings in excess of costs and estimated earnings on uncompleted contracts, and deferred revenue. The $8.0 million increase in accounts receivable was due to significant fourth quarter revenue which was primarily recognized in March, 2003.

The Company had a net decrease in cash and cash equivalents of $0.8 million for the twelve months ended March 31, 2003 compared to a net increase of $2.4 million for the twelve months ended March 31, 2002. For the period ended March 31, 2003, the Company’s operating activities generated cash of approximately $0.5 million, primarily through profitable operations and the collection of an income tax receivable offset by increases in accounts receivable and costs and earnings in excess of billings on uncompleted contracts. The Company’s investing activities used cash of approximately $1.3 million, primarily for capital expenditures and additions to restricted cash.

The Company’s primary capital requirements are for working capital, debt service, and capital expenditures. Since August of 2000, the Company has financed its operations and growth primarily through internally generated funds and income tax refunds. With the extension of the Company’s Senior and Junior Secured Loans and Revolving Loans and Letters of Credit through October 15, 2004, as discussed above, management of the Company believes that funds provided by operations and possible equipment installment financing will be sufficient to fund its cash needs and anticipated capital expenditures through the year ending March 31, 2004.

The Company is currently in discussions with several parties to negotiate an ultimate refinancing of its Credit Agreement or a transaction that would allow repayment of the debt. However, there can be no assurance that such a refinancing or transaction may be completed on terms that would be favorable to the Company, if at all.

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Commitments and Other Contractual Obligations

Disclosure of Commitments and Other Contractural Obligations

March 31,2003

(Amounts in thousands)

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the existing disclosure requirements for most guarantees, including product warranties and loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company’s disclosure of guarantees is included in Note 10 of the Notes to Financial Statements. The Company believes that adoption of the recognition and measurement provisions of Interpretation 45 will not have a material impact on its financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that its current revenue recognition policies comply with the guidance in EITF Issue 00-21 and does not expect the adoption to have a material impact on the Company’s consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements apply to all companies for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS 148 in these current financial statements and does not currently expect to change to the fair value based method of accounting for stock-based employee compensation. Accordingly, adoption of SFAS No. 148 is not expected to have a material impact on the Company’s consolidated financial statements.

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In January 2003, the FASB issued Interpretation 46, Consolidation of Variable Interest Entities. In general, a variable interest entity (VIE) is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not invest in VIEs and therefore the adoption of the Interpretation will not have a material impact on its financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Liabilities with Characteristics of both Liabilities and Equity. The Statement requires companies to classify certain types of financial instruments that the company is obligated to buy back in exchange for cash or other assets, or for a variable number of its equity shares based on a fixed monetary value, as liabilities rather than equity instruments. The Statement generally requires the liability to be measured at fair value at inception and to subsequently be valued at the present value of the amount to be paid at settlement. For public companies, the Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently classifies its mandatorily redeemable preferred stock outside of the stockholders’ equity section of its balance sheet and measures the instruments in a manner that approximates their present value at redemption with dividends reported as an adjustment before net income attributable to common shareholders. Therefore, the Company does not expect the adoption of SFAS 150 to have a material impact on its financial statements.

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’s 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, 2003.

As of March 31, 2003, the Company had a total of approximately $28 million in fixed rate debt at an interest rate of 10%, which, under the terms of a firm commitment of extension will mature on October 15, 2004, with the interest rate increasing to 15% for the period from June 2, 2003 through March 31, 2003, and then to 20% for the period from April 1, 2004 through the maturity date. The company also has a total of approximately $12.1 million in variable rate debt at an interest rate of prime plus primarily 1%, (5.25% as of March 31, 2003) which, under the terms of a firm commitment of extension will mature on October 15, 2004, with the interest rate increasing to prime plus 2.5% for the period from June 2, 2003, through December 31, 2003, and then to prime plus 3.5% for the period from January 1, 2004 through the maturity date. If interest rates on the Company’s existing variable rate debt were to increase by 10% over the next twelve months, management believes there would be no material adverse impact on the Company’s results of operations.

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Item 8.    Financial Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

of Firearms Training Systems, Inc.:

In our opinion, the accompanying consolidated balance sheets 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, 2003 and 2002, and the results of their operations and their cash flows for the years 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 years ended March 31, 2003 and 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion.

May 20, 2003, except for Note 3 which is dated June 26, 2003

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

REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS

To Firearms Training Systems, Inc.:

We have audited the accompanying consolidated balance sheets of FIREARMS TRAINING SYSTEMS, INC.(a Delaware corporation) AND SUBSIDIARIES as of March 31, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders deficit, and cash flows for each of the three years in the period ended March 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

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

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

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

ARTHUR ANDERSEN LLP

Atlanta, Georgia

May 18, 2001

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS