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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

OR

COMMISSION FILE NUMBER: 333-13105

FIREARMS TRAINING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

7340 MCGINNIS FERRY ROAD

SUWANEE, GEORGIA 30024

(Address of principal executive offices)

TELEPHONE NUMBER (770) 813-0180

(Registrant’s telephone number, including area code)

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

As of February 10, 2004, there were 70,153,159 shares of the Registrant’s Class A Common Stock outstanding.

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FIREARMS TRAINING SYSTEMS, INC.

INDEX

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

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

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FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of presentation and liquidity

The unaudited condensed consolidated financial statements of Firearms Training Systems, Inc. and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for the full year ending March 31, 2004. We suggest that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto for the year ended March 31, 2003, included in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

The Company is currently in discussions with several parties to negotiate a refinancing of its Credit Agreement. The Company has received indications of interest from certain potential new lenders that would substantially improve the Company’s capital structure. However, there can currently be no assurance that the Company will either be successful in negotiating a refinancing with its existing lending group, or in finalizing an agreement with new lenders under terms that would be favorable to the Company, if at all. The inability of the Company to satisfactorily address the concerns related to its capital structure prior to October 15, 2004 could have a severe adverse effect on the Company’s financial condition and future operations. As further discussed in Note 9 - “Related party transactions,” the current holders of the Company’s debt and preferred stock are also major stockholders of the Company.

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

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

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

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

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

3. Stock-based compensation

The Company has elected to account for its stock-based compensation plans under APB No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:

The Company issued options to purchase a total of 5.8 million shares of its common stock under its option plan on May 1, 2003, with an exercise price equal to the $0.40 per share market value of the stock on that date. No options were granted during the nine-month period ended December 31, 2002, and accordingly, the assumptions are not applicable for that period.

The weighted-average grant-date fair value of options granted during the nine months ended December 31, 2003 was computed as approximately $2.2 million or $0.38 per share under option. That value and the value computed for unvested options granted in prior years is being amortized on a pro forma basis over the vesting period of the options. Pro forma information (in thousands, except per share amounts) regarding net earnings (loss) and earnings (loss) per share as if the Company had accounted for options using the fair value method is as follows:

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4. Inventory

Inventories consist primarily of simulators, computer hardware, projectors, and component parts. Inventories are valued at the lower of cost on a moving weighted average or market basis. Cost includes materials, labor, and factory overhead. Market is defined as net realizable value.

Inventories consist of the following (in thousands):

5. Long-term contracts

Costs and estimated earnings on uncompleted contracts and related amounts billed as of December 31, and March 31, 2003, respectively, are as follows (in thousands):

6. Other noncurrent assets

Intangible assets consist of the following (in thousands):

Deferred financing costs as of December 31, 2003, includes approximately $409,000 relating to a June 26, 2003 amendment to the Company’s credit agreement which extended the maturity date from September 30, 2003 to October 15, 2004.

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Amortization expense for the three and nine-month periods ended December 31, 2003 was $87,000 and $298,000, respectively. Estimated amortization expense for the year ending March 31, 2004 will be approximately $384,000.

7. Long-term debt

Long-term debt consists of the following (in thousands):

Prior to March 31, 2003, interest expense on the Company’s credit agreement was substantially offset by amortization of debt discount that was established in a previous debt restructuring. As of March 31, 2003, the debt discount was fully amortized, and interest expense is currently being reported without the offsetting amortization.

On June 26, 2003, the Company and its lenders agreed to amend the Company’s 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.

Under the terms of the amendment, the Company paid an amendment fee of approximately $409,000 in July 2003 and reduced the outstanding balance of the Senior Secured Loans by approximately $400,000 as of December 31, 2003 (paid January 5, 2004), and by an additional amount of approximately $1,100,000 on June 30, 2004. The interest rate on the Senior Secured Loans increased from prime plus 1% to prime plus 2.5% for the period from June 2, 2003 through December 31, 2003, and to prime plus 3.5% for the period from January 1, 2004 until the maturity date. The interest rate on the Junior Secured Loans increased 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 Company’s credit agreement remain unchanged.

8. Mandatorily redeemable preferred stock

In August 2000 the Company issued 21,361.113 shares of Series B preferred stock with a liquidation value of $1,000 per share (approximately $21.4 million) in conjunction with a debt restructuring. Holders of the Series B preferred stock are entitled to receive cumulative dividends equal to 10% of the liquidation preference payable quarterly in additional shares of Series B preferred stock. The preferred stock is subject to mandatory redemption on the latest maturity date (October 15, 2004, as of December 31, 2003) of the Senior Secured Loans (Note 7) at the liquidation value thereof. Accrual of dividends prior to March 31, 2003 was substantially offset by amortization of a restructuring liability allocated to the preferred stock, which was fully amortized on March 31, 2003.

During the three months ended June 30, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities. Accordingly, the mandatorily redeemable preferred stock has been subsequently classified as a liability, which became a current liability as of October 15, 2003, in the balance sheet, and has been reclassified in the March 31, 2003 balance sheet for comparative purposes. The $725,000 and $2,124,000 dividends on the preferred stock have been included in operations as additional interest expense for the three and nine-month periods ended December 31, 2003, respectively. In periods prior to April 1, 2003, dividends on preferred stock were reported as an adjustment to net income to arrive at net income attributable to common stockholders.

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9. Related party transactions

A group of entities affiliated with Centre Partners Management LLC (the Centre Entities) are among the Company’s largest stockholders, owning collectively approximately 48.2% of our common stock. The Centre Entities hold a seat on the Company’s Board of Directors. In addition, the Centre Entities, and other institutional lenders who are also major stockholders as a result of a previously reported restructuring transaction, were party to the amendment to the credit agreement discussed in Note 7. These entities continue to be the Company’s primary lenders. As a result of the share ownership of the Centre Entities and their representation on the Board of Directors, the Centre Entities have the ability to influence the operations of the Company.

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 fees of $211,000 plus expenses of $47,000 for consulting services under the agreement during the nine-month period ended December 31, 2002.

10. Net income per common share

Net income (loss) per share was calculated as follows for the three and six month periods ended September 30, 2003 and 2002

(in thousands except per share amounts):

The number of stock options assumed to be bought back by the Company for computation of diluted earnings per share purposes has been calculated by dividing gross proceeds from all weighted average stock options outstanding during the period, as if exercised, by the average common share market price during the period. The average common share market price used in the above calculation was $0.48 and $0.59 respectively, for the three and nine-month periods ended December 31, 2002.

Options to purchase 2,092,777 and 1,552,077 shares of common stock respectively, as well as warrants to purchase 3,246,164 shares of common stock were not included in the computation of diluted earnings per share for the three and nine-month periods ended December 31, 2002 because the exercise price of the options and warrants was greater than the average market value of the common shares and their effect would have been anti-dilutive.

Options to purchase 6,834,038 shares of common stock and warrants to purchase 5,246,164 shares of common stock were outstanding as of December 31, 2003 but were not included in the computation of the 2003 diluted EPS because their effect would have been anti-dilutive, thereby decreasing net loss per share.

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11. Contingencies and commitments

Product Warranty Reserve

The Company’s product warranty accrual reflects management’s best estimate of probable liability under its product warranties. Management determines the warranty reserve based on known product failures (if any), historical experience, and other currently available evidence.

Changes in the product warranty accrual for the three and nine-month periods ended December 31, 2003 and 2002 were as follows (in thousands):

12. Comprehensive income (loss)

The components of comprehensive income (loss) consists of the following (in thousands):

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s most recently filed Form 10-K for the fiscal year ended March 31, 2003.

In this Quarterly 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 Quarterly Report include, but are not limited to:

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 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.

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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 being 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 changes 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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RESULTS OF OPERATIONS

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

FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS