SECURITIESTable ANDof EXCHANGE COMMISSION Contents

WASHINGTON,Index DCto 20549Financial Statements

~~FORM~~SECURITIES ~~10-K~~AND EXCHANGE COMMISSION

~~(Mark~~WASHINGTON, ~~One)~~DC 20549

xFORM ~~ANNUAL~~10-K ~~REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~(Mark ~~the~~One) ~~fiscal year ended March 31, 2003~~

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨For ~~TRANSITION~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION~~March 1331, OR2005 ~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~Commission~~OR ~~File Number 333-13105~~

~~Firearms~~¨ ~~Training~~TRANSITION ~~Systems,~~REPORT ~~Inc.~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~(Exact~~Commission ~~name~~File ofNumber ~~registrant~~333-13105 ~~as specified in its charter)~~

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

Firearms Training Systems, Inc.

~~Registrant’s telephone~~(Exact ~~number,~~name ~~including~~of ~~area~~registrant ~~code:~~as ~~(770)~~specified ~~813-0180~~in its charter)

Name of exchange on which registered:


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

7340 McGinnis Ferry Road Suwanee, Georgia		30024
(Address of principal executive offices)		(Zip Code)

~~None~~Registrant’s telephone number, including area code: (770) 813-0180

~~Securities~~Name ~~pursuant~~of toexchange ~~Section~~on ~~12(g)~~which ~~of the Act~~registered:

~~Class A Common Stock, $0.000006 par value per share~~None

~~Indicate~~Securities bypursuant ~~check mark whether the registrant (1) has filed all reports required~~ to ~~be filed by~~ Section ~~13 or 15~~12(dg) 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~~Class byA ~~check~~Common ~~mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained~~Stock, to$0.000006 ~~the~~par ~~best~~value ofper ~~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~~ share

Indicate by check mark whether the registrant is(1) anhas ~~accelerated~~filed ~~filer~~all reports required to be filed by Section 13 or 15(asd) ~~defined~~of inthe Securities Exchange Act ~~Rule 12b-~~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 x ¨

~~The~~Indicate ~~aggregate~~by ~~market~~check ~~value~~mark if disclosure of ~~the~~delinquent ~~9,853,598~~filers ~~shares~~pursuant ofto ~~Common~~Item ~~Stock~~405 ~~held~~of byRegulation ~~non~~S-~~affiliates~~K ofis ~~the~~not ~~registrant~~contained ~~computed~~herein byand will ~~reference~~not be contained, to the ~~last~~best ~~sale~~of ~~price~~the onregistrant’s ~~the~~knowledge, ~~Over-The-Counter~~in ~~Bulletin~~definitive ~~Board~~proxy asor ofinformation ~~September~~statements ~~30,~~incorporated ~~2002 (the~~by ~~last~~reference ~~business~~in ~~day~~Part III of ~~the~~this ~~registrant’s~~Form ~~most~~10-K ~~recently~~or ~~completed~~any ~~second~~amendment ~~fiscal~~to ~~quarter)~~this ~~was $5,123,870~~Form 10-K. x

AsIndicate ofby ~~June~~check ~~25,~~mark ~~2003,~~whether the ~~there~~registrant ~~were~~is ~~issued~~an ~~and~~accelerated ~~outstanding~~filer ~~70,153,139~~(as ~~shares~~defined ofin ~~Common~~Exchange ~~Stock,~~Act ~~par~~Rule ~~value $0~~12b-2).~~000006~~ Yes ¨ No x ~~per share.~~

~~DOCUMENTS~~The ~~INCORPORATED~~aggregate BYmarket ~~REFERENCE~~value of the 10,855,898 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, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter) was $7,924,806.

~~Part~~As ~~III—The Registrant’s definitive Proxy Statement for its Annual Meeting~~ of ~~Shareholders’~~July ~~presently~~6, ~~scheduled~~2005, tothere bewere ~~held~~issued inand ~~August~~outstanding ~~2003~~75,945,337 isshares ~~incorporated~~of bycommon ~~reference~~stock, inpar ~~Part~~value ~~III~~$0.000006 toper ~~the extent described therein~~share.

PARTTable Iof Contents

ThisIndex Annual Report modifies and supersedes documents filed prior to thisFinancial 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. Statements

~~You should carefully review the information contained in this Annual Report, and should particularly consider any risks and other factors that we set~~ ~~forth~~Firearms inTraining ~~this~~Systems ~~Annual Report and in other reports or documents that we file from time to time with the SEC~~Inc. 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,~~on ~~but~~Form ~~are~~10-K ~~not limited to:~~

•For ~~changes~~the inYear ~~laws~~Ended ~~and~~March ~~regulations~~31, ~~both~~2005 ~~domestically and in the international markets in which we compete,~~

•Table ~~changes in the competitive environment, including the introduction~~ of ~~competitors~~Contents ~~attracted by the prospect of increased government spending on security,~~

• changes in technology,


		Page
PART I

Cautionary Note Regarding Forward-Looking Statements		3
Item 1.	Business	4
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 8.	Financial Statements and Supplementary Data	32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33
Item 9A.	Controls and Procedures	33
Item 9B.	Other Information	34

PART III

Item 10.	Directors and Executive Officers of the Registrant	34
Item 11.	Executive Compensation	37
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
Item 13.	Certain Relationships and Related Transactions	45
Item 14.	Principal Accountant Fees and Services	46

PART IV

Item 15.	Exhibits and Financial Statement Schedules	46

Signatures		52

	Financial Statements and Report of Auditors	F-1

•2 ~~disruptions in scheduled development of new products, such as our FATS V platform,~~

•Table lack of market acceptance of existing products,Contents

•Index currencyto fluctuations,Financial Statements

• PART ~~the~~I ~~ability to realize cost reductions and operating efficiencies in a manner that does not unduly disrupt business operations,~~

• Cautionary ~~industry~~Note ~~consolidation~~Regarding ~~and~~Forward-Looking ~~mergers,~~Statements

•You ~~market~~should ~~conditions~~carefully review the information contained in this Report and should particularly consider any risks and other factors that ~~may~~we ~~adversely~~set ~~affect~~forth in this Report and in other reports or documents that we file from time to time with the ~~availability~~SEC. Except for historical information contained herein, this Report contains forward-looking statements within the meaning of ~~debt~~Section 27A of the Securities Act of 1933, as amended, and ~~equity~~Section ~~financing~~21E ~~for~~of ~~working~~the ~~capital~~Securities Exchange Act of 1934, ~~capital~~as ~~expenditures~~amended, including statements of 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 ~~purposes~~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 ~~general~~that ~~economic~~may ~~conditions.~~cause our actual results to differ materially from any of our forward-looking statements presented in this Report include, but are not limited to:

~~Item~~• ~~1. Business~~changes in laws and regulations, both domestically and in the international markets in which we compete,

~~Company~~• ~~Overview~~diversion of funds that otherwise might be spent on our products in support of the war on terror,

~~Over~~• ~~its~~changes ~~19-year~~in ~~history, FATS®~~the ~~has~~competitive ~~developed over 300 variations of simulated weapons~~environment, ~~manufactured~~including ~~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~~introduction ~~and production~~ of ~~interactive simulation~~competitors ~~systems~~attracted ~~designed~~by ~~to provide training for and in~~ the ~~use~~prospect of ~~small~~increased ~~and~~government ~~supporting~~spending ~~arms~~on ~~for dismounted and mounted military operations~~security, ~~and~~especially ~~training~~with ~~for~~respect ~~judgmental use of force for law enforcement and military peacekeeping activities. The Company has broadened its array of products~~ to ~~accommodate~~large ~~the~~defense ~~current tactics~~contractors,

2• changes in technology which may affect our existing and future product offerings,

~~training~~• ~~and~~disruptions ~~equipment~~in ~~available~~scheduled todevelopment ~~both law enforcement and military communities. Examples include the provision~~ of ~~simulators~~new ~~and courseware to support indirect fire~~products, 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~~decline ~~and hardware technologies have evolved along with advances~~ in ~~the~~market ~~computer~~acceptance ~~industry. Recognizing that commercial technological capabilities are moving faster than any one company can replicate, the Company takes advantage~~ of ~~commercially~~existing 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 completeproducts, 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~~currency 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 hardwarefluctuations, 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.~~ability ~~and~~to ~~international~~realize ~~military~~cost ~~and~~reductions ~~law enforcement market through its principal facilities near Atlanta, Georgia. Larger gunnery simulation systems are developed~~ and ~~manufactured~~operating byefficiencies ~~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~~manner ~~armored~~that ~~vehicle~~does ~~crew~~not ~~trainer:~~unduly ~~and,~~disrupt ~~an appended~~business ~~light armored vehicle crew trainer. Other smaller subsidiaries located in the United Kingdom~~operations, ~~the Netherlands, Singapore and Australia provide sales, service and limited manufacturing support.~~

~~Industry~~• ~~Overview~~industry consolidation and mergers that involve our competitors, especially with respect to large defense contractors,

~~The~~• ~~firearms~~market ~~simulation~~conditions ~~training sector is comprised of simulation systems and weaponry~~ that ~~are~~may ~~used~~adversely byaffect ~~domestic~~the ~~and international~~availability ~~military and law enforcement organizations to hone a variety~~ of ~~skills,~~debt ~~including individual marksmanship, squad tactical engagement, indirect fire~~ and ~~combined~~equity ~~arms,~~financing 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~~working ~~$2.3 billion in 2001~~capital, ofcapital ~~which~~expenditures ~~U.S.~~or ~~Military~~other ~~forces accounted for approximately one half. The small and supporting arms category~~purposes, ~~which includes products offered by FATS, has an estimated value of approximately $450 million.~~

In• ~~light~~general ofeconomic ~~the~~conditions ~~recent~~including ~~war~~changes in ~~Iraq,~~customer ~~the~~budgets ~~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~~spending ~~continuing fight against terrorism.~~ profiles,

In• the ~~aftermath~~fact ofthat ~~the~~our ~~attacks of September 11th, the~~ U.S. and other government ~~has~~customers ~~demonstrated~~may agenerally ~~significant~~terminate ~~commitment~~our tocontracts ~~homeland~~for ~~security~~convenience inif ~~terms~~termination ~~of financial~~is ~~and~~deemed ~~human~~by ~~resources.~~them ~~Current~~to ~~homeland~~be ~~security~~in their best interests,

3• the fact that a significant portion of our revenues are derived from international sales, which are subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations and changes in import/export regulations and tariff rates, and

~~functions~~• ~~are being redefined, reorganized, and redeployed. Requirements for homeland security applications have not been finalized; however,~~ the ~~Company anticipates~~other ~~that~~risks ~~future~~identified ~~homeland~~in ~~security~~Management’ ~~training~~Discussion ~~will include judgmental, analytical,~~ and ~~situational~~Analysis ~~training~~of ~~applications~~Financial ~~for~~Condition ~~law enforcement, first responders, firefighters,~~ and ~~security~~Results ~~personnel.~~of ~~The~~Operations ~~Company~~– ~~can,~~Risk ~~however, provide no assurance the Company’s operations and financial position will benefit from anticipated increases in homeland security resources~~Factors.

~~Military~~3 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:

•Table Unitedof States Military Acceptance: The United States Marine Corps (“USMC”), the United States Army (the “Army”), the United States Navy (“USN” or the “Navy”) and the United States Air Force (“USAF”) all utilize FATS systems as a prerequisite to live fire training. Controlled tests have been conducted by the Army, USAF, and Navy indicating a positive training transfer from virtual simulation to live fire events. As time, expense, and environmental challenges continue to impact training, the Company expects reliance on simulation to increase.Contents

•Index United States Navy Opportunity: Management believes that the Navy currently represents a substantial opportunity in the simulated firearms market. The October 2000 attack on the USS Cole encouraged the USN to reevaluateFinancial its preparedness. The USN has recently announced plans to deploy simulated firearms trainers on the majority of its ships to enhance the preparedness of its sailors and officers at sea and in port.Statements

~~Judgmental Training: Homeland~~For ~~security~~these ~~assignments and the rising number of non~~forward-~~traditional~~looking ~~law enforcement and military missions~~statements, ~~such~~we asclaim ~~joint-force~~the ~~peacekeeping,~~protection ~~peacemaking~~of ~~actions,~~the ~~and~~safe ~~urban~~harbor ~~warfare~~for ~~situations~~forward-looking statements ~~require~~in aSection ~~heightened~~27A ~~level~~ of ~~judgment~~ ~~regarding~~ the ~~appropriate~~Securities ~~use~~Act of ~~measured~~1933 ~~force. Training in simulation enables law enforcement~~ and ~~military~~Section ~~organizations~~21E toof ~~test~~the ~~and~~Securities ~~hone~~Exchange ~~judgment~~Act 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~~1934.

~~The Company can, however, provide no assurance the Company’s operations~~ ~~and~~Item ~~financial position will benefit from anticipated increased reliance on simulation training~~1. Business

~~Many~~Company ~~companies~~Overview 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~~Firearms Training Systems, Inc. (referred to in this Report as “FATS”, the “Company”, “we” or “our”) incorporated as a Delaware corporation in 1984. We believe FATS® continues to be a leader in terms of our products and the number of markets we serve, having developed over 300 variations of simulated weapons, manufactured and delivered over 60,000 simulated weapons, developed over 1,200 training scenarios, and delivered over 5,200 systems to more than 50 countries. Our virtual training solutions are designed to provide state-of-the-art training for military, law enforcement, and security personnel in:

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

~~FATS’~~• ~~product~~tactical ~~offering represents a comprehensive set of training systems~~decision-making, 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

4• close air support,

~~units~~• injudgmental ~~virtual~~use ~~battle scenarios while a forward observer calls for and adjusts artillery, naval, and mortar fire. The combination~~ of ~~the~~lethal ~~ability to conduct tactical planning on digitized terrain databases that represent real world mission locations~~ and ~~the~~non-lethal ~~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.~~ force,

~~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 systemmarksmanship, 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~~convoy ~~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.~~ trainer,

~~Evolution~~• ofmotion ~~FATS®~~platform ~~Training Platforms~~ systems,

Platform	Year of Introduction	Features/Improvements
FATS I	1985	Control Program for Microcomputers (“CPM”) based, stand-alone weapons, judgmental laser disc video.
FATS II	1988	Versa Module Eurocard (“VME”) based, system controlled weapons, video branching.
FATS III	1992	Weapons trace function, lanes marksmanship, dry fire weapons, primer fire weapons, judgmental laser disc video, 2D full screen graphics, high resolution hit detection.
FATS IV	1998	PC based digital video, three-dimensional (“3D”) sound, 3D graphics, indirect fire trainer, higher hit detection accuracy, open architecture.
FATS V	FY2005 (estimated)	HDTV capable, through-sight display, higher firing rate, scalable system architecture.

•

integrated solutions, and

~~While~~• ~~the~~light ~~FATS~~armored 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 abovevehicles.

~~The~~Keeping ~~following~~pace ~~sections~~with ~~detail~~national ~~the~~and ~~Company’s~~international ~~product~~concerns, ~~offering~~FATS has developed virtual training solutions, which istrain units and individuals in situational ~~divided~~awareness ~~into~~for ~~four~~highly ~~major~~complex ~~groups:~~operations, ~~simulators~~including urban warfare, ~~weaponry~~peacekeeping/making, ~~training~~crowd ~~software,~~control and ~~related~~hostage ~~products~~negotiations. ~~The~~Additional ~~product~~emphasis ~~offering~~has ~~detail~~been isplaced ~~followed~~on bynight aoperations ~~discussion~~in ofmany ~~additional~~environments ~~products~~which, ~~and~~in ~~service~~most ~~opportunities~~cases, allow our customers to utilize their organic night vision equipment.

~~Simulators~~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 components that allow reuse and upgrade capability as well as commonality and the ability to integrate with other simulation systems. This philosophy allows FATS to provide its customers with what we believe are the best technical and economical solutions for their training. FATS also works specifically with each customer so that each training solution provided is complete, integrated and functional, from the embedded technology and courseware to the unique language requirements of each customer. This results in a simulated firearm or weapons system that is integrated and compatible with each customer’s specific training programs, replicating precise weapon ballistic data, desired environmental effects, and target damage realism.

~~The~~FATS ~~Company’s~~uses ~~simulators~~what ~~represent~~we ~~the~~believe ~~core~~is ofa unique ~~FATS’~~approach ~~product~~to ~~set~~sales and marketing utilizing subject matter experts (“SMEs”). ~~Simulators~~SMEs are ~~integrated~~ex-military ~~training~~and/or ~~systems~~law ~~that combine~~enforcement ~~COTS~~professional ~~components~~trainers and ~~technologies,~~weapons ~~such~~specialists aswith ~~Intel~~expertise ~~Pentium®-based~~in ~~computers~~developing ~~running~~weapons ~~the~~training ~~Microsoft~~systems ~~Windows®~~requirements and ~~operating~~customizing ~~system~~hardware, ~~3D graphics~~software, ~~digital~~and ~~video~~weapon ~~encoding~~designs ~~and~~to ~~decoding~~meet ~~technologies,~~specific ~~and~~customer ~~LCD~~training ~~projectors,~~requirements. ~~with~~SMEs ~~FATS~~establish ~~proprietary~~an ~~technologies~~interactive ~~such~~dialogue aswith ~~hit~~decision-makers ~~detection~~and ~~cameras~~system ~~and~~end-users ~~software~~who generally have comparable backgrounds and ~~computer~~experiences, enabling ~~hardware~~the SMEs to ~~create~~communicate ~~a versatile~~customer ~~training~~requirements ~~solution.~~to ~~Each~~the ~~FATS~~Company’s ~~IV-based~~design ~~simulator~~engineers. ~~enables~~Through ~~end-users~~this tointeraction, ~~train~~the ~~using~~Company ~~either~~is ~~computer~~better ~~generated~~able ~~imagery~~to ~~(“CGI”)~~provide orits ~~combined~~customers ~~video~~with ~~and~~customized ~~graphics~~training scenarios. ~~Instructors~~that are realistic, using simulated weapons that maintain the ~~Instructor~~fit, ~~Control~~form, ~~Station (“ICS”)~~and ~~have~~feel ~~real-time~~of ~~control~~live weapons. The average tenure of ~~scenario~~FATS’ ~~events~~team ~~and~~of ~~after-action~~SMEs ~~review~~is over nine years.

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

SimulatorIndex Productto OfferingsFinancial by Target Market Statements

~~Domestic~~Our ~~Military~~facility ~~Domestic~~in ~~Law~~Atlanta ~~Enforcement~~serves ~~International~~as ~~Law~~the ~~Enforcement~~operational &base ~~Military~~for ~~Small~~a ~~Arms~~wide ~~Trainer~~array ~~Small~~of ~~Arms~~products ~~Trainer~~servicing ~~Small~~markets throughout ~~Arms~~the ~~Trainer~~world. ~~Indirect~~Complementing ~~Fire~~our ~~Trainer~~vertically ~~Live~~integrated ~~Fire~~manufacturing ~~Trainer~~operations ~~Indirect~~in ~~Fire~~Atlanta ~~Trainer~~are ~~Judgmental~~engineering ~~Trainer~~resources ~~Judgmental~~located ~~Trainer~~in ~~Live~~Atlanta ~~Fire~~and ~~Trainer~~Montreal, ~~Forward~~which ~~Observer~~are ~~Trainer~~supported ~~Authoring~~by ~~Station~~sales ~~Judgmental~~and ~~Trainer~~service ~~Motion~~operations ~~Integrated~~in ~~Trainer~~the ~~Authoring~~United ~~Station~~States, ~~Heavy~~United ~~Weapons~~Kingdom, Netherlands, ~~Simulation~~Australia, ~~Motion~~Singapore, ~~Integrated~~and ~~Trainer~~Canada. ~~Combined~~By ~~Arms~~consolidating ~~Trainer~~key ~~Heavy~~functional ~~Weapons~~groups ~~Simulation~~in ~~Networked~~Atlanta ~~Trainers~~such ~~Combined~~as ~~Arm~~Marketing ~~Trainer~~and ~~Networked~~Sales, ~~Trainers~~Business Development, Program Management, Contracts, Finance, and Supply Management, the Company can more readily execute a “one FATS” approach worldwide.

~~Small~~Industry ~~Arms~~Overview 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~~The ~~Fire~~virtual ~~Trainer~~simulations ~~(“IFT”): Designed~~training ~~for artillery~~market ~~and mortar units, the IFT~~ is ~~designed~~comprised toof ~~portray~~hardware, software, ~~the call for fire procedures~~ and ~~effects~~courseware ofthat ~~all~~are ~~artillery,~~used ~~mortars,~~by ~~naval gunfire~~military, ~~close~~law ~~air~~enforcement ~~support,~~ and ~~attack~~security ~~helicopter~~professionals ~~supporting arms~~worldwide. ~~These~~The ~~systems~~products ~~may~~are beused ~~integrated~~to ~~into~~hone a ~~combined arms~~variety ~~battle~~of ~~space~~skills, including ~~howitzer~~individual ~~and mortar crews~~marksmanship, ~~while~~tactical ~~conducting direct fire engagements against simulated forces. In addition~~engagement, ~~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~~judgmental ~~same~~decision-making ~~virtual~~for ~~battlefield,~~lethal atand ~~the~~non-lethal ~~same~~use ~~time.~~of ~~This combined arms training capability is a unique feature offered only by FATS~~force.

~~Live~~We ~~Fire~~believe ~~Trainer~~recent ~~(“LFT”): The~~world ~~system~~events ~~enables~~and anthe ~~organization~~continuing towar ~~employ~~on ~~its~~terrorism ~~own~~have ~~service~~increased ~~weapons~~the independence aon, ~~wide~~and ~~variety~~the ofdemand ~~scenarios~~for, simulations training. Operational tempo, time, and increasing environmental issues are key drivers that make ~~offering~~simulations atraining ~~complete~~extremely ~~spectrum~~attractive. ofAdditionally, ~~potential~~there ~~force~~are ~~responses~~training events that are almost cost prohibitive if restricted to live solutions. ~~The~~An ~~system~~example ~~displays~~is ~~the~~close ~~impact~~air ~~point~~support where the cost of a live ~~rounds~~aircraft onsortie awith ~~specially~~ordnance ~~designed~~is in the tens of thousands of dollars. Simulation training solutions, ~~self~~such as FATS Indirect-~~healing~~Forward ~~screen~~Air Controller, provide robust and ismeaningful ~~capable~~training, ofwhich ~~branching~~is transferable to ~~different~~the ~~outcomes~~live ~~depending~~environment ~~upon~~and ~~the~~provides ~~student’s~~substantial ~~actions, reactions,~~savings in both time and ~~effectiveness~~money.

~~Law~~Over ~~Enforcement Trainer: The Law Enforcement Trainer provides training for~~ the ~~individual~~last ~~patrolman~~decade, ~~team~~military and~~/or~~ ~~section,~~law ~~and~~enforcement organizations ~~SWAT~~have ~~teams~~increasingly ~~through~~embraced ~~the~~firearms ~~entire~~simulation ~~force~~training ~~continuum.~~as ~~Weapons~~an ~~include~~important ~~small~~supplement ~~arms,~~to ~~semi-automatic~~live ~~weapons,~~fire ~~shotguns,~~training. ~~and~~We ~~non-lethal alternatives~~believe ~~such as chemical spray,~~ the ~~simulated~~following ~~TASER®~~factors ~~stun~~favor ~~gun, and batons. Law enforcement courseware spans~~ the ~~spectrum~~use of ~~conflicts~~simulated ~~that~~firearms antraining ~~officer~~systems: 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~~United ~~Training~~States Military Acceptance: ~~FATS~~ ~~produces~~The ~~light~~United ~~armor~~States ~~vehicle~~Marine ~~and~~Corps, ~~gunnery~~the ~~crew~~United ~~training~~States ~~systems~~Army, ~~including~~the aUnited ~~stand-alone~~States ~~classroom~~Navy ~~armored vehicle~~and ~~trainer,~~ the ~~Cougar~~United ~~Crew~~States ~~Gunnery~~Air ~~Trainer,~~Force ~~the~~all ~~TOW~~utilize ~~Video~~FATS ~~Interactive~~systems ~~Gunnery~~as ~~Simulator,~~a ~~the~~prerequisite ~~Javelin~~to ~~Detachment~~live ~~Trainer,~~fire ~~and~~training. anThe ~~appended~~Army, ~~light~~Air ~~armored~~Force ~~vehicle~~and ~~crew~~Navy ~~trainer.~~have ~~The~~conducted ~~Company~~controlled ~~provides~~tests ~~appended~~which ~~and~~indicate ~~stand-alone~~that ~~versions~~soldiers ofare ~~these products,~~able ~~and~~to istransfer the ~~sole-source~~techniques ~~provider~~learned offrom training in the ~~embedded~~virtual ~~training~~simulation ~~software~~environment ~~solutions~~immediately ~~for~~to ~~the~~live Ufire events.S. ~~Army~~As ~~STRYKER~~time, ~~Program.~~expense, Inand ~~addition~~environmental challenges continue to impact training, ~~FATS~~the Company expects reliance by these military forces on simulation to increase.

6• 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 with the ability to provide after-action review.

~~provides~~FATS ~~contract~~focuses ~~software~~on ~~development~~the application of affordable technology to individual and ~~programming~~small ~~services~~unit training and judgmental/use of force requirements. ~~Historically~~During the last few years, rapid advancements in commercial computer technology have allowed FATS ~~has~~to ~~not~~develop ~~emphasized~~low ~~its~~cost ~~armored~~simulators ~~vehicle~~that ~~simulation~~support ~~capabilities~~contemporary combat training objectives. FATS simulators use highly interactive three-dimensional computer-generated ~~Management,~~imagery ~~however,~~that isallows ~~exploring~~simulated ~~current~~battles ~~demand~~to ~~for~~take ~~gunnery~~place ~~crew~~in ~~training~~high-fidelity ~~systems~~virtual environments with computer-generated semi-automated forces.

~~Motion~~Products 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’ 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, experience, and expertise enable military leaders to progress from basic weapons skills to directing entire units in virtual battle scenarios while a forward observer calls for and adjusts artillery, naval, mortar fire, and close-air support. The combination of the ability to conduct tactical planning on digitized terrain

~~FATS~~5 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.

FATSTable 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. Contents

FATSIndex weapons designers are able to replaceFinancial 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. Statements

~~Weapons are available~~ ~~with~~databases ~~various~~that ~~levels~~represent ofreal ~~sensor~~world ~~diagnostics~~mission ~~and~~locations, ~~can be custom-designed~~ and ~~manufactured for each customer’s specific installation. Additionally,~~ the ~~Company’s~~technically ~~weapons~~advanced ~~are~~features ~~offered~~embedded ~~with~~in ~~radio~~FATS ~~frequency~~training ~~(“RF”) wireless capability~~systems, ~~utilizing~~ aresult ~~backpack~~in ~~that contains electronics and compressed air containers to enable FATS weapons to function under system control and provide diagnostic capabilities. Currently~~ the ~~Company~~opportunity ~~is developing wireless weapons using Bluetooth RF~~for ~~technology.~~military ~~The~~organizations ~~objective is~~ to ~~embed~~conduct ~~all~~meaningful ~~components~~simulation oftraining ~~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~~leads ~~integration~~to ofadvanced ~~the technology will actually be accomplished~~readiness.

The Company’s ~~arsenal~~technology ~~includes~~strategy ~~simulated~~is ~~revolvers;~~based ~~semi-automatic~~on ~~pistols;~~creating ~~shotguns;~~training ~~bolt-action,~~platforms ~~semi-automatic,~~designed ~~and~~around ~~automatic~~a ~~rifles;~~combination ~~submachine~~of off-the-shelf and ~~machine~~proprietary ~~guns;~~technologies that ~~anti-tank/anti-personnel~~customers ~~rocket~~can ~~launchers;~~easily ~~single-shot~~customize ~~and~~to ~~automatic grenade~~meet ~~launchers;~~their ~~automatic~~distinctive ~~cannons;~~specifications and ~~mortars~~requirements. ~~FATS~~Faster ~~also~~processors ~~provides~~and asmaller ~~customer-installed~~computer ~~weapons~~parts ~~simulation~~and ~~conversion~~chips ~~kit~~are ~~that~~enabling ~~enables~~FATS ~~customers~~ to ~~modify~~create ~~their~~training ~~own~~devices ~~weapons~~that toeliminate ~~function~~the ~~like~~current ~~FATS~~requirement ~~simulated~~that weapons. ~~These kits, which are easily~~be ~~removed~~tethered ~~for~~to ~~live~~the ~~fire~~ training system, ~~lower~~affording ~~the~~personnel ~~total~~freedom ~~system~~of ~~cost~~movement toin ~~customers~~the ~~and~~training ~~represent~~space ~~the~~while ~~only~~retaining ~~simulated~~all ~~weapons~~current ~~conversion~~data ~~kit~~feedback ~~available~~and insystem ~~the~~training ~~industry~~features.

~~Training~~The ~~Software~~following table illustrates the progression of the Company’s training platforms from its FATS I system developed in 1984 to the current FATS IV system:

~~The~~Evolution ~~Company’s~~of ~~training software provides interactive engagements to meet specific training objectives using real-world imagery or CGI.~~ FATS~~’ scenario~~® ~~library~~Training ~~includes~~Platforms 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.


Platform	Year of Introduction	Features/Improvements
FATS I	1985	Control Program for Microcomputers based, stand-alone weapons, judgmental laser disc video.

FATS II	1988	Versa Module Eurocard based, system controlled weapons, video branching.

FATS III	1992	Weapons trace function, lanes marksmanship, dry fire weapons, primer fire weapons, judgmental laser disc video, 2D full screen graphics, high resolution hit detection.

FATS IV	1998	PC based digital video, three-dimensional sound and graphics, indirect fire trainer, higher hit detection accuracy, open architecture.

FATS IV	Periodic Enhancements	HDTV video, through-sight display, higher firing rate, scalable system architecture.

~~FATS~~The ~~has~~following ~~developed~~sections detail ~~thousands~~the ~~of customized scenario programs. The~~ Company’s ~~offers~~product aoffering, ~~comprehensive~~which ~~set~~is ~~of scenarios~~divided ~~covering~~into ~~basic~~four ~~and~~major ~~advanced~~groups: ~~marksmanship~~simulators, ~~judgmental/measured response~~weaponry, ~~collective and combined arms~~ training software, and ~~numerous~~related ~~other training requirements~~products. The ~~following~~product ~~table~~offering ~~provides~~detail is followed by a ~~list~~discussion of ~~selected~~additional ~~scenarios~~products and ~~courseware~~service opportunities ~~developed~~we ~~by FATS~~are pursuing.

~~Training~~Simulators ~~Software~~

~~Corporate~~The ~~Security~~Company’s ~~Nuclear~~simulators ~~Station~~represent ~~Security~~the ~~Federal~~core ~~Scenarios~~of ~~Private~~FATS’ ~~Security~~product ~~First~~set. Simulators ~~Responder~~are ~~State~~integrated ~~Police~~training ~~Force~~devices ~~Continuum~~that ~~SWAT~~combine ~~Team~~commercial ~~High~~off-the-shelf ~~Risk~~components, ~~Patrol~~the ~~U.S.~~latest ~~Border~~technologies ~~Patrol~~available Insuch ~~Custody~~as /Windows ~~Corrections~~XP® ~~U.S.~~operating ~~Immigration~~system, &3D ~~Naturalization~~graphics, ~~Service~~digital ~~Inspections~~video ~~Judgmental~~encoding ~~Pistol~~and ~~Shooting~~decoding Utechnologies, and LCD projectors.S. ~~Postal~~FATS ~~Service~~proprietary ~~Inspections~~technologies ~~Marksmanship~~such ~~Lanes~~as ~~Use~~the ofhit detection ~~Force~~system, ~~Mortar~~software and ~~Sustained~~training ~~Fire~~courses ~~Machine~~create ~~Gun~~a ~~Australian~~versatile ~~Army~~training ~~East~~solution. ~~Timor~~Of ~~Checkpoint~~significant ~~Operations~~interest ~~U.S.~~is ~~Army~~the embedded “after-action-review” capability allowing a thorough examination of key actions/tasks of each trainee.

~~Related~~The ~~Products~~following ~~and~~list ~~Services~~identifies the system capabilities and training available in a FATS platform:

~~FATS~~• ~~offers~~Direct ~~additional~~Fire/Crew ~~products~~Gunnery- ~~that enhance the basic platform capability, including a video authoring station, which~~ enables customers to ~~develop,~~hone ~~edit,~~skills ~~modify,~~ranging ~~and/or~~from ~~customize~~individual ~~their~~marksmanship ~~own~~to collective training ~~video~~incorporating ~~scenarios;~~weapons aranging ~~hostile~~from ~~fire~~pistols ~~return~~to ~~simulator~~anti-tank ~~that~~missiles. ~~propels~~Focus ~~simulated~~is ~~ammunition~~on inindividual, ~~the direction of a trainee~~team, ~~reinforcing proper cover techniques; selected military~~ and ~~law~~leadership ~~enforcement~~training ~~equipment~~for ~~such~~basic asthrough aadvanced ~~remote trigger device~~marksmanship, ~~flashlight,~~as ~~night~~well ~~vision~~as ~~filters~~tactical/combined ~~for~~arms. ~~customer-owned~~FATS ~~devices,~~also ~~simulated~~provides ~~binoculars~~light ~~for~~armor ~~use~~vehicle ~~during~~and ~~indirect~~gunnery ~~fire~~crew 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~~systems.

~~FATS~~• ~~has~~Indirect ~~developed~~Fire/Combined ~~other~~Arms- ~~products~~designed ~~that~~to ~~have~~train ~~not~~call-for-fire ~~yet~~procedures ~~penetrated~~artillery, ~~the market~~mortars, ~~such~~naval ~~as the Company’s Motion Integrated Training System~~gunfire, ~~which~~close ~~combines FATS core firearms simulation technology with a dynamic motion platform to simulate numerous~~ air~~-based~~ support, and ~~sea-borne~~attack ~~weapons at a considerably reduced cost~~helicopter. This ~~system~~training ismay ~~currently~~be inaccomplished ~~use~~independent ~~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.~~ or

~~Management~~6 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.

ManagementTable isof 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. Contents

Additionally, asIndex theto Company’sFinancial customer base increases, so does the potential for additional revenue from the sale of extended maintenance and service contracts. Statements

~~The~~concurrently ~~Company can~~with, ~~however~~a virtual combined arms training event incorporating direct fire engagements against simulated forces. In addition, ~~provide~~indirect nofire ~~assurance~~and ~~the~~combined ~~Company’s~~arms ~~operations~~simulations provide capabilities for command post and ~~financial~~fire ~~position~~direction ~~will~~center ~~benefit~~personnel ~~from~~to ~~any~~become offull ~~the~~participants ~~anticipated~~in ~~products~~an ~~or services.~~indirect fire scenario.

~~Target~~• ~~Markets~~Live Fire- 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.

~~The~~• ~~Company~~Judgmental/Law ~~currently~~Enforcement- ~~targets~~provides ~~three~~training ~~principal~~for ~~market~~the ~~components:~~individual ~~(i) international~~patrolman, ~~which~~team ~~includes~~and/or ~~military~~section, and ~~law~~SWAT ~~enforcement~~teams ~~authorities~~through ~~outside~~ the Uentire force continuum.S. orWeapons ~~its~~include ~~territories;~~small ~~(ii)~~arms, Usemi-automatic weapons, shotguns, and less than lethal alternatives such as chemical spray, the simulated TASER® stun gun, and batons.S. ~~military;~~Law enforcement training courses span the spectrum of conflicts that an officer may encounter, from basic marksmanship to hostage negotiations and ~~(iii)~~rescue Uand domestic disturbances, in each case requiring judgment and measured response.S. ~~law~~Systems include complete diagnostics and data feedback.

8Weaponry

~~enforcement~~FATS produces sophisticated and realistic simulated training weapons. ~~The~~We ~~following~~are ~~table~~able ~~sets~~to ~~forth~~provide ~~dollar~~realistic ~~amounts~~weaponry ~~(in~~by ~~thousands)~~retrofitting real, live fire weapons with simulation technology to deliver the true form, fit, and ~~percentages~~feel of ~~sales~~a ~~for~~live ~~each~~fire ofweapon. ~~the~~FATS ~~Company’s~~offers ~~major~~a ~~markets~~broad onset ~~an historic~~of ~~basis~~weapons, from small to supporting arms.

	Year Ended March 31, 2003				Year Ended March 31, 2002				Year Ended March 31, 2001
International	$	32,104	48.6	%	$	23,809	40.3	%	$	21,875	52.7	%
Domestic Military		28,061	42.4			27,836	47.1			11,224	27.0
Domestic Law Enforcement		5,719	8.6			6,669	11.3			7,419	17.9
Hunter / Sports		241	0.4			743	1.3			983	2.4
Total	$	66,125	100.0	%	$	59,057	100.0	%	$	41,501	100.0	%

FATS simulated weapons offer a number of training advantages. Our weapons provide diagnostic information not available with live fire weapons, such as trigger squeeze, 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, we believe an actual M-16 has a field life of approximately 5,000 rounds before rebuild is necessary, while the FATS simulated M-16 is designed to fire a minimum of 50,000 rounds before requiring service.

~~International~~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 such as safety switch and loading, center of gravity, balance, or weight.

~~The~~Our weapons are available with various levels of sensor diagnostics and can be custom-designed and manufactured for each customer’s specific installation. During fiscal 2005, the Company ~~has~~began ~~sold~~delivery of un-tethered, wireless weapons using Bluetooth radio frequency technology. FATS ~~systems~~BLUEFIRE® toweapons ~~customers~~and devices provide the end user with all of the diagnostics and capabilities present in ~~more~~FATS ~~than~~tethered 50weapons, ~~countries across~~but ~~six~~are ~~continents~~without the hard wire connection to the system.

~~The~~Our ~~international~~weapons ~~firearms~~arsenal ~~simulation marketplace~~currently isincludes: ~~comprised~~simulated ofrevolvers; ~~national~~semi-automatic ~~military~~pistols; ~~organizations~~shotguns; ~~and police organizations of foreign nations. International law enforcement organizations have a broader~~bolt-action, ~~more militaristic scope than domestic law enforcement organizations~~semi-automatic, ~~are structured~~ ~~comparably to military organizations,~~ and inautomatic ~~many~~rifles; ~~countries~~submachine ~~are organized within the same structure as the military. International military~~ and ~~law~~machine ~~enforcement~~guns; ~~organizations~~anti-tank/anti-personnel ~~therefore~~rocket ~~both~~launchers; ~~demand~~single-shot ~~applications that mirror those of domestic military markets. International customers typically utilize small arms trainers, judgmental trainers,~~ and ~~indirect~~automatic ~~fire~~grenade ~~trainers.~~launchers; ~~The~~automatic ~~same~~cannons; ~~forces that impact the U.S. military~~ and ~~law enforcement markets drive global military and law enforcement trends~~mortars.

~~International~~Training ~~military~~Software 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~~The ~~requirements,~~Company’s ~~procurement~~training ~~processes,~~software ~~and~~provides ~~customers~~interactive ~~vary~~engagements ~~widely~~to ~~among~~meet ~~countries~~specific training objectives using real-world imagery or computer generated imagery. FATS’ ~~has~~scenario ~~secured~~library ~~exclusive~~includes: ~~agreements~~terrain ~~with~~scenes ~~strategic~~derived ~~sales~~from ~~agents to~~data ~~provide~~sets aof ~~local~~the ~~presence~~National inImagery ~~markets~~and inMapping ~~which~~Agency; ~~such~~realistic atargets ~~presence~~(both isfriendly ~~essential~~and tothreatening); ~~the~~realistic ~~Company’s~~human ~~success~~images; and various time of day, weather, and lighting conditions.

~~For~~FATS ~~fiscal~~has ~~2003~~developed over 1,200 48customized scenario programs.6% ofThe ~~the~~ Company’s ~~total~~offers ~~revenues~~a ~~were~~comprehensive ~~attributable~~set toof ~~sales~~scenarios tocovering ~~military~~basic and ~~law~~advanced ~~enforcement~~marksmanship, ~~authorities~~judgmental/measured ~~outside~~response, ~~the~~collective ~~U.S. See Management’s Discussion~~ and ~~Analysis~~combined ofarms ~~Financial~~training, ~~Condition~~ and ~~Results~~numerous ofother ~~Operations~~training ~~and Note 7 of Notes to Consolidated Financial Statements~~requirements.

~~Domestic~~7 ~~Military.~~

TheTable 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. Contents

DomesticIndex militaryto customersFinancial 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. Statements

~~The~~FATS ~~two~~has ~~principal~~also ~~methods~~become ~~used~~an byindustry ~~U.S.~~leader ~~Military~~in ~~organizations to~~interoperability ~~procure~~with ~~training~~similar ~~equipment~~and ~~are~~dissimilar ~~purchasing~~training ~~programs~~systems. Projects ~~defined~~with in the U.S. ~~Government’s~~Department ~~budget~~of Defense have demonstrated our ability to integrate via high-level architecture, with multiple systems and ~~discretionary~~live ~~spending~~training. ~~The~~We ~~Company~~believe ~~has~~this acapability ~~compelling~~makes ~~track~~FATS ~~record~~technically ahead of ~~success~~its oncompetition ~~both~~and ~~large-scale~~has ~~competitive~~brought the ~~procurements~~Company new opportunities that will provide growth in both its market and ~~discretionary purchases~~product offerings.

9Related Products and Services

~~For~~FATS ~~fiscal~~offers ~~2003~~additional products that enhance its basic platform capability, ~~42.4%~~including: ofa ~~the~~video ~~Company’s~~authoring ~~total~~station, ~~revenues~~enabling customers to develop, edit, modify, and/or ~~82.5%~~customize oftheir ~~the~~own ~~Company’s~~training ~~U.S.~~video ~~revenues~~scenarios; and a hostile fire return ~~were~~simulator ~~attributable~~that topropels ~~sales~~simulated ammunition in the direction of a trainee and designed to ~~U.S.~~reinforce ~~military~~proper ~~authorities~~cover techniques. ~~See~~We ~~Management’s~~also ~~Discussion~~offer selected military and ~~Analysis~~law ofenforcement ~~Financial~~equipment ~~Condition~~such as: a remote trigger device; lookback 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 ~~Results~~a ofMILES™ ~~Operations~~shoot-back device that trains military personnel to react to hostile fire simulated by an electronic laser.

~~Domestic~~FATS ~~Law~~is ~~Enforcement~~currently conducting turnkey training services for the Australian Defense Force, Singapore Armed Forces and Singapore Police Coast Guard. Management continues to explore opportunities to provide turnkey training services to military and law enforcement organizations worldwide. We believe expanding the Company’s turnkey training services will provide a recurring revenue stream for FATS.

FATS ~~divides~~has ~~the~~teamed ~~domestic~~up with a North Carolina company, CMT Solutions, to establish a regional training center to deliver virtual simulation training to military and law enforcement ~~segment~~personnel ~~into~~in ~~four~~the ~~principal~~Fort ~~categories:~~Bragg / Fayetteville area. CMT Solutions is providing the training facility and training staff while FATS is providing the training systems, simulated weapons and service support. We believe that market research indicates that there is significant potential for this type of training, particularly among the Special Forces community in Fort Bragg. The first training courses are expected to commence in July 2005.

•Management ~~Federal~~continues ~~entities,~~to ~~including~~explore ~~the~~opportunities ~~U.S.~~to ~~Department~~deliver ofoperator ~~the~~refresher training ~~Treasury~~and ~~(which~~advanced ~~oversees~~system ~~organizations~~operator ~~such~~training. asFATS ~~the~~continues ~~Secret~~to ~~Service,~~deliver ~~Bureau of Alcohol~~five-day, ~~Tobacco~~in-plant, operator and ~~Firearms~~instructor ~~(“ATF”)~~courses, and ~~the~~courses ~~Internal~~are ~~Revenue~~scheduled ~~Service);~~throughout the ~~U.S.~~current ~~Postal~~fiscal ~~Service; the Federal Bureau of Investigation; the Drug Enforcement Agency; and the Central Intelligence Agency~~year.

•Target ~~State~~Markets ~~and local law enforcement departments.~~

•FATS ~~Colleges~~targets two markets globally: military and ~~universities~~law ~~offering~~enforcement/security. ~~criminal~~The ~~justice~~Company ~~training~~has ~~programs~~sold FATS systems to customers in more than 50 countries across six continents. The following table sets forth dollar amounts (in thousands) and percentages of sales for the Company’s international and domestic markets on an historic basis:

• Federal, state, and private correctional facilities.


	Year Ended March 31, 2003				Year Ended March 31, 2004				Year Ended March 31, 2005
	(Restated)				(Restated)
International	$	32,384	48.8	%	$	37,753	51.6	%	$	39,829	45.1	%
Domestic Military		28,061	42.2			27,385	37.5			43,659	49.4
Domestic Law Enforcement		5,719	8.6			7,943	10.9			4,878	5.5
Other		241	0.4			8	0.0			—	—

Total	$	66,405	100.0	%	$	73,089	100.0	%	$	88,366	100.0	%

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

~~Law~~While ~~enforcement agencies use simulation~~ training ~~primarily~~requirements ~~for~~vary ~~judgmental~~among ~~applications~~countries, ~~that~~the structural ~~address~~basis ~~force~~is ~~escalation~~often ~~and~~similar ~~de-escalation~~to ~~decision-making~~U.S. ~~in high~~military ~~stress~~doctrine ~~situations~~and procedure. ~~Domestic~~Major ~~law~~differences ~~enforcement~~typically ~~agencies~~exist ~~have~~in ~~been~~weaponry ~~early~~used ~~adopters~~and ofmarksmanship ~~simulation~~ training, ~~given the need for more realistic means to teach these critical skills~~standards.

~~Federal~~8 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.

ForTable 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. Contents

HomelandIndex Security to Financial Statements

~~Homeland security is a sub-segment of both the domestic~~ ~~military~~FATS ~~and law enforcement markets. The President~~ has ~~proposed~~secured aexclusive ~~homeland~~agreements ~~security~~with ~~budget~~strategic ~~which~~sales isagents ~~expected~~ to ~~support~~provide ~~increased~~a ~~training~~local ~~for~~presence ~~law~~in ~~enforcement~~those ~~and~~markets ~~military~~in ~~organizations~~which ~~responsible~~such ~~for~~a ~~domestic~~presence ~~security.~~is ~~Management~~essential ~~expects judgmental and small arms training~~ to ~~be integral components of this training, given~~ the Company’s ~~complex nature of homeland security assignments~~success. ~~FATS~~These isagents ~~the~~assist ~~leading~~in ~~provider~~defining ofrequirements ~~judgmental use of force~~ and ~~small~~providing ~~arms~~clarification ~~simulation training, and management believes it is well-positioned~~ to ~~capitalize~~product ontenders ~~increasing~~and ~~training opportunities~~solicitations.

~~Gunnery~~FATS ~~Crew~~expects ~~Training~~major growth potential in the Asian Pacific region and in Eastern Europe, and we are aggressively cultivating opportunities in both regions.

~~FATS~~We ~~has~~believe ~~recently~~that ~~won commitments for~~ the ~~embedded~~U.S. ~~training~~military ~~system~~continues ofto ~~the~~provide ~~interim~~FATS with ~~armored~~long-term ~~vehicle~~opportunities. ~~(“STRYKER~~We ~~IAV”),~~believe ~~and~~the ~~has~~U.S. ~~received~~military ~~indications~~sets ~~that~~ the ~~Army~~standards ~~will~~for ~~expand~~training ~~the~~in ~~order.~~a Insimulations ~~addition~~environment. toU.S. ~~working~~military ~~with~~customers GMrecognize ~~Defense-Delco~~simulation ~~Systems~~training ~~(“GM~~as ~~Defense”)~~a ~~on the~~viable ~~STRYKER~~teaching ~~program,~~method ~~FATS~~and ismeans ~~also~~of ~~working~~preparation asfor alive ~~subcontractor~~fire training. toSimulation ~~Saab~~training’s ~~Bofors~~inherent ~~Dynamics~~advantages onin acost, ~~light~~flexibility, ~~anti-tank~~diagnostics, ~~weapon~~safety, ~~program.~~and ~~Management~~diminished ~~anticipates~~environmental ~~that~~impact ~~the~~are ~~increased~~recognized ~~visibility~~attributes ofby ~~the~~military ~~Company’s~~organizations, ~~gunnery~~both ~~crew trainers~~ in ~~these~~the ~~high-profile~~United ~~programs stimulate~~States ~~demand~~and ~~for its heavy weapons simulators~~abroad.

The ~~Company~~two principal methods used by U.S. military organizations to procure ~~can,~~training ~~however,~~equipment ~~provide~~are nopurchasing ~~assurance~~programs defined in the ~~Company~~U.S. Government’s ~~operations~~budget and ~~financial~~discretionary ~~position~~spending. ~~will~~We ~~benefit~~believe ~~from~~the ~~additional~~Company ~~spending~~has ~~for~~a ~~either~~compelling ~~homeland~~track ~~security~~record orof ~~gunnery~~success ~~crew~~on ~~training~~both large-scale competitive procurements and discretionary purchases.

10Reliance on virtual simulations in the U.S. is expected to expand, and we believe that, as the U.S. military adopts new features and capitalizes on the newest technology, other countries will similarly follow suit.

~~Hunter~~Domestic ~~and~~Law ~~Sports~~Enforcement ~~Training.~~

~~The~~FATS ~~Company~~divides ~~has reduced~~ its ~~focus~~domestic onlaw ~~the~~enforcement ~~hunter~~segment ~~and~~into ~~sports~~four ~~training~~principal ~~components~~categories: 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~~Federal ~~2003~~entities, ~~0.4%~~including of the ~~Company’s~~Secret ~~total~~Service, ~~revenues~~Bureau ~~were~~of ~~attributable~~Alcohol, toTobacco, ~~sales~~and inFirearms, the ~~hunter~~Internal ~~and~~Revenue ~~sports~~Service, ~~training component of~~ the ~~market~~U.S. ~~See~~Postal ~~Management’s~~Service, ~~Discussion~~the ~~and~~Federal ~~Analysis~~Bureau of ~~Financial~~Investigation, ~~Condition~~the Drug Enforcement Agency, and ~~Results~~the ofCentral ~~Operations.~~Intelligence Agency.

~~Sales~~• State and ~~Marketing~~local law enforcement departments.

~~FATS’~~• ~~sales~~Colleges and ~~marketing~~universities ~~organization~~offering iscriminal ~~structured~~justice ~~around~~training ~~its customer segments, with separate sales forces for domestic military, international military and law enforcement, and domestic law enforcement~~programs.

~~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’ SMEsFederal, ~~through~~ ~~their depth of experience and critical links to key customer contacts~~state, ~~bolster the Company’s sales~~ and ~~marketing~~private ~~efforts~~correctional ~~and reinforce the FATS® brand in its end-markets~~facilities. ~~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’~~Law ~~longstanding~~enforcement ~~history~~agencies inuse ~~military~~ simulation training isprimarily afor ~~primary~~judgmental ~~key~~applications tothat ~~FATS’~~address ~~success~~force ~~with~~escalation ~~domestic~~and ~~military~~de-escalation ~~organizations.~~decision-making ~~Seasoned~~in high ~~FATS~~stress ~~managers,~~situations. ~~with~~Domestic ~~significant~~law ~~experience~~enforcement inagencies ~~the~~have ~~markets~~been ~~they cover,~~early ~~oversee~~adopters ~~the~~of ~~Company’s~~simulation ~~domestic~~training, ~~military~~given ~~sales~~the ~~and~~need ~~marketing~~for ~~efforts.~~a ~~FATS~~more ~~deploys~~realistic ~~three~~means ~~full-time sales managers~~ to ~~address~~teach ~~the~~these ~~following~~critical ~~market~~skills. ~~segments:~~

•Federal ~~USMC~~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 ~~USN~~local law enforcement, colleges and universities, and correctional facilities) represent a diverse collection of independent organizations with discrete procurement systems and unique training demands.

•Homeland ~~Army.~~Security

•Homeland ~~USAF~~security is still viewed to be a near-term growth opportunity. As organizational structure is resolved, training requirements are beginning to emerge. We believe FATS is positioned to capitalize on this market condition.

~~These~~Sales ~~three sales managers are supported by field sales representatives, the FATS engineering staff, a core staff of SMEs,~~ and ~~six~~Marketing 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~~FATS’ ~~managers~~longstanding ~~are~~history ~~charged~~in ~~with serving~~simulation ~~current~~training ~~FATS~~is ~~customers. Program managers provide~~ a ~~contact~~primary ~~with~~key ~~each~~to our ~~FATS~~success ~~customer~~ to ~~ensure~~date ~~that~~within ~~customers~~the ~~receive~~global ~~technical~~marketplace. ~~assistance,~~Our ~~product~~field ~~maintenance~~sales ~~support~~representatives, ~~and~~the ~~information about new~~ FATS ~~products.~~engineering ~~The~~staff, ~~Company’s~~a ~~program managers~~core ~~also~~staff ~~probe~~of ~~for~~SMEs, ~~new~~marketing ~~training~~operations ~~requirements~~ and ~~upcoming~~program ~~procurements~~management towork ~~position~~as ~~the~~a ~~Company~~team to ~~provide~~respond ~~upgrades~~to ~~and~~customer ~~replacement~~requirements, ~~training~~design ~~systems.~~the best

~~The~~9 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’Table relationships withof 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. Contents

11Index to Financial Statements

~~FATS serves the domestic law enforcement market (including Canada) primarily on a regional basis. Because~~ ~~each~~approach ~~domestic local~~ and ~~national~~deliver ~~law~~what ~~enforcement~~we ~~has~~believe ~~discrete~~is ~~decision-making~~the ~~processes,~~best ~~budget~~virtual ~~cycles,~~training ~~and~~solution ~~training~~available ~~requirements,~~for the ~~Company~~customer. ~~deploys~~This ~~seven~~team ~~dedicated~~is ~~in-house regional managers~~ charged with ~~developing~~maintaining ~~relationships~~a ~~and creating~~continuous ~~opportunities~~customer ~~within~~dialogue ~~their~~to ~~respective~~uncover ~~territories.~~potential Insales ~~addition,~~leads ~~FATS~~and ~~has~~to ~~one~~ensure ~~in-house~~customer ~~sales~~satisfaction. ~~representative~~FATS’ ~~responsible~~field ~~for~~sales ~~opportunities~~representatives atvisit ~~Federal~~potential ~~law~~customer ~~enforcement~~locations ~~agencies~~to ~~such~~maintain asclose, on-the-ground ~~FBI,~~contact ~~DEA,~~with ~~Postal~~end-users ~~Service,~~ and ~~Government Services Administration Protective Service~~decision-makers.

Management believes that ~~its~~the Company’s sales agents’ experience in the simulation industry, weapons and product expertise, and longstanding relationships with key military and law enforcement decision-makers in their respective territories will enable ~~the~~FATS ~~Company~~ to maintain and expand 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~~Our ~~Company’s~~customer ~~principal~~base ~~customers~~represents ~~historically~~a ~~have~~global ~~been~~footprint ~~in the public sector~~ of ~~the~~significant Uproportion.~~S.,~~ With ~~including~~over ~~the federal~~5,200 ~~state~~fielded ~~and local governments~~platforms, and ~~in the~~over ~~public~~60,000 ~~sectors~~simulated ~~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~~weapons, ~~42.4%~~FATS ~~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~~found tothroughout ~~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~~world. ~~Moreover,~~The ~~U.S.~~following ~~government~~table ~~contracts~~provides ~~and those of many international government customers may generally be terminated for~~ a ~~variety~~partial ofpresentation ~~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~~FATS’s ~~future~~customers: ~~results of operations and financial condition.~~

12U.S. Law Enforcement U.S. Military International Federal Bureau of Investigation United States Marine Corps Canadian Department of National Defense Dominion Virginia Power United States Air Force Australian Defense Forces Drug Enforcement Agency Air National Guard United Kingdom Ministry of Defense South Carolina Department of Corrections Army National Guard Singapore Army and Police Coast Guard Omaha Police Department United States Army Belgium Army Missouri Bureau of Corrections United States Navy Norwegian Police AT Systems, Inc. Italian Army Ministry of Defense Federal Protective Services—GSA Royal Netherlands Land Army San Francisco Police Department United Arab Emirates Forces United States Border Patrol Greek Police United States Department of Justice SAAB/Bofors Amtrak System Support Services Bahrain Defense Force Republic of Yemen New Zealand Army Brazilian Army Commission

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

Domestic Law Enforcement		Domestic Military		International
Federal Bureau of Investigation New York Police Department Drug Enforcement Agency South Carolina Department of Corrections Connecticut Police Officer Standards and Training Council Missouri Bureau of Corrections Texas Department of Public Safety Federal Protective Service—GSA Rhode Island State Police Utah Department of Public Safety United States Immigration and Naturalization Service San Francisco Police Department United States Border Patrol		United States Marine Corps United States Air Force Defense Threat Reduction Agency Air National Guard United States Army United States Navy 7th Army ATC		Canadian Department of National Defense Australian Army United Kingdom Ministry of Defense Republic of Singapore Army Italy Caribinieri Norwegian Police Guardia di Finanza (Italy) Royal Netherlands Land Army United Arab Emirates National Police Republic of Singapore Coast Guard Swedish Police Bahrain Defense Force Republic of Kenya Department of Defense Venezuelan National Police Chinese National Police

Our research and development expenditures totaled approximately $6.8 million, $7.2 million, and $8.2 million in fiscal 2003, 2004, and 2005, respectively. Of these amounts, approximately $4.0 million, $4.3 million, and $4.2 million was funded as engineering under customer specific contracts, resulting in net research and development expenses to FATS of $2.8 million, $2.9 million, and $4.0 million in fiscal 2003, 2004, and 2005, respectively.

InWe ~~fiscal~~believe ~~2003,~~FATS ~~the Company’s~~has ~~five~~a ~~largest~~proven ~~customers~~track ~~accounted~~record ~~for approximately 49.7%~~ of ~~the~~developing ~~Company’s~~new ~~revenues,~~technologies ~~with~~to ~~two~~create ~~customers~~more ~~accounting~~realistic ~~for~~and ~~more~~effective ~~than~~simulated ~~10%~~training ~~of revenues~~environments. In ~~fiscal 2002, the Company’s five largest customers accounted for~~ ~~approximately 50.5% of the Company’s revenues~~addition, ~~with~~FATS ~~four~~makes ~~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~~substantial ~~customer~~investment in ~~one year may not be a significant customer in a subsequent year. In order to reach its growth objectives,~~ the ~~Company~~continuous ~~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~~10 ~~and Development~~

ResearchTable 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. Contents

FATSIndex has a proven track record of developing new technologies to createFinancial 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 Statements

13 improvement of its existing systems and products, which drive upgrades. Weapons expertise and customer understanding provided by SMEs are key ingredients in the Company’s research and development efforts. Our SMEs work with engineers to develop technology applications based on specific customer desires and needs.

~~understanding~~In ~~provided~~order byto ~~SMEs~~maintain ~~are~~our ~~key~~market ~~ingredients~~position, inFATS ~~the~~is ~~Company’s~~engaging in research and development ~~efforts.~~in ~~SMEs~~the ~~work~~following ~~with~~areas: ~~engineers to develop technology based on specific customer desires and needs.~~

In• ~~order~~Improving ~~to maintain~~visual ~~its~~quality ~~market~~for ~~position,~~both ~~the~~3D ~~Company~~graphic ~~is engaging in research~~ and ~~development~~digital ~~in the following areas:~~ video.

• ~~Improving~~Developing ~~visual~~simulation ~~quality~~software ~~for~~that ~~both~~supports 3Dmore ~~graphic~~realistic ~~and~~training ~~digital video~~scenarios.

• ~~Developing~~Expanding ~~simulation~~FATS’ ~~software~~technology ~~that~~to ~~supports~~support ~~more~~the ~~realistic~~new training ~~scenarios~~needs for operations in urban terrain.

• ~~Expanding~~Enhancing ~~FATS~~radio ~~technology~~frequency towireless ~~support~~weapons ~~the~~utilizing ~~new~~Bluetooth ~~training needs for operations in urban terrain~~technology.

•The ~~Enhancing~~Company’s RFresearch ~~wireless~~and ~~weapons~~development ~~utilizing~~efforts ~~Bluetooth~~are ~~technology~~divided into four separate disciplines: mechanical, electrical, training, and audio-visual.

• ~~Extending~~Mechanical Research and Development: Mechanical research and development consists of the ~~live~~design ~~fire~~and ~~training~~development ~~system~~of ~~product~~specialized ~~line~~assemblies and simulated weaponry. By combining mechanical engineering with specialized sensing mechanisms and weapons technology, FATS is able to ~~include~~produce ~~paper~~a ~~live~~customized ~~fire~~simulated ~~screens~~weapon.

~~The~~• ~~Company’s~~Electrical Research and Development: Electrical research and development ~~efforts~~combines ~~are~~hardware ~~divided~~and ~~into~~software ~~four~~engineering ~~separate~~with ~~disciplines:~~electro-optical ~~mechanical,~~technologies to produce the system platform and application programs. FATS electrical research and development capabilities include real-time system software and hardware design and development, ~~training~~ system integration, laser optics, ballistic modeling and ~~audio~~calculation, interactive digital video, interactive 3D computer graphics, networking of simulation systems using high-~~visual.~~level architecture, 3D target and terrain modeling, and motion simulation.

• ~~Mechanical~~Training Research and Development: ~~Mechanical~~Training research and development ~~consists~~focuses ofon the ~~design~~interpretation and ~~development~~translation of ~~specialized~~customer ~~assemblies~~training requirements into quantifiable objectives and ~~simulated~~the ~~weaponry.~~development Byof ~~combining~~simulation ~~mechanical~~programs ~~engineering~~to ~~with~~meet ~~specialized~~those ~~sensing~~objectives. ~~mechanisms~~Experienced weapon training and ~~weapons~~shooting ~~technology,~~specialists ~~FATS~~with isextensive ~~able~~military toor ~~produce~~law aenforcement ~~customized~~related ~~simulated~~experience ~~weapon~~staffs FATS’ professional training department.

• ~~Electrical~~Audio-Visual Research and Development: ~~Electrical~~Audio-visual research and development ~~combines~~focuses ~~hardware~~on ~~and~~the ~~software~~production ~~engineering~~of ~~with~~specialized ~~electro~~audio-~~optical~~visual ~~technologies to produce the system platform and application~~ programs. ~~FATS electrical research~~ and ~~development~~a ~~capabilities~~range ~~include~~of ~~real-time~~media ~~system~~support ~~software and hardware design and development~~activities, ~~system~~from ~~integration,~~full ~~laser~~production ~~optics, ballistic modeling and calculation, interactive digital video, interactive 3D computer graphics, networking~~ of ~~simulation~~training ~~systems~~programs ~~using~~to ~~HLA,~~customer 3Dassistance ~~target~~in ~~and~~user-produced ~~terrain~~programs ~~modeling,~~that ~~and~~create ~~motion~~realistic ~~simulation~~scenarios.

•Supplementing ~~Training~~the ~~Research~~technical ~~and~~capabilities ~~Development:~~of ~~Training research and development focuses on~~ the ~~interpretation~~Company ~~and~~is ~~translation~~a cadre of ~~customer~~strategic ~~training~~relationships ~~requirements~~with ~~into~~what ~~quantifiable~~we ~~objectives~~believe ~~and~~to be the ~~development~~“best of ~~simulation programs to meet those objectives~~breed” suppliers. ~~FATS’~~We ~~training~~believe ~~department~~this iscombination ~~staffed~~of byinternal ~~experienced weapon training~~ and ~~shooting~~external ~~specialists~~capabilities ~~with~~solidifies ~~extensive~~leading ~~military~~edge ortechnology ~~law~~for ~~enforcement experience~~FATS.

•Manufacturing ~~Audio-Visual~~Operations Research and Development: Audio-visual research and development focuses on the production of specialized audio-visual programs and a range of media support activities, from full production of training programs to customer assistance in user-produced programs that create realistic scenarios.

FATS’ manufacturing operations are conducted primarily at our Atlanta facility and, to a limited extent, at our foreign subsidiaries’ facilities. Manufacturing ~~Operations~~operations are divided into two groups: systems manufacturing and weapons manufacturing.

~~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.~~Manufacturing 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~~manufacturing, which is the assembly of FATS hardware and software components into a single platform, is performed at our Atlanta facility. A select few suppliers or systems integrators support this process. The receipt of sub-assemblies and components is accomplished through a just-in-time delivery process. Pre-established quality requirements have been identified through supplier source inspection consistent with a comprehensive quality assurance plan based on industry-recognized standards.

~~Systems~~11 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.

14Table of Contents

WeaponsIndex Manufacturingto Financial Statements

~~Weapons~~Due ~~manufacturing~~to ~~involves~~our ~~the~~internal ~~production~~efficiencies ~~of simulated firearms~~ and ~~non-lethal~~external ~~simulators~~capabilities, bywe ~~either~~believe ~~removing~~FATS’ ~~firing~~production ~~mechanisms~~capacity ~~and other devices from~~is ~~live~~adequate ~~weapons~~to orsupport ~~assembling~~future ~~simulators from conversion kits~~growth. ~~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’~~Weapons ~~combined~~Manufacturing ~~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~~The ~~Improvements~~production of FATS weapon simulators is also performed in our Atlanta facility. The process of “de-milling” live weapons into a simulated training product is accomplished through a combination of various sub-assemblies complemented by the machining of critical parts. The manufacturing process of the FATS simulator is considered a “core competency” thus requiring a focused vertically integrated effort. Employees assigned to these work cells are highly trained and considered to be experts not only in the field of weaponry but also mechanical assembly processes.

~~Beginning~~Operational inImprovements 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~~The ~~its~~standard ~~reorganizational~~operating ~~efforts~~procedure for manufacturing FATS products is the utilization of “lean manufacturing” techniques. By implementing state of the art processes, FATS has moved from a traditional “batch” production ~~process~~ to a more efficient “pull” process. ~~Systems~~ ~~manufacturing~~Work ~~work~~ cells have been ~~streamlined,~~established ~~combining~~in ~~electrical~~both systems ~~assemblers~~set-up ~~with~~and ~~hardware~~the ~~technicians,~~weapons ~~thus~~assembly ~~creating~~areas. ~~the~~The ~~opportunity~~use toof ~~deliver~~common tools and processes combined with a ~~complete~~cross ~~simulator~~trained ~~system~~workforce inhas ~~conjunction~~not ~~with~~only ~~the~~increased ~~appropriate~~efficiencies, ~~weapon~~but ~~simulator~~elevated our quality standards. A continuous improvement process has enhanced the ~~by-product~~effectiveness of ~~this~~the ~~process~~manufacturing ~~was~~group athus ~~reduction~~reducing intime ~~utilized~~to ~~physical~~market ~~space~~deliveries. ~~and~~On anaverage, ~~improvement~~product incycle ~~flow~~times ~~through~~have ~~the~~been ~~manufacturing~~reduced ~~area~~from 30 to 50 percent from mid-2002 to the present.

~~Operational~~Quality ~~improvements~~has ~~have~~become ~~also~~a ~~been~~built-in-process ~~made~~monitored inby ~~the~~key ~~weapons~~performance ~~assembly~~metrics ~~department~~and ~~through~~a ~~the~~cross-functional ~~combination~~quality ofcouncil. Performance ~~the~~results ~~hardware~~are ~~assembly~~visible ~~and~~on ~~electrical~~a ~~wiring groups~~real intime ~~one~~basis ~~location~~making corrective action a part of daily routines. ~~Personnel~~This ~~have~~“closed ~~been~~loop” ~~cross-trained~~system of documenting problems which lead to ~~perform~~engineering ~~multiple~~change ~~tasks~~notices ~~associated~~and ~~with~~corrective ~~weapons~~action ~~assembly~~plans, serves to reinforce continuous improvement.

~~Product~~Numerous ~~Support~~adjustments have been made to the management of the supply chain with improvements being realized in supplier on time delivery and in received quality. The improvements have led to the creation of several strategic supply agreements which also address ongoing cost improvement through collaborative FATS and supplier value engineering. The Company continues to evaluate in-house competencies or core processes that ultimately lead to sound decisions with respect to improving operating efficiencies.

~~The~~Product ~~Company~~Support 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~~FATS is committed to providing outstanding customer service. We deliver global after-sales customer service via ~~Operating~~strategically ~~System;~~located ~~Raw~~Customer ~~Materials~~Service ~~and~~Departments ~~Suppliers~~that are centrally controlled from our corporate headquarters in Atlanta. Customer Service Technicians/Engineers are located in:

~~The~~• ~~Company currently~~Atlanta ~~purchases~~for ~~from~~customers ~~numerous~~in ~~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~~USA ~~earlier model simulators use a software operating system known as OS-9, which is an operating system developed~~ and ~~owned~~Latin ~~by Microware Corporation~~America. ~~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~~

15• Montreal for Canadian customers.

of• ~~the~~Lincolnshire, ~~license~~UK ~~has~~and ~~had~~Waardenburg, ~~no effect on the Company’s business operations or financial condition.~~ The ~~Company~~Netherlands ~~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~~in ~~Company believes that there are viable alternative sources for all of its raw materials. In addition~~Europe, the ~~Company~~Middle ~~has~~East ~~a sophisticated machine shop in which it can convert actual weapons into simulated weapons~~ and ~~produce certain weapon and simulator parts~~Africa. ~~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~~ • Albury, Australia and Singapore for customers in the Asia/Pacific region.

AsIn ofaddition ~~March~~to ~~31,~~technical ~~2003~~support, ~~the~~all ~~Company~~FATS ~~had~~Customer aService ~~backlog~~Departments ~~of approximately~~offer ~~$64.3~~accessories, ~~million~~parts, ~~compared~~system ~~with~~upgrades/enhancements ~~$59~~and training.6 ~~million~~Also, asthe majority of ~~March~~our ~~31,~~Customer ~~2002.~~Service ~~The~~Departments ~~Company’s~~store ~~backlog~~government asowned ofspare ~~March~~equipment ~~31,~~and ~~2003 consisted of $50~~components.7 ~~million~~Depot ~~from international~~ customers, ~~$13.0~~include ~~million~~the ~~from~~ U.S. ~~military~~Marine ~~customers~~Corps, ~~and~~the ~~$0.6 million from~~ U.S. ~~law~~Navy, ~~enforcement~~the ~~customers. Management expects that approximately $39.3 million of backlog will be delivered in fiscal 2004. Contracts with~~ U.S. ~~and~~Air ~~other~~National ~~governments~~Guard, ~~may generally be terminated by~~ the ~~customer,~~Canadian inDepartment ~~whole~~of orNational ~~in part~~Defense, ~~for default~~the orAustralian ~~convenience~~Defense ifForce, ~~such termination would be in~~ the ~~best~~British ~~interest~~Ministry of ~~the~~Defense ~~customer.~~and ~~Accordingly,~~the ~~there~~Royal ~~can~~Netherlands beArmy. noDepot ~~assurance~~support ~~that~~includes ~~the~~shipping ~~Company’s~~spare ~~backlog~~equipment ~~will~~and ~~result~~components into ~~future~~customers ~~revenues.~~within ~~However,~~24 ~~these~~hours ~~contracts~~of ~~generally~~notification ~~provide for reimbursement~~ of ~~actual~~ ~~cost~~a ~~incurred~~weapon ~~through~~or ~~the~~system ~~date~~failure. ofOur ~~termination.~~Customer

~~A summary~~12 ~~of changes in the Company’s backlog for the years ended March 31, 2003, 2002, and 2001 is as follows (in thousands):~~

	Years Ended March 31
	2003			2002			2001
Backlog—beginning of year	$	59,618		$	55,440		$	25,809
New bookings		70,853			63,235			71,132
Revenue		(66,125	)		(59,057	)		(41,501	)
Backlog—end of year	$	64,346		$	59,618		$	55,440

CompetitionIndex to Financial Statements

~~The~~ Service ~~recent~~Departments ~~increase~~offer inwebsite, ~~sales~~hotline and ~~acceptance~~after ofhours ~~small~~support, ~~arms~~and ~~simulation products~~are ~~has~~committed ~~brought~~to ~~about~~rapid anturnaround ~~increase~~times inwhen ~~competition~~customers’ ~~from~~equipment ~~both~~is ~~domestic~~received for ~~and international companies~~repair. ~~The~~All ~~Company~~repairs ~~competes~~conducted ~~with~~by ~~divisions~~FATS ortechnicians/engineers ~~subsidiaries~~undergo ofa ~~larger~~final ~~companies~~quality ~~solely~~test ~~dedicated~~prior to ~~simulation~~being ~~for~~shipped ~~sales~~back ofto the ~~Company’s small and supporting arms simulation products~~customer.

InProprietary ~~the~~Operating 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 UKSystem; ~~Cergy~~Raw ofMaterials ~~France; Thales Air Defence of Northern Ireland, formerly Shorts,~~ and ~~Thales~~Suppliers ~~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.~~

InThe ~~the~~Company ~~U.S.~~currently ~~law~~purchases ~~enforcement~~raw materials from numerous suppliers on both a competitive bid and ~~commercial~~long-term ~~component~~contract basis. We believe there are viable alternative sources for all of ~~the~~our ~~market~~raw materials. In addition, FATS 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 us with the ~~Company’s~~flexibility to produce a large portion of our principal ~~competitors~~components ~~include,~~if ~~among~~they ~~others,~~become ~~Advanced~~unavailable ~~Interactive~~or ~~Systems~~it ~~and~~becomes ~~I.E.S.,~~economically ~~Incorporated~~advantageous to do so.

~~The~~Backlog ~~international law enforcement component of the market has also seen an increase in competition from small European companies.~~

~~The~~As ~~growing~~of ~~awareness~~March 31, 2005, the Company had a backlog of ~~simulation~~approximately ~~budgets,~~$58.4 ~~combined~~million compared with ~~the~~$59.3 ~~competitive nature~~million as of ~~the~~March ~~marketplace~~31, ~~have~~2004. ~~contributed~~Our tobacklog ~~the~~as ~~formation~~of March 31, 2005 consisted of ~~teaming~~$39.5 ~~arrangements~~million byfrom ~~competitors~~international customers, ~~that~~$17.5 ~~present~~million ~~potent~~from ~~competitive~~U.S. ~~challenges~~military customers and $1.4 ~~Many~~million from U.S. law enforcement customers. Management expects that approximately $40.2 million of ~~the~~backlog ~~Company’s~~will ~~current~~be delivered in fiscal 2006. The U.S. and ~~potential~~other ~~competitors~~government ~~have~~customers ~~significantly~~may generally ~~greater~~terminate ~~financial~~contracts, in whole or in part, for default or convenience if such termination would be in the best interest of the customer. However, these contracts generally provide for reimbursement of actual cost incurred plus a reasonable ~~technical~~profit ~~and~~through ~~marketing~~the ~~resources~~date ~~than~~of ~~FATS~~termination.

16A summary of changes in the Company’s backlog for the years ended March 31, 2003, 2004, and 2005 is as follows (in thousands):

Employees


	Years Ended March 31
	2003			2004			2005
	(Restated)			(Restated)
Backlog - beginning of year	$	59,618		$	64,346		$	59,310
New bookings		71,133			68,053			87,467
Revenue		(66,405	)		(73,089	)		(88,366	)

Backlog - end of year	$	64,346		$	59,310		$	58,411

AsCompetition 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~~The ~~Contracts~~recent increase in sales and ~~Regulation~~acceptance of small arms simulation products has brought about an increase in competition from both domestic and international companies. FATS faces a number of major competitors including Thales Elektronik Systeme GMBH, Cubic Simulation Systems, Inc., Advanced Interactive Systems, Inc. and I.E.S., Incorporated. We believe that none of these competitors offers the entire scope of training capability as does FATS. However, our competitors each possess marksmanship and judgmental training capability and have been very aggressive in the marketplace. FATS does not take the competition lightly and continues to enhance the existing product portfolio that allows the Company to be marketed as a leading provider of virtual training solutions.

~~Sales~~The togrowing ~~public~~awareness ~~sector customers are subject to a multiplicity~~ of ~~detailed regulatory~~simulation ~~requirements~~budgets, ~~and~~combined ~~public~~with ~~policies that may affect~~ the ~~ability~~competitive nature of the ~~Company~~marketplace, tohave ~~increase~~contributed orto ~~even maintain such sales. In particular,~~ the ~~choice~~formation of ateaming ~~contractor~~arrangements by acompetitors ~~customer~~that ~~may~~present bepotential ~~affected~~competitive bychallenges. ~~the~~Many ~~size~~ of the ~~contractor, the place of manufacture of the contractor~~Company’s ~~products~~current orand ~~whether~~potential ~~the~~competitors ~~contractor~~have issignificantly ~~given~~greater ~~preferential consideration based upon socioeconomic factors. Furthermore~~financial, ~~contracts with government agencies are conditioned upon the continuing availability of public~~ ~~funds,~~technical ~~which in turn depends upon lengthy~~ and ~~complex~~marketing ~~public~~resources ~~budgetary~~than ~~procedures whose outcome is difficult to predict~~FATS. ~~In particular, contracts with the U.S. Government are conditioned upon the continuing availability of Congressional appropriations.~~

~~The~~Employees ~~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,~~As ~~any contractor who is suspected~~ of, orMarch ~~found to have engaged in~~31, ~~commission of fraud or a criminal offense in connection with a government contract or subcontract~~2005, ~~a serious violation of~~ the ~~terms~~Company ofand aits ~~government~~subsidiaries ~~contract~~employed ~~or subcontract~~418 employees, ~~unfair trade practices, or any other offense indicating moral turpitude or a lack~~ of ~~business~~which ~~integrity~~312 orwere ~~business~~employed ~~honesty~~at ~~faces~~our ~~the~~corporate ~~possibility~~headquarters ~~of being~~in ~~suspended or debarred from all further government contracting~~Atlanta. ~~The~~Unions ~~decision~~represent tonone ~~suspend or debar a contractor is generally at the discretion~~ of the ~~government~~Company’s employees. ~~Any~~We ~~such~~consider ~~suspension~~relations orwith ~~debarment~~our ~~could~~employees ~~have~~to abe ~~material~~satisfactory ~~adverse~~with ~~effect~~employee onturnover ~~the Company’s~~well ~~future~~below ~~results~~industry ~~of operations and financial condition~~averages. ~~See Legal Proceedings.~~

~~The~~13 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.

TheTable 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. Contents

17Index to Financial Statements

~~The~~Government ~~Company~~Contracts ~~has a license from the U.S. Treasury Department’s Bureau of Alcohol, Tobacco~~ and ~~Firearms~~ ~~(ATF)~~Regulation 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~~Sales ~~FATS~~to ~~simulation~~public ~~systems~~sector ~~use~~customers ~~laser-emitting~~are ~~devices~~subject to ~~locate~~detailed ~~the~~regulatory ~~user’s~~requirements ~~aiming~~and ~~point~~public inpolicies ~~relation~~that tomay ~~the~~affect ~~target. Such products must be~~the ~~manufactured~~ability ~~and~~of ~~operated~~the inCompany ~~accordance~~to ~~with~~increase ~~safety~~or ~~standards~~even ~~adopted~~maintain tosuch ~~protect human eyesight~~sales. In ~~the United States~~particular, ~~such~~the ~~standards~~choice ~~are included as part~~ of ~~Food~~a ~~and~~contractor ~~Drug~~by ~~Administration~~a ~~regulations~~customer ~~currently~~may ~~administered~~be affected by the ~~Center~~size ~~for~~of ~~Devices and~~the ~~Radiological~~contractor, ~~Health.~~the ~~Systems~~place ~~sold~~of tomanufacture ~~many~~of ~~international~~the ~~customers,~~contractor’s ~~including~~products ~~those~~or inwhether ~~Europe~~the contractor ~~and~~is ~~Canada,~~given ~~however,~~preferential ~~must~~consideration ~~comply~~based ~~with~~upon ~~international~~socioeconomic ~~standard~~factors. ~~IEC 825-1~~Furthermore, ~~which~~contracts ~~contains~~with ~~more~~government ~~rigorous~~agencies ~~criteria~~are ~~than~~conditioned ~~the~~upon ~~present U.S. standards. Depending on~~ the ~~amount~~continuing availability of ~~laser~~public ~~energy emitted~~funds, ~~room~~which ~~safety~~in ~~precautions,~~turn ~~warning~~depends ~~signs~~upon lengthy and ~~labels,~~complex ~~special~~public budgetary ~~shut-off~~procedures ~~devices,~~whose ~~special~~outcome ~~training~~is ~~for~~difficult ~~personnel~~to ~~and~~predict. ~~related~~In ~~safety~~particular, ~~measures~~contracts ~~may~~with bethe ~~required,~~U.S. ~~which~~Government ~~increase~~are ~~costs~~conditioned ~~and~~upon ~~can~~the ~~create~~continuing ~~administrative concerns~~availability ~~for~~of ~~the~~Congressional ~~Company’s customers~~appropriations.

~~Item~~The U.S. Government or the relevant agency may generally terminate government 2contracts, in whole or in part for its convenience, if such termination would be in the best interest of the U. ~~Properties~~S. Government.

~~FATS’~~Furthermore, ~~Suwanee facility~~any ~~houses~~contractor ~~most~~who ofis ~~the~~suspected ~~Company’s~~of, ~~manufacturing~~or ~~operations~~found asto ~~well~~have asengaged ~~its~~in, ~~corporate~~the ~~headquarters.~~commission ~~The~~of ~~Suwanee~~fraud ~~facility~~or ~~occupies~~ a ~~98,100~~criminal ~~square-foot~~offense ~~building~~in ~~that~~connection ~~resides~~with ona government ~~eight~~contract ~~acres.~~or ~~The~~subcontract, ~~United~~a ~~Kingdom~~serious ~~subsidiary~~violation ~~has~~of the ~~ability~~terms ~~to produce~~of a ~~broad~~government ~~range~~contract ofor ~~FATS® systems~~subcontract, ~~giving~~unfair ~~FATS the~~trade ~~ability~~practices, toor ~~shift~~any ~~production~~other ~~based~~offense onindicating ~~capacity~~moral ~~constraints~~turpitude inor ~~Suwanee.~~a ~~FATS’~~lack ~~heavy~~of ~~weapons~~business ~~systems~~integrity ~~are~~or ~~manufactured~~business inhonesty faces the possibility ~~facility~~of ~~located~~being insuspended ~~Montreal,~~or ~~Canada.~~debarred ~~Management~~from ~~believes~~all ~~that~~further ~~the~~government ~~Company~~contracting. ~~has~~The ~~adequate~~decision ~~manufacturing capacity~~ to ~~support~~ ~~projected~~suspend ~~growth,~~or ~~and~~debar ~~that~~a ~~capacity~~contractor ~~can~~is begenerally ~~increased~~at ~~with~~the ~~minimal~~discretion ~~capital~~of ~~expenditures~~the government. ~~The~~Any ~~Company’s~~such ~~subsidiaries~~suspension ~~located~~or indebarment ~~the~~could ~~United~~have ~~Kingdom,~~a ~~the~~material ~~Netherlands,~~adverse ~~Australia,~~effect on ~~and~~the ~~Canada~~Company’s ~~support~~future ~~sales,~~results ~~service,~~of operations and ~~training~~financial ~~activities for FATS products~~condition.

Facility	Location	Owned or Leased	Square Footage	Lease Expiration	Month of Expiration
FATS, Inc.	Suwanee,Georgia	Leased	98,100	2008	May
FATS, LTD	Lincolnshire,England	Leased	12,000	2004	April
FATS, B.V.	Waardenburg,Netherlands	Leased	4,800	2004	August
Simtran	Montreal,Canada	Leased	25,129	2012	February
FATS Australia	Lavington,Australia	Leased	10,005	2005	February

The type of government contracts awarded to the Company in the future may affect our financial performance. A number of our 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 or as sole source contracts may affect our profit margins.

~~The~~We ~~Company~~are ~~has~~subject ~~a lease~~to atexport ~~its~~licensing ~~Netherlands~~jurisdiction ~~based~~of ~~subsidiary,~~the ~~FATS~~U.S. BDepartment of State and the U.VS., ~~which~~Department ~~expires~~of inCommerce ~~August~~with ~~2004;~~respect to the ~~Company~~temporary ~~intends~~or topermanent ~~renew~~export of certain of FATS’ products and the ~~lease~~import ~~with~~of certain other products based on the ~~same~~Arms ~~terms~~Export Control Act and ~~conditions~~the asExport inAdministration Act which, though expired, is carried out by Presidential Executive Order issued under the ~~expiring~~auspices ~~lease~~of the International Emergency Economic Powers Act. ~~The~~In ~~Company~~addition ~~has~~to aapplication ~~lease~~to attransfer ~~its~~information ~~U.K.~~and ~~based~~products ~~subsidiary~~to customers, ~~FATS~~such ~~U.K.,~~regulations also may from ~~which~~time ~~expires~~to intime ~~April~~require ~~2004.~~a ~~The~~license for the transfer of technical information from the Company isto ~~contemplating~~its ~~relocating~~foreign subsidiaries, such as information necessary to enable a ~~larger~~subsidiary ~~facility~~to modify simulated weapons for use in systems being supplied by the subsidiary ~~same~~to ~~area~~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, ~~however~~export licenses and other authorizations may be revoked, ~~that~~suspended ~~has~~or ~~yet~~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 ~~determined~~taken for, among other reasons, commission of civil violations and criminal offenses in connection with exports.

~~The~~We ~~Company~~have ~~believes~~a ~~its~~license ~~manufacturing,~~from ~~warehouse~~the U.S. Justice Department’s Bureau of Alcohol, Tobacco and ~~office~~Firearms ~~facilities~~(ATF) ~~are~~to ~~suitable,~~import destructive ~~adequate,~~devices and ~~afford~~certain ~~sufficient~~other ~~manufacturing~~materials. ~~capacity~~This ~~for~~license ~~current~~ also authorizes us to be a dealer in regulated firearms and ~~anticipated~~other ~~requirements~~destructive devices. FATS also has a license from ATF that authorizes it to be a manufacturer of destructive devices and certain other materials. The Company ~~believes~~is itregistered ~~maintains~~with ~~adequate~~the ~~insurance~~Director ~~coverage~~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 ~~its~~failure ~~properties~~to ~~and~~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 ~~contents~~jurisdictions of incorporation.

18Certain 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

~~Item~~14 ~~3. Legal Proceedings~~

PursuantTable 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. Contents

The CompanyIndex isto occasionallyFinancial 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. Statements

~~Item~~ 4protect human eyesight. ~~Submission~~ In the United States, such standards are included as part of ~~Matters~~Food and Drug Administration regulations currently administered by the Center for Devices and Radiological Health. Systems sold to amany ~~Vote~~international customers, including those in Europe and Canada, however, must comply with international standards, which contain more rigorous criteria than the present U.S. standards. Depending on the amount of ~~Security~~laser ~~Holders~~energy emitted, room safety precautions, warning signs and labels, and 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.

NoSarbanes-Oxley Act ~~matters were submitted to a vote~~ of ~~the~~2002 ~~security holders of the Company during the fourth quarter of the fiscal year.~~

~~Item~~On 4AJuly 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive ~~Officers~~Officer and Chief Financial Officer of the ~~Registrant~~reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC. Because FATS’ Common Stock is registered with the SEC, it is currently subject to this Act.

~~Ronavan~~Since ~~Mohling, age 61, a Director of~~ the ~~Company~~Sarbanes-Oxley ~~since~~Act ~~October 2000,~~ was ~~elected~~enacted ~~Chairman~~in ~~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~~SEC ~~East,~~ and ~~Africa from 1988 to 1998. From 1995 to 1998, he was~~ the ~~Vice~~various ~~President~~securities ofexchanges ~~Business~~issued ~~Development,~~new ~~responsible~~regulations ~~for~~affecting ~~acquisitions and divestitures, for~~ the ~~company~~Company’s corporate ~~Consumer~~governance ~~Medicines Division~~ and, ~~from~~heightening ~~1992~~its todisclosure ~~1995~~requirements. ~~was~~Among ~~President of~~ the ~~Consumer~~many ~~Products~~new ~~Division~~changes ~~with~~are ~~responsibility~~enhanced ~~for the~~proxy ~~regions~~statement ofdisclosures ~~Europe,~~on ~~the~~corporate ~~Middle East~~governance, ~~and~~stricter ~~Africa.~~independence ~~From~~requirements ~~1972~~for ~~to 1988, Mr. Mohling served in~~ the ~~capacities~~Board of ~~President~~Directors and ~~Vice-President~~its ~~with~~committees, ~~Schering-Plough~~and required ~~Corporation~~posting ~~where~~of hevarious ~~was~~SEC ~~responsible~~reports ~~for~~on ~~overseeing~~ the ~~company~~Company’s ~~Consumer Products Division~~website.

~~David W. McGrane, age 52, was named Chief~~ ~~Operating~~Item ~~Officer of the Company in July 2002~~2. Properties 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~~FATS’ A.Atlanta ~~Morelli~~facility, ~~age~~located 54in Suwanee, ~~has~~Georgia, ~~served~~houses asmost ~~Chief~~of ~~Financial~~our ~~Officer~~manufacturing ~~and~~operations ~~Treasurer~~as ~~since~~well ~~March~~as ~~1999.~~our Mrcorporate headquarters. ~~Morelli~~The ~~previously served~~Suwanee asfacility ~~Chief~~occupies ~~Operating~~a ~~Officer~~98,100 ~~from~~square-foot ~~October~~building ~~2000~~that toresides ~~May~~on ~~2002~~eight ~~and~~acres. asIn addition, ~~Corporate~~our ~~Controller~~United ~~from~~Kingdom ~~September~~subsidiary ~~1996~~facility tohas ~~March~~the ~~1999.~~ability ~~Prior~~ to ~~joining~~produce ~~the~~a ~~Company,~~broad ~~Mr.~~range ~~Morelli~~of ~~served~~FATS® assimulated ~~Financial~~weapons, ~~Liaison~~giving ~~from~~FATS ~~January~~the ~~1996~~ability to ~~August~~shift ~~1996~~production ~~with~~based ~~General Dynamics~~on ~~during~~capacity ~~its~~constraints ~~acquisition~~in ofSuwanee. ~~Teledyne~~Management ~~Continental~~believes ~~Motors,~~that athe ~~major~~Company ~~weapons~~has ~~defense~~adequate ~~contractor.~~manufacturing ~~From~~capacity ~~April 1990~~ to support ~~December~~projected ~~1995~~growth, ~~Mr.~~and ~~Morelli~~that ~~served~~capacity ascan ~~Division~~be ~~Controller~~increased with ~~Sparton~~minimal ~~Electronics,~~capital ~~Inc~~expenditures., anThe ~~electronics-manufacturing~~Company’s ~~firm~~subsidiaries located in the ~~defense~~ ~~industry.~~United ~~From~~Kingdom, ~~1979~~the ~~to 1990~~Netherlands, ~~Mr. Morelli served as Controller for Fairchild-ASD~~Australia, ~~an aircraft manufacturing~~ and ~~modification~~Canada ~~company.~~support ~~From 1974 to 1979~~sales, ~~Mr. Morelli served as Finance Manager with Fairchild-Republic~~service, anand ~~aircraft~~training ~~manufacturing~~activities for ~~company~~FATS products.

19The following table provides additional information regarding our facilities:

PART II


Facility	Location	Owned or Leased	Square Footage	Lease Expiration	Month of Expiration
FATS, Inc.	Suwanee, Georgia	Leased	98,100	2008	May
Firearms Training Systems Limited	Lincolnshire, UK	Leased	12,000	2005	July
Firearms Training Systems Netherlands, B.V.	Waardenburg, Netherlands	Leased	4,800	2005	August
FATS Canada, Inc.	Montreal, Canada	Leased	25,129	2007	February
Firearms Training Systems Australia Pty Ltd.	Lavington, Australia	Leased	10,000	2010	January

~~Item~~15 ~~5. Market Common Equity and Related Stockholder Matters~~

TheTable 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. Contents

TheIndex tableto showsFinancial the high and low closing prices of the common stock during the period from April 1, 2001 through the year ended March 31, 2003: Statements

~~Quarterly~~The ~~Stock~~Company ~~Price~~had ~~Range~~a lease at its U.K. based subsidiary, Firearms Training Systems Limited, which expired in July 2004 and is currently on a month-to-month basis. The Company is negotiating an extension of the lease through June 2009. The Company has a lease at its Netherlands based subsidiary, Firearms Training Systems Netherlands, B.V., which expires in August 2005. The lease automatically renews each year at the Company’s option and the Company intends to renew the lease with the same terms and conditions as in the expiring lease.

	High	Low
Fiscal 2002
First Quarter	0.23	0.14
Second Quarter	0.60	0.18
Third Quarter	0.54	0.23
Fourth Quarter	0.64	0.27
Fiscal 2003
First Quarter	0.88	0.51
Second Quarter	0.79	0.35
Third Quarter	0.56	0.40
Fourth Quarter	0.54	0.43

We believe FATS maintains adequate insurance coverage for its properties and their contents.

~~The Company did not~~ ~~pay~~Item ~~cash dividends on the common stock during the two most recently completed fiscal years~~3. Legal ~~The~~Proceedings 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.

20The 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 FATS that would have a materially adverse effect on our financial position, liquidity, or results of operation.

Item 64. ~~Selected~~Submission ~~Financial~~of ~~Data~~Matters to a Vote of Security Holders

~~The~~No ~~selected~~matters ~~consolidated~~were ~~financial~~submitted ~~data~~to ~~set~~a ~~forth~~vote ~~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~~security ~~statements~~holders of the Company ~~included~~during ~~elsewhere in this Report and referred to in~~ the ~~Index~~fourth toquarter ~~Financial Statements~~of ~~(together with~~ the ~~notes~~fiscal ~~and~~year ~~other~~covered ~~reports~~by ~~relating~~this toAnnual ~~such financial statements)~~Report.

	Year Ended March 31
	2003			2002			2001			2000			1999
	(Amounts in thousands, except per share amounts)
Statement of Operations Data:
Revenue	$	66,125		$	59,057		$	41,501		$	38,889		$	55,514
Gross margin		21,169			17,450			6,475			7,194			19,331
Gross margin %		32.0	%		29.5	%		15.6	%		18.5	%		34.8	%
Operating expenses		14,696			17,895			18,403			18,269			16,329
Operating income (loss)		6,473			(445	)		(11,928	)		(11,075	)		3,002
Interest (income) expense		114			(220	)		4,444			8,056			7,316
Other (income) expense		(104	)		61			257			325			400
Income (loss) before provision for income taxes		6,463			(286	)		(16,629	)		(19,456	)		(4,714	)
Provision for income taxes		(867	)		(4,892	)		(1,052	)		(808	)		(1,700	)
Net income (loss) before preferred stock adjustments		7,330			4,606			(15,577	)		(18,648	)		(3,014	)
Preferred stock adjustments		298			270			(1,469	)		254			93
Net income (loss) attributable to common stockholders	$	7,032		$	4,336		$	(14,108	)	$	(18,902	)		(3,107	)
Earnings per common share
Basic	$	0.10		$	0.06		$	(0.26	)	$	(0.91	)	$	(0.15	)
Diluted	$	0.10		$	0.06		$	(0.26	)	$	(0.91	)	$	(0.15	)
Balance Sheet Data:
Working capital	$	23,976		$	20,957		$	15,893		$	21,020		$	27,010
Total assets	$	42,806		$	36,351		$	32,173		$	41,575		$	60,150
Long-term debt	$	39,858		$	42,977		$	43,990		$	73,772		$	72,200
Redeemable preferred stock	$	27,617		$	27,319		$	27,049		$	—		$	—
Stockholders’ deficit	$	42,494		$	49,802		$	54,086		$	48,201		$	29,633

Item 7. Management’sTable Discussion and Analysis of Financial Condition and Results of Operations Contents

ThisIndex 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 futureFinancial 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. Statements

~~Critical~~ PART ~~Accounting~~II ~~Policies and Estimates~~

~~The~~ Item ~~following~~5. Market ~~discussion~~for ~~and~~Registrant’s ~~analysis~~Common ofEquity, ~~our~~Related ~~financial~~Stockholder ~~condition~~Matters and ~~results~~Issuer ofPurchases ~~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.~~Equity ~~The~~Securities ~~preparation of these financial statements requires us to make~~

21The common stock of Firearms Training Systems, Inc. is traded on the Over-The-Counter Bulletin Board (OTC:BB) under the symbol “FATS”. As of July 6, 2005, there were 180 holders of record of the Company’s Common Stock.

~~judgments~~The ~~regarding~~table ~~estimates~~below ~~that~~shows ~~affect~~ the ~~reported~~high ~~amounts of assets, liabilities, revenues~~ and ~~expenses,~~low ~~and~~closing ~~related~~bid ~~disclosures.~~information Weof ~~base~~the ~~our~~Common ~~judgments on~~Stock ~~historical~~during ~~experience and on various assumptions that we believe are reasonable under~~ the ~~circumstances.~~period ~~Actual results may differ~~ from ~~these~~April ~~estimates~~1, ~~under~~2003 ~~different~~through ~~assumptions~~the oryear ~~conditions.~~ended WeMarch ~~believe~~31, 2005 ~~our~~as ~~judgments~~reported ~~and~~by ~~related estimates regarding~~ the ~~following~~OTC:BB ~~accounting~~for ~~policies are critical in~~ the ~~preparation~~period ~~of our consolidated financial statements~~indicated. ~~Refer~~OTC tomarket ~~Note~~quotations 2reflect tointerdealer ~~our~~prices, ~~financial~~without ~~statements~~retail ~~included~~mark-up, inmark-down ~~item~~or 8commissions ~~for~~and amay ~~discussion~~not ofnecessarily ~~our~~reflect ~~accounting~~actual ~~policies with respect to these and other items~~transactions.

~~Revenue~~Quarterly ~~Recognition~~Stock Price Range

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.


	High	Low
Fiscal 2004
First Quarter	0.50	0.38
Second Quarter	0.54	0.37
Third Quarter	0.51	0.37
Fourth Quarter	0.90	0.43
Fiscal 2005
First Quarter	1.14	0.52
Second Quarter	0.99	0.63
Third Quarter	2.51	0.69
Fourth Quarter	1.92	1.30

~~Inventory~~We ~~Reserve~~did not pay cash dividends on the Common Stock during the two most recently completed fiscal years. FATS 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 our Board of Directors 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. In addition, the Company’s New Credit Agreement prohibits the payment of any dividends on our Common Stock. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.

~~Inventories~~17 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.

ContractTable Costof Provision Reserve Contents

ManagementIndex routinely assesses the Company’s performance and estimated cost to completeFinancial 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. Statements

~~Warranty~~ Item ~~Cost~~6. Selected ~~Provision Reserve~~Financial Data

~~Management~~The ~~periodically~~selected ~~estimates~~consolidated ~~expected warranty~~financial ~~costs~~data ~~under~~set ~~the~~forth ~~Company’s~~below ~~standard~~should ~~product~~be ~~warranty.~~read Inin ~~determining~~conjunction ~~the~~with ~~estimate,~~ Management’s ~~analyzes~~Discussion ~~the~~and ~~relationship~~Analysis of ~~historical~~Financial ~~standard~~Condition ~~warranty~~and ~~costs~~Results ~~incurred~~of onOperations ~~historical~~set ~~sales~~forth below and the ~~underlying~~financial statements ~~product~~of ~~mix comprising~~ the ~~historical~~ ~~sales.~~Company ~~Management,~~included elsewhere in ~~turn, utilizes~~ this ~~historical~~Report ~~information~~and referred to ~~estimate~~in ~~expected warranty costs on recent sales within~~ the ~~standard~~Index ~~warranty time frame. Due~~ to ~~the~~Financial ~~inherent~~Statements ~~limitations~~(together inwith the ~~estimation~~notes ~~process, the potential for product defects~~ and other ~~unforeseen~~reports ~~circumstances~~relating ~~by the Company, the possibility exists that the recorded warranty provision reserve will be inadequate~~ to ~~offset~~such ~~actual~~financial ~~warranty costs incurred resulting in additional charges against income~~statements). ~~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.~~


	Year Ended March 31
	2001			2002			2003			2004			2005
							(Restated)			(Restated)
	(Amounts in thousands, except per share amounts)
Statement of Operations Data:
Revenue	$	41,501		$	59,057		$	66,405		$	73,089		$	88,366
Gross margin		6,475			17,450			21,449			28,343			30,926
Gross margin%		15.6	%		29.5	%		32.3	%		38.8	%		35.0	%
Operating expenses		18,403			17,895			14,696			16,464			18,697

Operating income (loss)		(11,928	)		(445	)		6,753			11,879			12,229
Interest (income) expense		4,444			(220	)		114			8,044			6,458
Other (income) expense		257			61			(95	)		(125	)		738

Income (loss) before (benefit) provision for income taxes		(16,629	)		(286	)		6,734			3,960			5,033
(Benefit) provision for income taxes		(1,052	)		(4,892	)		(792	)		(1,871	)		2,434

Net income (loss) before preferred stock adjustments		(15,577	)		4,606			7,526			5,831			2,599
Preferred stock adjustments		(1,469	)		270			298			—			—

Net income (loss) attributable to common stockholders	$	(14,108	)	$	4,336		$	7,228		$	5,831		$	2,599

Earnings (loss) per common share
Basic	$	(0.26	)	$	0.06		$	0.10		$	0.08		$	0.04

Diluted	$	(0.26	)	$	0.06		$	0.10		$	0.08		$	0.03

Balance Sheet Data:
Working capital	$	15,893		$	20,957		$	24,048		$	29,415		$	24,210
Total assets		32,173			36,351			43,198			52,470			54,085
Long-term debt		43,990			42,977			39,858			41,068			29,053
Mandatorily redeemable preferred stock		27,049			27,319			27,617			30,485			—
Preferred Stock		—			—			—			—			32,028
Stockholders’ deficit		54,086			49,802			42,272			35,681			28,504

~~Risks~~ Item ~~could~~7. Management’s ~~arise~~Discussion ~~due~~and toAnalysis ~~Arthur~~of ~~Andersen~~Financial ~~LLP~~Condition ~~being~~and ~~our~~Results ~~past~~of ~~auditors~~Operations

~~Investors~~This ~~are~~analysis ~~unlikely~~of tothe ~~have~~Company’s ~~any~~results ~~effective~~of ~~remedy~~operations ~~against~~should ~~Arthur~~be ~~Andersen LLP~~viewed in ~~connection~~conjunction with athe ~~material~~accompanying ~~misstatement~~financial orstatements, ~~omission~~including notes thereto, contained in Item 8 of this Annual Report on Form 10-K. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934. 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 ~~financial~~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 Report.

~~Arthur~~Restatement 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~~As ~~inability~~previously toreported ~~include in future registration statements the reports~~ on ~~financial~~Form ~~statements~~8-K ~~for~~filed ~~one~~June or29, ~~more~~2005, ~~years~~the ~~audited~~Company byconcluded ~~Arthur~~that ~~Andersen~~it ~~LLP~~was ornecessary to ~~obtain~~ ~~Arthur~~restate ~~Andersen~~its ~~LLP’s~~annual ~~consent~~financial tostatements for the fiscal ~~inclusion~~years ofended ~~their~~March ~~report~~31, on2003 ~~our 2000~~ and ~~2001~~2004 ~~financial~~as ~~statements~~well ~~may~~as ~~impede our access to~~ the ~~capital~~financial ~~markets.~~

~~Should~~18 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.

CompanyTable Overviewof Contents

TheIndex Company is a leading worldwide producer of interactive simulation systems designed to provideFinancial 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. Statements

~~Although~~ data of the ~~Company~~quarters ~~sells~~ended ~~its~~June ~~products~~30, ~~and~~September ~~services~~30, toand aDecember ~~large~~31, ~~number~~2004 ~~of military~~ and ~~law~~2005 ~~enforcement agencies both in the U.S.~~ and ~~abroad,~~ the ~~top~~quarter ~~five customers~~ended ~~accounted~~March ~~for approximately 49.7%~~31, 502004.5% ~~and~~The ~~34.9%~~restatements ofrelate to the accounting ~~Company’s~~treatment ~~revenues~~previously inused ~~fiscal~~with ~~2003,~~respect ~~2002,~~to ~~and~~two ~~2001,~~percentage-of-completion ~~respectively.~~contracts Aentered ~~significant~~into ~~increase or decrease in demand~~ by aforeign ~~major~~subsidiaries ~~customer~~of ~~can have a substantial effect on~~ the Company’s ~~revenues~~denominated ~~and~~in ~~cash~~foreign ~~flow.~~currencies ~~Revenue~~which ~~from~~were ~~any~~accounted ~~one~~for ~~customer can vary materially from period to period~~incorrectly. In ~~addition~~the past, athe ~~significant~~Company ~~decrease in~~ deferred the ~~overall~~impact ~~level or allocation~~ of ~~defense~~foreign ~~spending~~currency influctuations ~~the~~until ~~U.S. or other countries could have a material adverse effect on~~ the ~~Company’s~~period ~~future~~in ~~results~~which ofeach ~~operations~~contract ~~and~~was ~~financial condition~~completed. The Company ~~expects~~determined that ~~sales~~its tomethod ~~the~~of ~~U.S.~~deferring ~~military~~the ~~will~~recognition ~~continue~~of toforeign ~~comprise~~currency afluctuations ~~significant~~on ~~portion~~these percentage-of-completion ~~the~~contracts ~~Company’s~~was incorrect ~~revenues~~and ~~due~~that toa ~~renewed commitments~~restatement ofwas ~~the U~~necessary.S. ~~government~~The toCompany ~~protect~~has ~~and~~restated ~~safeguard~~ its ~~domestic~~financial ~~and~~statements ~~international~~to ~~interests.~~recognize ~~Significant~~the ~~portions~~effects of ~~the~~foreign ~~Company’s~~currency ~~revenue~~transactions ~~are~~and ~~derived~~translations ~~from~~in ~~customers~~accordance ~~located~~with ~~outside~~SFAS ~~the~~52, UForeign Currency Translation.~~S.,~~ ~~primarily~~The ineffect of ~~Canada,~~these ~~Europe~~adjustments increased revenues and ~~Asia. During~~operating ~~fiscal~~income ~~2003,~~by ~~2002~~$280,000 and ~~2001~~$1, ~~approximately 48.6%~~235,000 ~~40.3%~~in 2003 and ~~52.7%~~2004, respectively, ofand ~~the~~increased ~~Company’s~~net ~~revenues~~income ~~were~~by ~~derived~~$196,000 ~~from~~and ~~sales~~$793,000 tofor ~~international~~those ~~customers~~years. ~~The Company expects that sales to~~

23The Company has restated its financial statements to correct its financial statements for the foregoing adjustments. Therefore, with this Annual Report on Form 10-K, the Company is filing its restated audited financial statements for fiscal years ended March 31, 2003 and 2004, as well as the financial data of the quarters ended June 30, September 30, and December 31, 2004 and 2005 and the quarter ended March 31, 2004. All financial information contained in this filing gives effect to the restatement and revision.

~~international~~The ~~customers~~effect ~~will continue to account for a significant percentage~~ of ~~future revenues, as~~ the ~~worldwide~~restatement ~~acceptance~~on 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~~line ~~countries.~~items ~~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~~consolidated tostatements ~~international~~of ~~customers.~~income ~~Certain~~and ofbalance ~~the~~sheets ~~Company’s international~~is ~~sales~~as ~~are~~follows ~~denominated~~ (in thousands): ~~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.


	Year Ended March 31, 2003									Year Ended and At March 31, 2004
	As Previously Reported			Adjustment			As Restated			As Previously Reported			Adjustment			As Restated
Consolidated Statements of Income:
Revenue	$	66,125		$	280		$	66,405		$	71,854		$	1,235		$	73,089
Gross margin		21,169			280			21,449			27,108			1,235			28,343
Operating income		6,473			280			6,753			10,644			1,235			11,879
Other income, net		104			(9	)		95			107			18			125
Income before provision for income taxes		6,463			271			6,734			2,707			1,253			3,960
Benefit for income taxes		867			(75	)		792			2,331			(460	)		1,871
Net income		7,032			196			7,228			5,038			793			5,831
Basic and diluted income per share		.10			—			.10			.07			.01			.08

Consolidated Balance Sheet:
Cost and estimated earnings in excess of billings on incomplete contracts		4,697			295			4,992		$	4,268		$	1,690		$	5,958
Income taxes receivable		823			16			839			104			10			114
Deferred income taxes		—			—			—			2,774			(450	)		2,324
Income taxes payable		176			91			267			214			95			309
Billings in excess of costs and estimated earnings on incomplete contracts		1,277			(2	)		1,275			1,428			(78	)		1,350
Total stockholders’ deficit		(42,494	)		222			(42,272	)		(36,914	)		1,233			(35,681	)

~~Restructure~~Net ~~Transaction~~cash flows from operating, financing, and investing activities, as previously reported, remained unchanged as a result of the restatement.

OnCritical ~~August~~Accounting ~~25,~~Policies ~~2000, the Company, its lenders~~ and ~~its~~Estimates 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~~The offollowing ~~the~~discussion ~~financial~~and ~~institutions~~analysis ~~that participated in the restructuring transaction became holders~~ of ~~significant amounts of~~ our ~~common~~financial ~~stock~~condition ~~issued~~and inresults ~~exchange for indebtedness. For a further discussion~~ of ~~the~~operations ~~relationship~~is ~~between~~based ~~the~~upon ~~Company~~our ~~and~~consolidated ~~its~~financial ~~lenders see Item 13~~statements, ~~Certain~~which ~~Relationships and Related Transactions~~have ~~which~~been isprepared ~~incorporated~~in byaccordance ~~reference~~with ~~from~~accounting ~~our~~principles ~~definitive~~generally ~~Proxy Statement to be filed no later than July 29, 2003.~~

On19 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.

RelatedTable Partyof Transactions Contents

TheIndex 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 evaluateFinancial 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. Statements

24 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. See Note 3 to our Consolidated Financial Statements contained elsewhere in this Report for a discussion of our accounting policies with respect to these and other items.

~~Results~~Revenue ofRecognition ~~Operations~~

~~The~~A ~~following~~significant ~~table~~amount ~~sets~~of ~~forth~~the Company’s revenue is derived from the ~~operations~~sale of ~~the~~small ~~Company~~and supporting arms training simulators and accessories. Revenue from sales to commercial customers and governmental agencies is recognized upon shipment when title passes; as all material commitments have been fulfilled, the sales price is fixed and determinable and collectibility is reasonably assured. Some contracts contain acceptance clauses giving customers a ~~percentage~~right to test products. In these instances, revenue is not recognized until the customer accepts the products or the acceptance clause lapses. A large portion of ~~gross~~the ~~revenues~~Company’s small and supporting arms training simulator revenue is derived from contracts with large governmental agencies. Governmental contracts that involve high volume purchases of the Company’s standard systems and related accessories are accounted for as multiple-deliverable arrangements, in accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables, based on the ~~periods~~relative ~~indicated:~~fair values of the deliverables specified in the contract. 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.

~~FIREARMS~~Other ~~TRAINING~~governmental ~~SYSTEMS~~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 in accordance with SOP 81-1, ~~INC~~Accounting for Performance of Construction-Type and Certain Production-Type Contracts, measured by the percentage of cost incurred to date to the total costs for each contract. ~~AND~~Contract ~~SUBSIDIARIES~~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.

~~CONSOLIDATED~~Provisions ~~STATEMENTS~~for OFestimated ~~OPERATIONS~~losses on uncompleted contracts accounted for under both methods described above are made in the period in which such losses are determined.

	Years Ended March 31
	2003		2002		2001
Revenue	100.00	%	100.00	%	100.00	%
Cost of revenue	67.99		70.45		84.40
Gross margin	32.01		29.55		15.60
Operating expenses
Selling, general and administrative	16.56		18.74		24.38
Research and development	4.27		6.91		11.44
Depreciation and amortization	1.40		3.01		5.53
Impairment charges	—		1.64		3.00
Total operating expenses	22.22		30.30		44.34
Operating income (loss)	9.79		(0.75	)	(28.74	)
Other income (expense), net
Interest income	0.16		0.41		0.60
Interest expense	(0.33	)	(0.04	)	(11.30	)
Foreign currency exchange	0.20		(0.02	)	(0.54	)
Other, net	(0.04	)	(0.09	)	(0.08	)
Total other income (expense)	(0.02	)	0.27		(11.33	)
Income (loss) before provision for income taxes	9.77		(0.48	)	(40.07	)
Provision for income taxes	(1.31	)	(8.28	)	(2.53	)
Net income (loss) before preferred stock adjustments	11.09		7.80		(37.53	)
Accretion of preferred stock	(0.45	)	(0.46	)	(0.63	)
Gain on extinguishment of preferred stock	—		—		4.17
Net income (loss) attributable to common shareholders	10.63	%	7.34	%	(33.99	)%

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.

~~Fiscal~~Inventory ~~Year~~Valuation ~~Ended March 31, 2003 Compared to the Fiscal Year Ended March 31, 2002~~

~~Net Revenues. Revenues~~Inventories ~~increased~~are ~~$7.1~~valued ~~million,~~at orthe ~~12.0%,~~lower toof ~~$66.1~~cost ~~million~~on ~~for~~a ~~the~~moving ~~twelve~~weighted ~~months~~average ~~ended~~or ~~March 31~~market, ~~2003~~cost asbeing ~~compared~~determined toon ~~$59.1 million for~~ the ~~twelve months ended March 31~~first-in, ~~2002.~~first-out ~~Sales~~basis toand ~~U.S.~~market ~~military customers for~~is ~~the~~defined ~~twelve~~as ~~months~~net ~~ended~~realizable ~~March~~value. ~~31,~~Management ~~2003,~~periodically ~~increased~~reviews ~~slightly~~the ~~from~~Company’s ~~$27.8~~inventory ~~million~~for toitems ~~$28.0~~that ~~million.~~may ~~Sales~~be todeemed ~~U.S.~~obsolete, ~~law~~damaged ~~enforcement~~or ~~customers~~ for ~~the~~amounts ~~twelve~~on ~~months~~hand ~~ended~~in ~~March~~excess ~~31,~~of ~~2003~~anticipated ~~decreased~~future $1demand.0 ~~million~~The orunderlying ~~(14.2%)~~assumptions toutilized ~~$5.7~~in assessing ~~million~~the ~~due~~Company’s toinventory ~~increased competition~~change infrom ~~this~~time-to-time ~~market.~~due ~~Sales~~ to ~~international~~change ~~customers~~in ~~for~~ the ~~twelve~~underlying ~~months~~sales ~~ended~~mix, ~~March~~the ~~31,~~release ~~2003~~of ~~increased~~new ~~$8.3~~versions ~~million,~~of orthe ~~34.8%,~~Company’s toproprietary ~~$32.1~~system ~~million.~~and ~~The~~overall ~~increase~~changes in ~~international~~technology ~~sales~~and ~~was~~the ~~primarily~~marketplace. ~~due~~As ~~to substantial deliveries of orders that were included in~~ the Company’s develops ~~backlog~~new asproduct oflines ~~March~~future ~~31,~~charges ~~2002,~~against asincome ~~well~~may asbe ~~increased~~necessary ~~interest~~to inreduce ~~the~~inventory ~~Company’s~~to ~~products~~its innet ~~the~~realizable ~~international markets~~value.

~~Cost~~20 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

25Table of Contents

theIndex twelve months ended March 31, 2002. The decrease in cost of revenues as a percentage of revenues is attributable to severalFinancial 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. Statements

~~Gross~~Contract ~~Margin. As~~Loss aReserve ~~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~~Management ~~Operating~~assesses ~~Expenses. Total~~the ~~operating~~Company’s ~~expenses~~performance ~~decreased~~and ~~$3.2~~estimated ~~million,~~cost ~~or (17.9%)~~ to ~~$14.7~~complete ~~million~~ongoing ~~for~~sales ~~fiscal 2003 as compared to $17~~contracts.9 ~~million~~Changes ~~for~~in ~~fiscal 2002. As a percentage of revenues~~job performance, ~~total~~job ~~operating expenses decreased to 22.2% for the twelve months ended March 31~~conditions, ~~2003 as compared to 30.3% for the twelve months ended March 31, 2002. Selling, general~~ and ~~administrative~~ ~~(SGA)~~estimated ~~expenses decreased slightly to $10.9 million~~profitability, orincluding ~~16.6%~~those ofarising ~~revenue,~~ from ~~$11.0~~contract ~~million~~penalty provisions, orand ~~18.7%~~final ofcontract ~~revenue.~~settlements ~~The~~may ~~2002~~result ~~reduction~~ in ~~SG&A~~revisions ~~largely reflects the fact that the 2001 period included certain non-recurring expenses related~~ to ~~the~~costs ~~separation agreement with a former President~~ and ~~CEO~~income. ofIn the ~~Company~~event ~~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~~anticipates ~~the~~incurring ~~2003~~costs ~~period to control~~ in 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~~contract ~~and development expenses funded by the Company has been decreasing~~revenues, the Company’s ~~total~~records ~~research~~a ~~and~~contract ~~development~~loss ~~costs~~reserve ~~have~~in ~~increased~~an ~~from~~amount ~~$5.6~~equal ~~million for 2002~~ to ~~$6.8 million for 2003 or 21.4%, with~~ the ~~portion~~estimated ~~funded~~costs ~~under~~in ~~contracts~~excess byof ~~customers~~contracted ~~increasing~~revenues ~~from $1.5 million~~ in ~~2002~~the toperiod ~~$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~~such ~~written-off~~information ~~prior~~becomes ~~to March 31, 2002~~apparent.

~~Operating~~Warranty ~~Income. As~~Cost aReserve 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~~Management ~~Income~~periodically ~~(Expense), Net. Net~~estimates ~~interest~~expected ~~expense,~~warranty ~~which~~costs ~~included~~under ~~$167,000~~the Company’s instandard ~~amortization~~product ofwarranty. ~~deferred~~In ~~financing~~determining ~~costs~~the ~~and~~estimate, ~~was~~management ~~reduced~~analyzes bythe ~~$3,512,000~~relationship inof ~~amortization~~historical ofstandard ~~debt~~warranty ~~discount,~~costs ~~totaled~~incurred ~~$114,000,~~on orhistorical ~~0.2%~~sales ofand ~~revenues~~the ~~for~~underlying product mix comprising the ~~twelve~~historical ~~months~~sales. ~~ended~~Management, ~~March~~in 31turn, ~~2003~~utilizes asthis ~~compared~~historical information to ~~interest~~estimate ~~income~~expected ofwarranty ~~$220,000,~~costs oron ~~0.4%~~sales ofwithin ~~revenues for~~ the ~~twelve~~standard ~~months~~warranty ~~ended~~time ~~March~~frame. ~~31,~~Due ~~2002,~~to ~~which~~the ~~included~~inherent ~~$38,000~~limitations in ~~amortization~~the ofestimation ~~deferred~~process, ~~financing~~the ~~costs~~potential for product defects and ~~was~~other unforeseen ~~increased~~circumstances by $3the Company,~~513,000~~ inthe ~~amortization~~possibility ~~of debt~~exists ~~discount.~~that ~~The~~the ~~reduction~~recorded inwarranty ~~interest~~reserve ~~expense~~will ~~for~~be ~~the~~inadequate ~~amortization~~to ofoffset ~~debt~~actual ~~discount~~warranty iscosts ~~attributable~~incurred toresulting ~~the~~in ~~debt~~additional ~~restructuring~~charges ~~completed~~against byincome in the ~~Company~~period insuch ~~August~~information ~~2000~~is determined. ~~The~~Also, ~~debt~~actual ~~discount~~warranty ~~was~~costs ~~completely~~may ~~amortized~~be assignificantly oflower ~~March~~than ~~31,~~expected ~~2003,~~resulting ~~and~~in asthe ~~a result,~~reduction of the Company’s ~~will~~warranty ~~recognize~~reserve ~~interest~~generating ~~expense~~an ataddition ~~significantly~~to ~~increased~~income ~~levels~~in ~~over~~future ~~the remaining life of the debt~~periods.

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~~Overview 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~~We ofare ~~Preferred~~a ~~Stock. The~~leading ~~expense~~worldwide ~~for~~producer ~~the accretion~~ of ~~the~~interactive ~~preferred~~simulation ~~stock~~systems ~~remained~~designed ~~fairly~~to ~~constant~~provide ~~at approximately~~training ~~$0.3 million~~ for ~~the~~multiple ~~twelve~~markets ~~month~~to include ~~periods~~the ~~ended~~handling ~~March 31, 2003~~ and ~~2002.~~use ~~The accretion~~ of ~~preferred~~small ~~stock~~and ~~dividends~~supporting ~~has~~arms. ~~been~~FATS ~~reduced~~also bycompetes ~~amortization~~in ofair ~~the~~defense ~~debt~~and ~~restructure~~armored ~~liability~~vehicle ~~allocated to the preferred stock during the restructure transaction in August 2000~~weaponry. ~~As a result the net accretion of preferred stock~~

26Although we sell our 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 73.3%, 71.5% and 69.8% of the Company’s revenues in fiscal 2003, 2004, and 2005, respectively. A significant increase or decrease in demand by a major customer can have a substantial effect on our revenues, results of operations, 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 our future results of operations, financial condition, and cash flow. We expect 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 our revenue are derived from customers located outside the U.S., primarily in Canada, Europe and Asia. During fiscal 2003, 2004, and 2005, approximately 48.8%, 51.6% and 45.1%, respectively, of our revenues were derived from sales to international customers. We expect that sales to international customers will continue to account for a significant percentage of future revenues, as the worldwide acceptance of simulation-based training systems continues to grow. Sales to international customers may be subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations and changes in import/export regulations and tariff rates. In addition, various forms of protectionist trade legislation have been and in the future may be proposed in the U.S. and certain other countries. FATS, 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 these sales to international customers. Certain of our international sales are denominated in foreign currencies. We do not currently hedge these foreign currency transactions.

~~dividends~~Cost ~~during~~of ~~the~~revenues ~~2003~~generally ~~and~~includes ~~2002~~materials, ~~fiscal~~direct ~~years~~labor, ~~was~~overhead, ~~reduced~~and byother ~~approximately~~direct $2costs.3 ~~and~~Operating ~~$2.1~~expenses ~~million~~include selling, ~~respectively~~general and administrative expenses, ofresearch ~~debt~~and ~~liability~~development ~~amortization~~(R&D) costs, and bid and proposal expenses. ~~The~~Selling, ~~debt restructure~~general ~~liability~~and ~~was~~administrative ~~completely~~expenses ~~amortized~~consist asprimarily of ~~March~~salaries 31and commissions, ~~2003~~wages, ~~and~~benefits, aslegal, ~~a result~~accounting, ~~the~~and ~~Company~~marketing ~~will~~expenses. R&D ~~recognize~~expenses ~~accretion~~are largely comprised of ~~preferred~~salaries, ~~stock~~wages, ~~dividends~~benefits, atprototype ~~significantly~~equipment ~~increased~~and ~~levels~~project ~~over~~supplies. ~~the~~We ~~remaining~~expense ~~life~~all ofR&D costs in the ~~preferred~~period ~~stock~~in which they are incurred.

~~Net~~21 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.

FiscalTable Yearof Ended March 31, 2002 Compared to the Fiscal Year Ended March 31, 2001 Contents

Net Revenues. RevenuesIndex increased $17.6 million, or 41.7%, to $59.1Financial 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. Statements

~~Gross~~Results ~~Margin. Cost~~ of ~~revenues~~Operations 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~~The ~~Operating~~following ~~Expenses. Total~~table ~~operating~~sets ~~expenses~~forth ~~decreased~~the ~~$0.5~~operations ~~million,~~of orFATS ~~(2.7%) to $17.9 million for fiscal 2002~~ as ~~compared~~ ~~to $18.4 million for fiscal 2001. As~~ a percentage of gross revenues, ~~total operating expenses decreased to 30.4%~~ for the ~~twelve~~periods ~~months~~indicated: 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

27FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES

~~impairment~~CONSOLIDATED ~~loss~~STATEMENTS ofOF ~~$1.0~~INCOME 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.


	Years Ended March 31
	2003		2004		2005
	(Restated)		(Restated)
Revenue	100.00	%	100.00	%	100.00	%
Cost of revenue	67.70		61.22		65.00

Gross margin	32.30		38.78		35.00

Operating expenses
Selling, general and administrative	17.89		18.56		16.65
Research and development	4.25		3.97		4.51

Total operating expenses	22.14		22.53		21.16

Operating income	10.16		16.25		13.84

Other income (expense), net
Interest expense on debt	(0.17	)	(7.08	)	(5.56	)
Dividends on mandatorily redeemable preferred stock	—		(3.92	)	(1.75	)
Other, net	0.14		0.17		(0.84	)

Total other income (expense)	(0.03	)	(10.83	)	(8.15	)

Income before (benefit) provision for income taxes	10.13		5.42		5.69
(Benefit) provision for income taxes	(1.19	)	(2.56	)	2.75

Net income before preferred stock adjustments	11.32		7.98		2.94
Accretion of preferred stock	(0.45	)	—		—

Net income attributable to common shareholders	10.87	%	7.98	%	2.94	%

~~Other~~Fiscal ~~Income~~Year ~~(Expense),~~Ended ~~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~~2005 ~~attributable~~Compared to the ~~debt~~Fiscal ~~restructuring~~Year ~~completed~~Ended 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~~2004 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)~~Net ~~for Income Taxes~~Revenue. ~~The~~Revenue ~~effective~~increased ~~tax~~$15.3 ~~rate~~million, ~~was~~or ~~1,710~~20.59%, ofto ~~income~~$88.4 ~~before~~million ~~taxes~~ for the twelve months ended March 31, ~~2002~~2005, as compared to 6$73.3%1 ofmillion ~~income before taxes~~ for the twelve months ended March 31, ~~2001~~2004. ~~The~~Sales ~~Company~~to ~~has not~~U.S. ~~recorded~~military acustomers ~~tax~~for the ~~benefit~~twelve ~~for~~months ~~the~~ended ~~majority~~March of31, ~~its~~2005 ~~operating~~increased ~~losses~~from ~~due~~$27.4 million to ~~uncertainty~~$43.7 ofmillion ~~future~~due ~~realization;~~to ~~however,~~incremental ~~certain~~sales ofand ~~the~~system ~~Company’s~~upgrades ~~foreign~~with ~~subsidiaries~~existing ~~had~~customers ~~higher~~and ~~operating~~sales ~~income~~of inI-FACT ~~fiscal~~(Close ~~year~~Air ~~2001~~Support Trainer) and ~~fiscal~~VCCT ~~year~~(Virtual ~~2002,~~Combat ~~resulting in~~Convoy ~~additional~~Trainer). ~~tax~~Sales to ~~provisions~~U.S. ~~The~~law ~~unusually~~enforcement ~~large~~customers ~~benefit~~for inthe ~~fiscal~~twelve ~~year~~months ~~2002~~ended ~~was~~March ~~attributable~~31, to2005 adecreased $43.91 million, ~~benefit~~or ~~related~~39.2%, to an$4.8 ~~anticipated~~million ~~refund~~reflecting ~~due~~state and municipality budget shortfalls associated with diversion of funds to offset operational costs and the current ~~Company~~concentration on Homeland Security efforts. Sales to international customers for ~~carryback~~the oftwelve ~~certain~~months ~~net~~ended ~~operating~~March ~~losses~~31, ~~which~~2005 ~~was~~increased a$2.0 ~~result~~million, ofor ~~a change~~5.3%, into ~~the~~$39.8 ~~tax~~million. ~~law~~The ~~increasing~~increase ~~the~~in ~~carryback~~international ~~period~~sales ~~from~~was ~~three~~primarily due to ~~five~~the activation ~~years~~of amendments with existing contracts.

~~The~~Cost ~~Company~~of Revenue. Cost ~~recorded~~of arevenue increased to $157.04 million, ~~tax~~or ~~benefit~~65.0% of revenue, for fiscal ~~year~~2005 ~~2001~~as compared to $44.7 million, ~~which~~or ~~was~~61.2% ~~related~~of torevenue, anfor ~~anticipated~~fiscal ~~refund~~2004. ~~due~~The increase in cost of revenue as a percentage of revenue is attributable primarily to contract terms and conditions with specific deliveries in the ~~Company~~fourth ~~for~~quarter ~~carrybacks~~of fiscal year 2004. The fiscal year 2005 cost of ~~net~~revenues ~~operating~~of ~~losses~~65% compares favorably to historical results, reflecting continued cost reductions and process improvements.

~~Accretion~~22 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.

NetTable 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 Contents

28Index to Financial Statements

~~million~~Gross ~~($0~~Margin.26 As ~~per~~a ~~share)~~result ~~or (34.0%)~~ of ~~revenue~~the ~~for~~foregoing, the ~~twelve~~gross ~~months~~margin ~~ended~~increased ~~March 31~~$2.6 million, ~~2001~~or 9.2%, ~~which~~to ~~included~~$30.9 amillion, ~~Gain~~or on35.0% ~~Extinguishment~~ of ~~Preferred~~revenue, ~~Stock~~for ~~of $1.7~~fiscal ~~million~~year ~~and~~2005, aas ~~charge~~compared ofto $128.23 million, ~~for~~or ~~impairment~~38.8% of ~~long-lived~~revenue, ~~assets~~for ~~related~~fiscal ~~to Simtran~~2004.

~~Quarterly~~Total ~~Results~~Operating Expenses. Total operating expenses increased $2.2 million, or 13.3%, to $18.7 million for fiscal 2005, as compared to $16.5 million for fiscal 2004. As a percentage of ~~Operations~~revenue, total operating expenses improved to 21.2% for the twelve months ended March 31, 2005, as compared to 22.5% for the twelve months ended March 31, 2004. Selling, general and administrative (SG&A) expenses, which includes depreciation and amortization, increased to $14.7 million, or 16.7% of revenue, from $13.6 million, or 18.6% of revenue. This increase in SG&A is due primarily to increased emphasis in sales and marketing, bid and proposal costs for new business, and expenses associated with the reengineering of our Enterprise Resource Planning System. Research and development expenses increased to $4.0 million for fiscal 2005, as compared to $2.9 million for fiscal 2004 due primarily to increases in developmental efforts related to Bluefire weapons, enhancements to our I-FACT product, and single platform initiative.

~~The~~Operating ~~following~~Income. As ~~table~~a ~~presents~~result ~~certain~~of ~~unaudited~~the ~~quarterly~~foregoing, ~~statements~~operating ofincome ~~operations~~increased ~~data~~$0.3 ~~for~~million ~~each~~to $12.2 ofmillion, ~~the~~or ~~eight~~13.8% ~~quarters~~of ~~beginning~~revenue, ~~April~~for 1,the ~~2001~~twelve ~~and~~months ~~ending~~ended March 31, ~~2003. Such information~~2005, inas ~~the~~compared ~~opinion~~to of$11.9 ~~management~~million, ~~includes~~or ~~all adjustments necessary for a fair presentation of that information~~16.3% ~~The results~~ of ~~operations~~revenue, for ~~any quarter are not necessarily indicative of~~ the ~~results~~twelve tomonths beended ~~expected~~March ~~for~~31, ~~any future quarter~~2004.

	Year Ended March 31, 2003												Year Ended March 31, 2002
	Quarter Ended
	March 31			December 31			September 30			June 30			March 31			December 31			September 30			June 30
	(Amounts in thousands, except per share amounts)
Revenue	$	23,465		$	12,463		$	17,005		$	13,192		$	15,125		$	15,396		$	16,897		$	11,369
Gross margin		7,053			4,479			5,802			3,835			3,631			4,652			4,687			4,480
Gross margin%		30	%		36	%		34	%		29	%		24	%		30	%		28	%		39	%
Operating Expenses		3,463			3,723			3,968			3,542			5,416			4,267			4,073			4,139
Operating income (loss)		3,590			756			1,834			293			(1,785	)		385			614			341
Interest (income) expense		11			43			44			16			(143	)		67			1			(145	)
Other (income) expense		(28	)		(22	)		19			(73	)		(1	)		31			64			(33	)
Income (loss) before provision for income taxes		3,607			735			1,771			350			(1,641	)		287			549			519
Provision for income taxes		(1,810	)		222			602			119			(5,437	)		63			186			296
Net income before accretion of preferred stock		5,417			513			1,169			231			3,796			224			363			223
Accretion of preferred stock		77			75			74			72			70			68			67			65
Net income attributable to common stockholders	$	5,340		$	438		$	1,095		$	159		$	3,726		$	156		$	296		$	158
Earnings per common share
Basic	$	0.08		$	0.01		$	0.02		$	0.00		$	0.05		$	0.00		$	0.00		$	0.00
Diluted	$	0.07		$	0.01		$	0.02		$	0.00		$	0.05		$	0.00		$	0.00		$	0.00

Other Income (Expense), Net. Net interest expense on debt totaled $4.9 million, or 5.6% of revenue, for the twelve months ended March 31, 2005, as compared to $5.2 million, or 7.1% of revenue, for the twelve months ended March 31, 2004. The decrease in interest expense is due primarily to lower interest rates on the New Credit Agreement. Preferred dividends decreased $1.3 million due to the conversion of our Series B mandatorily redeemable preferred stock into a new Series C preferred stock, which currently does not pay dividends. In addition, due to the weaker dollar, the foreign currency exchange loss was $0.7 million for the twelve months ended March 31, 2005, as compared to foreign exchange income of $0.1 million for the twelve months ended March 31, 2004.

~~The~~(Benefit) ~~Company’s revenues~~Provision ~~and~~for ~~results~~Income ofTaxes. The ~~operations~~benefit ~~historically have varied substantially~~ from ~~quarter~~income totaxes ~~quarter,~~decreased ~~and~~by ~~the Company expects these variations to continue~~$4.3 ~~Among the factors causing these variations have been the number, timing and scope of the~~million ~~Company’s~~to ~~contracts~~a ~~and~~provision ~~purchase orders, concentration~~ of ~~shipments~~$2.4 ~~under~~million ~~large~~for ~~orders and~~ the ~~uneven~~twelve ~~timing~~months ofended ~~the~~March ~~receipt~~31, by2005, ~~the~~primarily ~~Company~~as ~~of necessary authorizations from government customers. The Company recognizes~~ a ~~substantial~~result ~~portion~~ of ~~its~~ ~~revenues~~the ~~upon~~elimination ~~shipment~~ of ~~its~~the ~~products~~valuation toallowance ~~customers~~for ~~under~~deferred ~~multi-element~~tax ~~arrangements,~~assets ~~while~~creating ~~the timing of~~ a ~~high~~$1.9 ~~percentage~~million oftax ~~the~~benefit ~~Company’s~~in ~~operating~~fiscal ~~expenses,~~year ~~including~~2004. ~~personnel,~~In ~~rent~~fiscal ~~and~~year ~~debt service~~2005, ~~are relatively fixed. As a result,~~ ~~with~~positive ~~the~~operating ~~concentration~~income ofresulted ~~several order deliveries~~ in a ~~particular~~utilization ~~quarter, unanticipated variations in the number and timing~~ of ~~shipments~~net oroperating ~~customer~~loss ~~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~~tax ~~condition~~credit carryforwards.

~~Liquidity~~Net ~~and~~Income ~~Capital~~Attributable ~~Resources~~to Common Stockholders. As a result of the foregoing, net income attributable to common stockholders decreased $3.2 million to $2.6 million ($.03 per diluted share) or 2.9% of revenue, as compared to $5.8 million ($0.08 per diluted share) or 8.0% of revenue, for the twelve months ended March 31, 2004.

InFiscal ~~August 2000,~~Year ~~the~~Ended ~~Company~~March ~~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~~31, ~~the~~2004 ~~unpaid~~Compared ~~principal~~to ~~and accrued interest under~~ the ~~old~~Fiscal ~~facility~~Year ~~was~~Ended ~~converted~~March ~~into shares of Common Stock~~31, ~~shares~~2003 ~~of Series B mandatory redeemable preferred stock, Senior Secured Loans, and Junior Secured~~ - restated

29Net Revenue. Revenue increased $6.7 million, or 10.1%, to $73.1 million for the twelve months ended March 31, 2004, as compared to $66.4 million for the twelve months ended March 31, 2003. Sales to U.S. military customers for the twelve months ended March 31, 2004 decreased slightly from $28.0 million to $27.4 million. Sales to U.S. law enforcement customers for the twelve months ended March 31, 2004 increased $2.2 million, or 38.6%, to $7.9 million due to increased opportunities resulting from greater emphasis on this market by management. Sales to international customers for the twelve months ended March 31, 2004 increased $5.4 million, or 16.7%, to $37.8 million. The increase in international sales was primarily due to substantial deliveries of orders that were included in our backlog as of March 31, 2003, as well as increased interest in our products in the international markets.

~~Loans.~~Cost ~~The New Credit Agreement also provides for a New Revolving Credit Commitment comprised~~ of ~~available~~Revenue. Cost ~~Revolving Loans and Letters~~ of ~~Credit.~~revenue ~~Aggregate borrowings~~decreased ~~under~~slightly ~~the New Revolving Credit Commitment are limited~~ to $~~882~~44.7 million,~~000,~~ ~~with~~or ~~borrowings~~61.2% ~~under~~of ~~the~~revenue, ~~Letters~~for fiscal of2004 ~~Credit~~as ~~subject~~compared to ~~a sub limit of~~ $~~828,000~~45.0 ~~During March~~million, ~~2002,~~or ~~the~~67.7% ~~Company~~of ~~and its lenders further amended the New Credit Agreement to~~revenue, ~~among~~for ~~other~~fiscal ~~amendments,~~2003. ~~provide~~Each aof ~~$2,200,000~~FATS’ ~~Support~~primary ~~Letter~~lines of ~~Credit~~business ~~Facility~~showed ~~and~~improved ~~extend~~margins ~~the~~for ~~maturity date of~~ the ~~Senior~~twelve ~~Secured~~months ~~Loans,~~ended ~~Junior Secured Loans and New Revolving Loans from~~ March 31, ~~2003 to September 30~~2004, ~~2003.~~as Ascompared ofto ~~March~~the ~~31, 2003,~~twelve ~~outstanding~~months ~~Revolving Loans totaled $130,000 and outstanding Letters of Credit totaled $2,884,000, with $68,000 in available unused funds.~~

On23 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.

UnderTable 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. Contents

Accordingly,Index ato totalFinancial 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. Statements

As ended of March 31, 2003,. ~~the~~The ~~Company~~decrease ~~had~~in ~~working~~cost ~~capital~~ of ~~$24.0~~revenue ~~million compared~~as toa ~~$21.0~~percentage ~~million as~~ of ~~March~~revenue ~~31,~~is ~~2002.~~attributable ~~The~~to ~~net~~several ~~$3.0~~factors: ~~million~~(1) ~~increase~~continued inproduct ~~working~~standardization; (2) ~~capital~~improved iscontract ~~primarily~~terms ~~due~~and toconditions anwith ~~$8.0~~specific ~~million~~product ~~increase~~acceptance incriteria; ~~accounts~~(3) ~~receivable~~a ~~which~~higher ~~was~~volume ~~substantially~~of ~~offset~~catalog byproduct ~~increases~~sales; in(4) ~~accounts~~greater ~~payable,~~efficiency ~~billings~~ in ~~excess of~~the ~~costs~~manufacturing process; and ~~estimated~~(5) ~~earnings~~improved oncontrol ~~uncompleted~~over ~~contracts,~~inventory ~~and deferred revenue~~obsolescence. The percentage ~~$8.0~~reduction ~~million~~in ~~increase~~cost inof ~~accounts~~revenue ~~receivable~~reflects ~~was~~management’s ~~due~~efforts to ~~significant~~emphasize ~~fourth~~higher ~~quarter~~margin ~~revenue~~contracts ~~which~~and ~~was~~improve ~~primarily~~efficiency ~~recognized~~ in ~~March,~~the ~~2003~~manufacturing process.

~~The~~Gross ~~Company~~Margin. As ~~had~~ a ~~net~~result ~~decrease~~of inthe ~~cash~~foregoing, ~~and~~gross ~~cash~~margin ~~equivalents~~increased of $06.89 million ~~for the twelve months ended March 31~~, ~~2003~~or ~~compared~~32.1% to ~~a net increase of~~ $228.43 million, ~~for~~or ~~the~~38.8% ~~twelve~~of ~~months ended March 31~~revenue, ~~2002.~~for ~~For~~fiscal ~~the~~year ~~period ended March 31~~2004, ~~2003,~~as ~~the~~compared ~~Company’s~~to ~~operating activities generated cash of approximately~~ $021.5 4 million, ~~primarily~~or ~~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~~32.3% ~~The Company’s investing activities used cash~~ of ~~approximately $1.3 million~~revenues, ~~primarily~~ for ~~capital~~fiscal ~~expenditures and additions to restricted cash~~2003.

~~The~~Total ~~Company’s~~Operating ~~primary~~Expenses. Total ~~capital~~operating ~~requirements~~expenses ~~are~~increased ~~for~~$1.8 ~~working~~million, ~~capital~~or 12.2%, ~~debt~~to ~~service~~$16.5 million for fiscal 2004, ~~and~~as compared ~~capital~~to ~~expenditures~~$14.7 ~~Since~~million ~~August~~for fiscal 2003. As a percentage of ~~2000~~revenue, ~~the~~total ~~Company~~operating ~~has financed~~expenses ~~its~~remained ~~operations~~fairly ~~and~~constant ~~growth~~at ~~primarily~~22.5% ~~through~~for ~~internally~~the ~~generated~~twelve ~~funds~~months ~~and~~ended ~~income~~March ~~tax~~31, ~~refunds~~2004, as compared to 22.1% ~~With~~for the ~~extension~~twelve ofmonths ~~the~~ended ~~Company’s~~March ~~Senior~~31, 2003. Selling, general and ~~Junior~~administrative ~~Secured~~(SG&A) ~~Loans~~expenses, ~~and~~which ~~Revolving~~includes ~~Loans~~depreciation and ~~Letters~~amortization, ofincreased ~~Credit~~to ~~through~~$13.6 ~~October 15~~million, ~~2004~~or 18.6% of revenue, ~~as discussed~~from ~~above~~$11.9 million, ~~management~~or 17.9% of ~~the~~revenue. ~~Company~~The ~~believes~~2004 ~~that~~increase ~~funds~~in ~~provided~~SG&A bylargely ~~operations~~reflects increased bonuses and ~~possible~~commissions ~~equipment~~related ~~installment~~to ~~financing~~the ~~will~~increased berevenue ~~sufficient~~and toincreased ~~fund~~marketing ~~its~~and ~~cash~~bid ~~needs~~ and ~~anticipated~~proposal ~~capital~~costs ~~expenditures~~related ~~through~~to the ~~year~~pursuit ~~ending~~of ~~March~~new ~~31,~~business. Research and development expenses increased slightly to $2.9 million for 2004 from $2.8 million in 2003.

~~The~~Operating ~~Company~~Income. As isa ~~currently~~result ~~in discussions with several parties~~of tothe ~~negotiate~~foregoing, anoperating ~~ultimate~~income ~~refinancing~~increased of$5.1 ~~its~~million ~~Credit~~to ~~Agreement~~$11.9 million, or a16.3% ~~transaction~~of ~~that~~revenue, ~~would~~for ~~allow~~the ~~repayment~~twelve ofmonths ~~the~~ended ~~debt.~~March ~~However~~31, ~~there~~2004, ~~can~~as becompared noto ~~assurance~~$6.8 ~~that~~million, ~~such a refinancing~~ or ~~transaction~~10.2% ~~may~~of berevenues, ~~completed~~for onthe ~~terms~~twelve ~~that~~months ~~would~~ended beMarch ~~favorable to the Company~~31, ~~if at all~~2003.

30Other Income (Expense), Net. Net interest expense on debt, which included $395,000 in amortization of deferred financing costs totaled $5.2 million, or 7.1% of revenue, for the twelve months ended March 31, 2004, as compared to $114,000, or 0.2% of revenue, for the twelve months ended March 31, 2003, which included $167,000 in amortization of deferred financing costs and was reduced by $3,512,000 in amortization of debt discount. The reduction in interest expense for the amortization of debt discount was attributable to the debt restructuring completed in August 2000. The debt discount was completely amortized as of March 31, 2003, and as a result, we recognized interest expense at significantly increased levels. We also adopted Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities (SFAS 150) as of the beginning of fiscal 2004. SFAS 150 requires that the Company’s mandatorily redeemable preferred stock be classified as a liability and that dividends on the mandatorily redeemable preferred be included in interest expense. Accordingly, we recorded $2.9 million in interest expense for the mandatorily redeemable preferred stock for the twelve months ended March 31, 2004. During fiscal 2003, the dividends on the mandatorily redeemable preferred were reduced by approximately $2.3 million in amortization of a related debt restructuring liability and were recorded as a $298,000 adjustment to net income to arrive at net income attributable to common stockholders. The debt restructure liability was completely amortized as of March 31, 2003, and as a result, we recognized interest expense related to the preferred stock dividends at significantly increased levels.

~~Commitments~~Provision ~~and~~for ~~Other~~Income Taxes. The ~~Contractual~~provision ~~Obligations~~for (benefit from) income taxes increased by $1.1 million, or 137.5%, to a benefit of $1.9 million for the twelve months ended March 31, 2004, primarily due to the elimination of our valuation allowance for deferred tax assets. FATS had not recorded a tax benefit for a substantial portion of its operating losses due to the uncertainty of future realization through taxable income. It now appears more likely than not that we will be able to recognize the benefit of its deferred tax assets through future taxable income.

~~Disclosure~~Accretion of ~~Commitments~~Preferred ~~and~~Stock ~~Other~~Dividends. The ~~Contractural~~adjustment ~~Obligations~~for the accretion of the preferred stock dividends was classified as interest expense in accordance with FAS 150 for the twelve months ended March 31, 2004, as

~~March~~24 ~~31,2003~~

(AmountsTable inof thousands) Contents

	Total		Less than 1 year		Within 1 - 3 years		Within 4 - 5 years		After 5 years
Long-term debt
Working capital—borrowings	$	130	$	—	$	130	$	—	$	—
Long-term debt—Senior		12,000		400		11,600		—		—
Long-term debt—Junior		28,010		—		28,010		—		—
Capital lease obligations		175		57		111		7		—
Other
Operating lease obligations		3,962		906		1,630		1,329		97
Total	$	44,277	$	1,363	$	41,481	$	1,336	$	97

Index to Financial Statements

~~Recent~~ discussed ~~Accounting~~above. ~~Pronouncements~~The accretion of preferred stock dividends was previously reduced by amortization of a debt restructure liability allocated to the preferred stock during the restructure transaction in August 2000. As a result, the net accretion of preferred stock dividends during the 2003 fiscal year was reduced by approximately $2.3 million of debt liability amortization. The debt restructure liability was completely amortized as of March 31, 2003, and as a result, we recognized interest expense related to the preferred stock dividends at significantly increased levels.

InNet ~~November~~Income ~~2002,~~Attributable ~~the~~to ~~Financial~~Common ~~Accounting~~Stockholders. As ~~Standards Board~~a ~~(FASB)~~result ~~issued Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees~~ of ~~Indebtedness of Others. The Interpretation elaborates on~~ the ~~existing~~foregoing, ~~disclosure~~net ~~requirements for~~income ~~most~~attributable ~~guarantees,~~to ~~including~~common ~~product~~stockholders ~~warranties~~decreased ~~and~~$1.4 ~~loan~~million ~~guarantees~~to ~~such~~$5.8 asmillion ~~standby letters of credit~~($0.08 Itper ~~also~~diluted ~~clarifies that at the time a company issues a guarantee~~share), ~~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~~8.0% ~~The provisions related to recognizing a liability at inception~~ of ~~the~~revenue, ~~guarantee~~as ~~for~~compared ~~the fair value of the guarantor’s obligations does not apply~~ to ~~product~~$7.2 ~~warranties~~million ~~or to guarantees accounted for as derivatives~~($0.10 ~~The~~per ~~initial~~diluted ~~recognition~~share), ~~and initial measurement provisions apply on a prospective basis to guarantees issued~~ or ~~modified after December 31, 2002~~10.9% ~~The Company’s disclosure~~ of ~~guarantees~~revenue, isfor ~~included in Note 10 of~~ the ~~Notes~~twelve tomonths ~~Financial~~ended ~~Statements.~~March ~~The~~31, ~~Company believes that adoption of the recognition and measurement provisions of Interpretation 45 will not have a material impact on its financial statements~~2003.

InLiquidity 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~~Capital toResources 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.

InOn ~~December~~September ~~2002~~30, 2004, the ~~FASB~~Company ~~issued~~entered ~~SFAS~~into ~~No.~~a ~~148,~~new ~~Accounting~~credit ~~for~~agreement ~~Stock-Based Compensation—Transition and~~(the ~~Disclosure—an~~New ~~Amendment~~Credit ofAgreement) ~~FASB~~with ~~Statement~~CapitalSource ~~No.~~Finance, ~~123~~LLC. ~~SFAS~~The ~~No.~~New ~~148~~Credit ~~amends~~Agreement ~~SFAS~~provides ~~No.~~for ~~123,~~a ~~Accounting~~revolving ~~for~~facility ~~Stock-Based~~up ~~Compensation,~~ to ~~provide~~$12 ~~alternative~~million; ~~methods~~a ofterm ~~transition~~A ~~for~~loan afacility ~~voluntary~~in ~~change~~an toaggregate ~~the~~maximum ~~fair~~principal ~~value~~amount ~~based method~~ of ~~accounting for~~$15 ~~stock-based~~million; ~~employee~~and ~~compensation.~~a Interm ~~addition,~~B ~~SFAS~~loan ~~No.~~facility ~~148~~in ~~amends~~an aggregate ~~the~~maximum ~~disclosure~~principal ~~requirements~~amount of ~~SFAS~~$15 Nomillion. ~~123~~A tomore ~~require~~complete ~~prominent~~description ~~disclosures in both annual and interim financial statements about the method~~ of ~~accounting for stock-based employee compensation and~~ the ~~effect~~terms of the ~~method~~New ~~used~~Credit onAgreement, ~~reported~~including ~~results. The disclosure requirements apply to all companies for fiscal years ending after December 15~~collateralization, ~~2002.~~mandatory ~~The~~excess ~~interim~~cash ~~disclosure~~flow ~~provisions~~prepayments ~~are~~and ~~effective~~restrictive ~~for financial reports containing financial statements for interim periods beginning after December 15~~covenants, ~~2002.~~is ~~The~~set ~~Company~~forth ~~has adopted the disclosure provisions of SFAS 148~~ in ~~these~~Note ~~current~~4 ~~financial statements and does not currently expect~~ to ~~change to~~ the ~~fair value~~ ~~based~~Consolidated ~~method~~Financial ofStatements ~~accounting~~contained ~~for~~elsewhere ~~stock-based~~in ~~employee~~this ~~compensation~~Report. ~~Accordingly, adoption of SFAS No. 148 is not expected to have a material impact on the Company’s consolidated financial statements.~~

As of March 31, 2005, we had working capital of $24.2 million compared to $29.4 million as of March 31, 2004. The net $5.2 million decrease in working capital is primarily due to a $1.7 million increase in billings in excess of costs and estimated earnings on incomplete contracts, a $2.0 million increase in deferred revenue, and a $1.6 million increase in long-term debt due within one year.

InWe ~~January~~had ~~2003,~~a ~~the~~net ~~FASB~~increase ~~issued~~in ~~Interpretation~~cash ~~46,~~and ~~Consolidation~~cash equivalents of ~~Variable Interest Entities~~$4. In1 ~~general,~~million afor ~~variable~~the ~~interest~~twelve ~~entity~~months ~~(VIE)~~ended isMarch ~~a corporation~~31, ~~partnership~~2005, ~~trust,~~as orcompared ~~any~~to ~~other legal structure used for business purposes that either (~~a) ~~does~~net ~~not~~decrease ~~have~~of ~~equity investors with voting rights or (b) has equity investors that do not~~$1.1 ~~provide~~million ~~sufficient financial resources~~ for the ~~entity~~twelve tomonths ~~support~~ended ~~its~~March ~~activities~~31, 2004. ~~Interpretation~~For ~~46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of~~ the ~~risk~~period ofended ~~loss~~March ~~from~~31, ~~the~~2005, ~~variable interest~~our ~~entity’s~~operating activities orgenerated ~~entitled~~cash ~~to receive a majority~~ of ~~the~~approximately ~~entity’s~~$14.7 ~~residual~~million, ~~returns~~primarily orthrough ~~both~~$2.6 ~~The~~million ~~consolidation~~in ~~requirements~~profitable ofoperations ~~Interpretation~~after 46a ~~apply~~$2.2 ~~immediately~~million ~~to variable~~ non-cash interest ~~entities~~and ~~created~~financing ~~after~~costs ~~January 31~~expense, ~~2003. The~~as ~~consolidation~~well ~~requirements~~as ~~apply~~$8.6 tomillion ~~older entities~~ in ~~the~~cash ~~first~~receipts ~~fiscal~~collected ~~year~~on oraccounts ~~interim~~receivable. ~~period~~Our ~~beginning~~investing ~~after~~activities ~~June~~used ~~15,~~cash ~~2003. Certain~~ of ~~the~~approximately ~~disclosure~~$1.2 ~~requirements~~million, ~~apply~~primarily infor ~~all~~capital ~~financial~~expenditures ~~statements~~and ~~issued~~additions ~~after~~to ~~January~~restricted ~~31, 2003, regardless of~~cash. ~~when~~Our ~~the~~financing ~~variable~~activities ~~interest~~used ~~entity~~cash ~~was~~of ~~established~~approximately $9.6 ~~The~~million, ~~Company~~primarily ~~does~~for ~~not~~the ~~invest~~reduction inof ~~VIEs~~long-term ~~and~~debt ~~therefore the adoption~~ of ~~the~~$50.7 ~~Interpretation~~million, ~~will~~offset ~~not~~partially ~~have~~by along-term ~~material~~debt ~~impact~~proceeds onof ~~its~~$37.7 ~~financial statements~~million.

InOur ~~May~~$28.5 ~~2003,~~million ~~the~~stockholders’ ~~FASB~~deficit ~~issued~~as ~~SFAS~~of ~~No.~~March ~~150~~31, ~~Accounting~~2005, ~~for Certain~~consists ~~Liabilities~~primarily ~~with Characteristics~~ of ~~both Liabilities and Equity~~$157.6 ~~The~~million ~~Statement requires companies to classify certain types of financial instruments that the company is obligated to buy back~~ in ~~exchange~~accumulated ~~for~~deficit ~~cash~~offset orsubstantially ~~other~~by ~~assets,~~$128.0 ormillion ~~for a variable number~~ of ~~its~~additional ~~equity~~paid-in ~~shares based on a fixed monetary value, as liabilities rather than equity instruments~~capital. The ~~Statement~~accumulated ~~generally~~deficit ~~requires~~results ~~the~~primarily ~~liability~~from to$172.2 bemillion ~~measured~~in atcharges ~~fair~~associated ~~value~~with ata ~~inception~~July ~~and~~1996 torecapitalization ~~subsequently~~of ~~be valued at~~ the ~~present~~Company ~~value~~including of the ~~amount~~purchase ~~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~~cancellation ~~is effective at the beginning~~ of ~~the first interim period beginning after June 15, 2003~~46.8 ~~The~~million ~~Company~~shares ~~currently~~of ~~classifies its mandatorily redeemable preferred~~ stock ~~outside~~held ofby the ~~stockholders’~~former ~~equity~~100% ~~section~~owner of ~~its balance sheet and measures~~ the ~~instruments~~Company. inPositive aretained ~~manner~~earnings ~~that~~from ~~approximates~~operations ~~their~~reduced ~~present value~~the atrecapitalization ~~redemption~~charges ~~with~~by ~~dividends~~approximately ~~reported as an adjustment before net income attributable to common shareholders~~$14.6 ~~Therefore,~~million ~~the~~as ~~Company does not expect the adoption~~ of ~~SFAS~~March 31, ~~150 to have a material impact on its financial statements~~2005.

~~Item~~Our ~~7(a)~~primary capital requirements are for working capital, debt service, and capital expenditures. ~~Quantitative~~ Since August of 2000, we have financed our operations and ~~Qualitative~~growth ~~Disclosures~~primarily ~~About~~through ~~Market~~internally generated funds and income tax refunds. With the issuance of the New Credit Agreement, which decreased ~~Risk~~debt and provided lower interest rates, management believes that funds provided by operations will be sufficient to fund our cash needs and anticipated capital expenditures through the year ending March 31, 2006. As previously disclosed, however, the Company has retained Houlihan Lokey Howard & Zukin Capital, Inc. as its exclusive financial advisor to assist the company in evaluating various strategic alternatives, including recapitalization, sale of stock, merger or asset disposition possibilities, all with the goal of maximizing shareholder value. The Company expects to complete its review of strategic alternatives and take any actions arising from this review during the next several months. However, there can be no assurance that this process will result in a transaction, any proposal or agreement for a transaction, or any other action by the Company.

~~The~~25 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.

AsTable 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. Contents

32Index to Financial Statements

~~Item~~Commitments ~~8. Financial Statements~~ and ~~Supplementary~~Other ~~Data~~Contractual Obligations

~~REPORT~~Disclosure OFof ~~INDEPENDENT~~Commitments ~~AUDITORS~~and Other Contractual Obligations

ToMarch ~~the~~31, ~~Board~~2005 ~~of Directors and Stockholders~~

of(amounts ~~Firearms~~in ~~Training~~thousands) ~~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.


	Total		Less than 1 year		Within 1 - 3 years		Within 3 - 5 years		After 5 years
Long-term debt
Long-term debt – Term A	$	13,938	$	4,584	$	7,705	$	1,649	$	—
Long-term debt – Term B		15,000		—		—		15,000		—
Accrued PIK		115		—		—		115		—
Other
Open purchase orders		6,736		6,439		297		—		—
Operating lease obligations		3,037		1,073		1,907		57		—

Total	$	38,826	$	12,096	$	9,909	$	16,821	$	—

~~/s/~~Employment ~~PRICEWATERHOUSECOOPERS~~agreements have ~~LLP~~been ~~Atlanta,~~excluded ~~Georgia~~from the above. See Employment and Related Matters.

~~May~~Off ~~20,~~Balance ~~2003,~~Sheet ~~except~~Arrangements ~~for Note 3 which is dated June 26, 2003~~

33As of March 31, 2005, we did not have any off-balance sheet financing transactions or arrangements other than disclosed in the table above.

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

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Liabilities with Characteristics of both Liabilities and Equity (SFAS 150). The ~~REPORT~~Statement OFestablishes ~~PREVIOUS~~standards ~~INDEPENDENT~~for ~~PUBLIC~~classifying ~~ACCOUNTANTS~~and measuring certain financial instruments with characteristics of both liabilities and equity. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS 150 as the beginning of our fiscal year ended March 31, 2004. The adoption of SFAS 150 did not have a material overall impact on the Company’s financial statements. However, the adoption did cause $2,867,000 of dividends on mandatorily redeemable preferred stock to be reported as a component of interest expense for the year ended March 31, 2004, rather than as an adjustment to net income in arriving at net income attributable to common stockholders as in prior years.

ToIn December 2004, FASB issued SFAS No. 123 (revised 2004), Share Based Payment (SFAS 123R), which is a revision of SFAS Statement No. 123, Accounting for Stock-Based Compensation. This statement ~~Firearms~~supercedes ~~Training~~APB ~~Systems~~Opinion 25, ~~Inc~~Accounting for Stock Issued to Employees, and amends SFAS Statement No.: 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123; however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The effective date of this statement for the Company is April 1, 2006.

WeFactors ~~have~~That ~~audited~~May ~~the accompanying~~Affect 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,Future ~~and~~Results ~~cash flows for each of the three years in the period ended March 31, 2001. These financial statements~~ and ~~the~~Financial ~~schedule~~Condition ~~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.~~

WeIn ~~conducted~~addition ~~our~~to ~~audits~~the inother information ~~accordance~~contained ~~with~~in ~~auditing~~this ~~standards~~Report, ~~generally~~you ~~accepted~~should inconsider carefully the ~~United~~following ~~States.~~factors, ~~Those~~risks ~~standards~~and ~~require~~uncertainties ~~that~~in weevaluating ~~plan~~our business. Our business and ~~perform~~operations ~~the~~are ~~audit~~subject to ~~obtain~~a ~~reasonable~~number ~~assurance~~of ~~about~~factors, ~~whether~~risks ~~the~~and ~~financial~~uncertainties, ~~statements~~and ~~are~~the ~~free~~following oflist ~~material~~should ~~misstatement.~~not Anbe ~~audit~~considered ~~includes~~to ~~examining,~~be on a ~~test~~definitive ~~basis~~list of all factors that may affect our business, ~~evidence~~financial ~~supporting~~condition ~~the~~and ~~amounts~~future results of operations and ~~disclosures~~should be read in conjunction with the ~~financial~~factors, ~~statements.~~risks Anand ~~audit~~uncertainties ~~also~~contained ~~includes~~in ~~assessing~~our other ~~the~~filings ~~accounting~~with ~~principles~~the ~~used~~Securities and ~~significant~~Exchange ~~estimates~~Commission. We caution readers that any forward-looking statements made by ~~management,~~ asus ~~well~~are asmade ~~evaluating~~with the ~~overall~~intention ~~financial~~of ~~statement~~obtaining ~~presentation.~~the Webenefits ~~believe~~of ~~that~~the ~~our~~“safe ~~audits~~harbor” ~~provide~~provisions aof ~~reasonable~~the ~~basis~~Private ~~for~~Securities Litigation ~~our~~Reform ~~opinion.~~Act

In26 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.

OurTable 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. Contents

ARTHURIndex ANDERSENto LLP Financial Statements

~~Atlanta~~ and that a number of factors, ~~Georgia~~including but not limited to those discussed below, could cause our actual results and experiences to differ materially from the anticipated results or expectations expressed in any forward-looking statements.

~~May~~Our ~~18,~~business ~~2001~~ relies on maintaining key customer relationships and certain key contracts.

~~The~~In ~~accompanying~~fiscal ~~notes~~2003, the Company’s five largest customers accounted for approximately 73.3% of the Company’s revenues, with two customers accounting for more than 10% of revenues. In fiscal 2004, the Company’s five largest customers accounted for approximately 71.5% of the Company’s revenues, with three customers accounting for more than 10% of revenues. In fiscal 2005, the Company’s largest customers accounted for approximately 69.8% of the Company’s revenues, with three customers accounting for more than 10% of revenues. Amounts for 2003 and 2004 have been restated to reflect the combination of all customers controlled by the U.S. government. Given the nature of our contracts, revenues attributable to specific customers are anlikely ~~integral~~to ~~part~~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 our growth objectives, we will be required to seek contracts from new domestic and international customers as well as orders from existing customers for additional types of ~~these~~virtual ~~consolidated~~simulated training solutions 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 our results of operations or financial ~~statements~~condition. See Note 8 of Notes to Consolidated Financial Statements.

34Our business relies on obtaining key government contracts that are subject to regulatory requirements and availability of public funds.

Most of our customers to date have been in the public sector of the U.S., including the federal, state and local governments, and in the public sectors of ~~FIREARMS~~a ~~TRAINING~~number ~~SYSTEMS~~of other countries. Approximately 49.4% of our revenues for fiscal 2005 were attributable to sales to military authorities in the U.S., ~~INC~~5.5% ~~AND~~were ~~SUBSIDIARIES~~attributable to sales to law enforcement authorities in the U.S. and 45.1%, were attributable to sales to military and law enforcement authorities internationally. Sales to public sector customers are subject to a multiplicity of detailed regulatory requirements and public policies. For example, we are subject to export licensing requirements with respect to the transfer of arms and technical data used by our foreign subsidiaries to modify simulated weapons for use in systems supplied to international customers. The key regulatory requirements for FATS are (1) the International Traffic in Arms Regulations (ITAR) whose oversight is performed by the Directorate of Defense Controls (DDTC) of the U.S. State Department and (2) the U.S. Government Firearms Control Act whose oversight is performed by the Bureau of Alcohol, Tobacco and Firearms.

~~CONSOLIDATED~~The ~~BALANCE~~ITAR ~~SHEETS~~regulates exports of U.S. military equipment and technical data to our subsidiaries and foreign customers. The DDTC may revoke, suspend or amend our licenses without notice. The Bureau of Alcohol, Tobacco and Firearms (ATF) authorize FATS to be a dealer in regulated firearms and other destructive materials. The ATF, like the DDTC, may revoke licenses or deny their renewal for failure to follow prescribed regulations or as a result of the commission of criminal offenses. All of our subsidiaries also have similar licenses in their jurisdictions of incorporation.

	March 31,
	2003			2002
	(In thousands)
ASSETS
Current assets
Cash and cash equivalents	$	3,457		$	4,252
Restricted cash		1,439			1,434
Accounts receivable, net of allowance of $362 and $352 in 2003 and 2002, respectively		18,469			10,500
Income taxes receivable		823			4,488
Costs and estimated earnings in excess of billings on uncompleted contracts		4,697			1,816
Unbilled receivables		103			1,378
Inventories, net		10,059			9,434
Prepaid expenses and other current assets		1,643			1,444
Total current assets		40,690			34,746
Property and equipment, net		2,018			1,579
Other noncurrent assets		98			26
Total assets	$	42,806		$	36,351
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Long-term debt due within one year	$	457		$	—
Accounts payable		5,248			4,430
Accrued liabilities		4,826			5,053
Accrued interest		861			861
Income taxes payable		176			—
Billings in excess of costs and estimated earnings on uncompleted contracts		1,277			285
Deferred revenue		1,854			902
Warranty and contract cost provision reserve—current		2,015			2,258
Total current liabilities		16,714			13,789
Long-term debt		39,858			42,977
Deferred income taxes		—			22
Warranty and contract cost provision reserve—noncurrent		615			1,467
Other noncurrent liabilities		496			579
Total liabilities		57,683			58,834
Commitments and contingencies (Note 10)
Manditorily redeemable preferred stock		27,617			27,319
Stockholders’ deficit
Class A common stock, $0.000006 par value; 100,000 shares authorized, 70,153 shares issued and outstanding		—			—
Additional paid-in capital		123,215			123,513
Stock warrants		613			613
Accumulated deficit		(166,219	)		(173,549	)
Accumulated other comprehensive loss		(103	)		(379	)
Total stockholders’ deficit		(42,494	)		(49,802	)
Total liabilities and stockholders’ deficit	$	42,806		$	36,351

Any revocation of or refusal to renew our licenses would have a material adverse effect on the conduct of our operations and financial condition since we must posses such licenses and comply with governmental regulations in order to manufacture and market our products. In addition, public sector customer 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 convenience for a variety of factors when it is in the best interest 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 our future results of operations and financial condition. See Business—Government Contracts and Regulations and —Customers.

~~The~~27 ~~accompanying notes are an integral part of these consolidated financial statements.~~

35Table of Contents

FIREARMSIndex TRAININGto SYSTEMS,Financial INC. AND SUBSIDIARIES Statements

~~CONSOLIDATED~~Our ~~STATEMENTS~~business OFrelies ~~OPERATIONS~~on maintaining and growing sales to international customers.

	Years Ended March 31
	2003			2002			2001
	(In thousands, except per share amounts)
Revenue	$	66,125		$	59,057		$	41,501
Cost of revenue		44,956			41,607			35,026
Gross margin		21,169			17,450			6,475
Operating expenses
Selling, general and administrative		10,947			11,065			10,119
Research and development		2,824			4,083			4,747
Depreciation and amortization		925			1,776			2,293
Impairment charges		—			971			1,244
Total operating expenses		14,696			17,895			18,403
Operating income (loss)		6,473			(445	)		(11,928	)
Other income (expense), net
Interest income		103			243			247
Interest expense		(217	)		(23	)		(4,691	)
Foreign currency exchange		131			(10	)		(223	)
Other, net		(27	)		(51	)		(34	)
Total other income (expense)		(10	)		159			(4,701	)
Income (loss) before provision for income taxes		6,463			(286	)		(16,629	)
Provision for income taxes		(867	)		(4,892	)		(1,052	)
Net income (loss) before preferred stock adjustments		7,330			4,606			(15,577	)
Accretion of preferred stock		(298	)		(270	)		(260	)
Gain on extinguishment of preferred stock		—			—			1,729
Net income (loss) attributable to common shareholders	$	7,032		$	4,336		$	(14,108	)
Earnings per share
Basic income (loss) per share	$	0.10		$	0.06		$	(0.26	)
Diluted income (loss) per share	$	0.10		$	0.06		$	(0.26	)
Weighted average common shares outstanding—basic		70,153			70,152			53,643
Weighted average common shares outstanding—diluted		71,729			70,829			53,643

A significant portion of our sales is made to customers located outside the U.S., primarily in Europe and Asia. In fiscal 2005, 2004 and 2003, 45.1%, 51.6% and 48.8% of our revenues, respectively, were derived from sales to customers located outside the U.S. We expect that our international customers will continue to account for a substantial portion of our revenues in the near future. Sales to international customers may be subject to political and economic risks, including political instability, wars, civil unrest, acts of terrorism and other conflicts, currency controls, exchange rate fluctuations and changes in import/export regulations and tariff rates. In addition, various forms of protectionist trade legislation have been and in the future may be proposed in the U.S. and certain other countries. Any resulting changes in current tariff structures or other trade and monetary policies could adversely affect our sales to international customers. Political and economic factors have been identified by the Company with respect to certain of the markets in which we compete. There can be no assurance that these factors will not result in defaults by customers in making payments due to the Company, in reductions in the purchases of our products by international customers or in foreign currency exchange losses. We do not currently hedge these foreign currency transactions. In certain cases, we have reduced certain of the risks associated with international contracts by obtaining bank letters of credit to support the payment obligations of our customers and/or by providing in our contracts for payment in U.S. dollars.

~~The~~Our ~~accompanying~~success ~~notes~~is ~~are~~dependent anupon ~~integral~~the ~~part~~Company’s ofability ~~these~~to ~~consolidated~~incorporate ~~financial~~rapid ~~statements~~technological change.

36Our R&D personnel use certain established market-leading technologies to develop simulation systems and related products. Our continued success will depend on our ability to incorporate in FATS products changing technologies in such fields as electronics, mechanical engineering, training development and audio-visual and to develop and introduce new technology that meets the increasingly sophisticated training needs of our customers. Although we continuously pursue product R&D efforts, there can be no assurance that we will be successful in adapting to these developments in a timely fashion. Any failure to so adapt could have a material adverse effect on our results of operations and financial condition. See Business—Research and Development.

~~FIREARMS~~Our ~~TRAINING~~market ~~SYSTEMS,~~is ~~INC.~~continuing ~~AND~~to ~~SUBSIDIARIES~~develop and there is no assurance that our products will continue to obtain acceptance.

~~STATEMENT~~The OFmarket ~~CONSOLIDATED~~for ~~CHANGES~~interactive INsmall ~~STOCKHOLDERS~~and supporting arms training simulators is developing, and we believe that the Company’s ~~DEFICIT~~continued and future success will depend upon, among other factors, the extent to which domestic and foreign military services and law enforcement departments continue to adopt simulation in their training regimens. There can be no assurance that the use of simulation training systems will become widespread or continue to grow or that our products will maintain their current share of the market. See Business—Industry Overview.

	Class A Voting Common				Class B Nonvoting Common				AdditionalPaid-InCapital			StockWarrants		DeferredCompensation			AccumulatedDeficit			Accumulated Other ComprehensiveLoss			Total
	Shares		Amount		Shares		Amount
	(Dollars in thousands)
Balance, March 31, 2000	19,394,447		$	—	1,694,569		$	—	$	114,592		$	—	$	(177	)	$	(162,578	)	$	(38	)	$	(48,201	)
Net loss																		(15,577	)
Foreign currency translation adjustment																					(248	)
Comprehensive Income																								(15,825	)
Preferred Stock Adjustments										1,469														1,469
Common stock issued to 401(k) plan	332,875			—						72														72
Forfeiture of restricted stock	(32,500	)		—																				—
Amortization of deferred compensation															177									177
Common stock issued in debt restructuring	48,695,212			—						7,609														7,609
Centre Entities stock exchange	1,694,569			—	(1,694,569	)		—																—
Warrants issued for Series A preferred stock													613											613
Balance, March 31, 2001	70,084,603			—	—			—		123,742			613		—			(178,155	)		(286	)		(54,086	)
Net income																		4,606
Foreign currency translation adjustment																					(93	)
Comprehensive Income																								4,513
Preferred Stock Dividends										(270	)													(270	)
Common stock issued to 401(k) plan	68,536			—						41														41
Balance, March 31, 2002	70,153,139		$	—	—		$	—	$	123,513		$	613	$	—		$	(173,549	)	$	(379	)	$	(49,802	)
Net income																		7,330
Foreign currency translation adjustment																					276
Comprehensive Income																								7,606
Preferred Stock Dividends										(298	)													(298	)
Balance, March 31, 2003	70,153,139		$	—	—		$	—	$	123,215		$	613	$	—		$	(166,219	)	$	(103	)	$	(42,494	)

We are likely to face continued competition for our products.

The ~~accompanying~~relatively ~~notes~~undeveloped ~~are~~nature anof ~~integral~~the ~~part~~market in which we compete may attract new entrants, as they perceive opportunities in this market. While management believes that the Company is currently the most effective competitor in its market, existing and new competitors may have significantly greater financial, technical and marketing resources than the Company, may foresee the course of ~~these~~market ~~consolidated~~developments more accurately than the Company, may develop products or may adapt more quickly than the Company to new technologies or evolving customer requirements. With respect to potential competitors, we believe that as the firearms simulation market continues to develop, a number of large domestic defense contractors have the capacity to become significant competitors due to their expertise with complex simulation systems and their relationships with the Department of Defense and the U.S. Congress. There can be no assurance that we will be able to maintain our current market position, and failure to compete successfully with existing and new competitors could have a material adverse effect on our results of operations and financial ~~statements~~condition. See Business—Competition.

3728

FIREARMSTable TRAININGof SYSTEMS, INC. AND SUBSIDIARIES Contents

CONSOLIDATEDIndex STATEMENTSto OFFinancial CASH FLOWS Statements

	Years Ended March 31
	2003			2002			2001
	(In thousands)
Cash flows from operating activities
Net income (loss) attributable to common shareholders	$	7,032		$	4,336		$	(14,108	)
Adjustments for non-cash items
Non-cash employee compensation		—			41			249
Preferred stock adjustments		298			270			(1,469	)
Amortization of debt discount		(3,512	)		(3,513	)		(2,049	)
Non-cash interest and financing costs		675			2,570			250
Depreciation and amortization		1,267			1,783			2,625
Change in inventory reserve		(2,311	)		2,492			4
Change in warranty and contract cost provision reserve		(1,095	)		(815	)		3,885
(Gain) loss on sale of assets		12			(66	)		178
Loss on impairment of assets		—			971			1,244
Deferred income taxes		(22	)		(201	)		(96	)
Changes in assets and liabilities
Accounts receivable, net		(7,969	)		(1,909	)		(1,937	)
Income taxes receivable		3,665			(3,679	)		364
Costs and estimated earnings in excess of billings on uncompleted contracts		(2,881	)		(336	)		—
Unbilled receivables		1,275			(23	)		1,427
Inventories		1,686			842			3,816
Prepaid expenses and other current assets		(199	)		(327	)		(493	)
Accounts payable		818			1,528			504
Accrued liabilities		(227	)		1,065			4,605
Income taxes payable		176			—			—
Billings in excess of costs and estimated earnings on uncompleted contracts		992			8			1,203
Deferred revenue		952			(731	)		(23	)
Noncurrent liabilities		(83	)		(217	)		(390	)
Total adjustments		(6,483	)		(247	)		13,897
Net cash provided (used) by operating activities		549			4,089			(211	)
Cash flows from investing activities
Change in restricted cash		(5	)		(806	)		714
Purchase of property and equipment		(1,350	)		(758	)		(736	)
Proceeds from disposal of property and equipment		19			59			52
Acquisition of other assets		—			(33	)		—
Net cash provided (used) by investing activities		(1,336	)		(1,538	)		30
Cash flows from financing activities
Proceeds from long-term debt		—			—			200
Payments on long-term debt		(34	)		(70	)		—
Payment of deferred financing costs		(250	)		—			—
Net cash provided (used) by financing activities		(284	)		(70	)		200
Effect of exchange rate changes on cash		276			(93	)		(41	)
Net increase (decrease) in cash and cash equivalents		(795	)		2,388			(52	)
Cash and cash equivalents, beginning of year		4,222			1,834			1,886
Cash and cash equivalents, end of year	$	3,427		$	4,222		$	1,834
Supplemental cash flow disclosures
Cash paid (received) for
Interest	$	2,866		$	965		$	1,010
Income taxes	$	(4,592	)	$	(1,030	)	$	(1,327	)
Non-cash investing and financing activities
Vehicles acquired through capital leases	$	209		$	—		$	—
Transfer of property and equipment to inventory	$	—		$	242		$	—

Our quarterly results are subject to significant variations.

~~The~~Our ~~accompanying~~revenues ~~notes~~and results of operations historically have varied substantially from quarter to quarter, and we expect 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. We recognize revenues primarily upon shipment of our products to FATS customers, while a high percentage of our operating expenses, including personnel, rent and debt service, are anrelatively ~~integral~~fixed ~~part~~in advance of ~~these~~any ~~consolidated~~particular quarter. As a result, the concentration of several order deliveries in a particular quarter, unanticipated variations in the number and timing of shipments or customer delays in proceeding to succeeding stages of a contract could have a material adverse effect on our quarterly results of operations and financial ~~statements~~condition. As a result of the foregoing factors, our operating results for a future quarter may be below the expectations of public market analysts and investors. In such event, the price of the common stock will likely be adversely affected.

38Our financial condition, and the restrictive covenants contained in our credit facility may limit our ability to borrow additional funds or raise additional equity as may be required to fund our future operations.

~~FIREARMS~~Our ~~TRAINING~~accumulated ~~SYSTEMS~~deficit and stockholders’ deficit was approximately $157.6 million and $28.5 million, ~~INC~~respectively, as of March 31, 2005. ~~AND~~Moreover, ~~SUBSIDIARIES~~the terms of our New Credit Agreement may limit our ability to, among other things:

~~NOTES~~• TOincur ~~CONSOLIDATED~~additional ~~FINANCIAL STATEMENTS~~ debt;

~~1. Organization~~• ~~and~~retire ~~Nature~~or ofexchange ~~Business~~outstanding debt;

~~Firearms~~• ~~Training~~pay ~~Systems~~cash dividends, ~~Inc.~~redeem, ~~(FATS~~retire or ~~the~~repurchase ~~Company)~~our ~~was~~stock ~~incorporated~~or inchange ~~Delaware~~our incapital ~~1984.~~ structure;

~~FATS~~• isacquire ~~engaged~~assets inor ~~the~~businesses ~~development,~~or ~~manufacture,~~make ~~sale,~~investments ~~and~~in ~~servicing~~other of small and supporting arms training simulators and simulated firearms. The Company’s products include simulators for military, law enforcement, sport shooting, and hunter education. The Company’s customers include primarily military and law enforcement agencies throughout the United States and most parts of the world. entities;

~~The~~• ~~Company~~enter ~~has~~into ~~one~~certain ~~wholly~~transactions ~~owned~~with subsidiary, FATS, Inc., which is the operating subsidiary (the Operating Subsidiary). As of March 31, 2003, FATS, Inc. had six wholly owned subsidiaries (collectively, the Subsidiaries): Firearms Training Systems Limited, which is based in the United Kingdomaffiliates; F.A.T.S. Singapore Pte, Ltd.; Firearms Training Systems Netherlands, B.V.; Simtran Technologies, Inc., which is based in Montreal, Canada (Simtran); FATS Canada Holdings, and Firearms Training Systems Australia Pty Ltd.

~~2. Summary~~• ofmerge ~~Significant~~or ~~Accounting~~consolidate ~~Policies~~with other entities;

~~Principles~~• sell or otherwise dispose of ~~Consolidation~~assets or use the proceeds from any asset sale or other disposition; and

~~The~~• ~~consolidated~~create ~~financial~~additional ~~statements~~liens ~~include~~on ~~the~~our ~~accounts of the Company, the Operating Subsidiary, and the Subsidiaries~~assets. ~~All significant intercompany transactions and balances have been eliminated.~~

~~Foreign~~Our ~~Currency~~business ~~Translation~~depends on our ability to manage growth.

~~The~~Our ~~assets~~growth has been a result of our ability to define, develop and ~~liabilities~~expand the markets for FATS products. Our future growth will depend on our ability to conduct such activities with the same or greater degree of success as in the ~~Operating~~past. ~~Subsidiary’s~~Any ~~foreign~~such ~~subsidiaries~~growth ~~are~~will ~~translated~~continue ~~into~~to place significant demands on our management and other resources. In particular, we will have to continue to increase the number of FATS personnel, particularly marketing and management personnel, and continue to develop and improve our operational, financial and other internal systems, both in the U.S. ~~dollars~~and ~~using~~internationally. ~~current~~Our ~~exchange~~inability ~~rates~~to inmanage ~~effect~~growth effectively could have a atmaterial adverse effect on the ~~balance~~quality ~~sheet~~of ~~date,~~our products and ~~revenues~~services, our ability to attract and ~~expenses~~retain ~~are~~key ~~translated~~personnel, atour ~~average~~business ~~monthly~~prospects ~~exchange~~and ~~rates~~our results of operations and financial condition.

~~The~~We ~~resulting~~depend ~~translation~~on ~~adjustments~~our ~~are~~current ~~recorded~~personnel asand amay ~~separate~~have ~~component~~difficulty ofattracting ~~stockholders’ deficit. Gains~~ and ~~losses,~~retaining ~~which result from foreign~~the ~~currency~~skilled ~~transactions,~~employees ~~are~~we ~~included~~need into ~~the~~execute ~~accompanying~~our ~~consolidated~~business ~~statements of operations~~plan.

~~Revenue~~Our ~~Recognition~~future success will depend, in large part, on the continued service of our key management and technical personnel, including Ronavan Mohling, our Chief Executive Officer, David McGrane, our Chief Operating Officer, Gregory Ton, our Chief Financial Officer, and other key management, sales, marketing and R&D personnel. Failure to retain such key personnel or to attract and integrate other qualified personnel could have a material adverse effect on our results of operations and financial condition. If any of these individuals or others we employ are unable or unwilling to continue in their present positions, our business, financial condition and results of operations could suffer. We do not carry key person life insurance on our personnel. Mr. Mohling and

A29 significant amount of the Company’s revenue is derived from the sale of small and supporting arms training simulators and accessories. Revenue from sales to commercial customers and governmental agencies is primarily recognized upon shipment when title passes; as all material commitments have been fulfilled, the sales price is fixed and determinable and collectibility is reasonably assured.

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

OtherIndex governmental contracts require significant customization of the Company’s existing proprietary platform or require the development of new systems to meetFinancial required customer specifications. These contracts Statements

39 Mr. McGrane have entered into an employment agreement with us; however, these agreements do not ensure their continued employment with us.

~~FIREARMS~~We ~~TRAINING~~are ~~SYSTEMS,~~dependent ~~INC.~~on ~~AND~~our ~~SUBSIDIARIES~~relationship with our agents in some countries.

~~NOTES~~We TOconduct ~~CONSOLIDATED~~business ~~FINANCIAL~~in ~~STATEMENTS—(Continued)~~some countries using a local agent who can provide knowledge of the local market conditions and facilitate the acquisition of necessary licenses and permits. We rely in part upon the services of these agents to market our services, to act as intermediaries with customers and financial institutions and to provide other services, such as training, minor maintenance, resolving customs issues, and collections, on our behalf. There can be no assurance that we will continue to be successful in maintaining our relationships with our agents in various foreign countries, or that we will find qualified replacements for agents who may terminate their relationships with us. Because our agents may occasionally have the primary relationship with certain of our customers, we could lose some customers if a particular agent were to terminate his or her relationship with us. The loss of or failure to obtain qualified agents in a particular country or region could result in the temporary or permanent cessation of our sales and/or the failure to develop our business in that country or region.

Because our ~~are~~business ~~accounted~~is ~~for~~dependent ~~under~~on ~~the~~commercial ~~percentage~~airfreight ofcarriers ~~completion~~and ~~method,~~air ~~measured~~charter byoperators, ~~the~~ocean ~~percentage~~freight ofcarriers ~~cost~~and ~~incurred~~other totransportation ~~date~~companies, tochanges ~~the~~in ~~total~~available ~~costs~~cargo ~~for~~capacity ~~each contract. Contract costs include all direct material, direct labor~~ and other ~~costs~~changes ~~directly~~affecting ~~related~~such ~~to the contract. Selling~~carriers, ~~general,~~as ~~and~~well ~~administrative costs are charged to expense~~ as ~~incurred.~~interruptions ~~Changes~~ in ~~job performance, job conditions, and estimated~~ ~~profitability,~~service ~~including~~or ~~those~~work ~~arising~~stoppages ~~from~~by ~~contract~~such ~~penalty provisions~~carriers, ~~and final contract settlements~~ may ~~result~~negatively inimpact ~~revisions~~our ~~to costs and income and are recognized in the period in which the revisions are determined~~business.

~~Provisions~~We ~~for~~rely ~~estimated~~on ~~losses~~commercial onairfreight ~~uncompleted~~carriers ~~contracts~~and ~~accounted~~air charter operators, ocean freight carriers, trucking companies and other transportation companies for ~~under~~the movement of our products. Consequently, our ability to provide ~~both~~our ~~methods~~products ~~described~~to ~~above~~our ~~are~~customer ~~made~~could be adversely impacted by shortages in ~~the~~available ~~period~~cargo capacity; changes by carriers and transportation companies in ~~which~~policies and practices such ~~losses~~as ~~are~~scheduling, ~~determined~~pricing, payment terms and frequency of service or increases in the cost of fuel, taxes and labor; and other factors not within our control. Material interruptions in service or stoppages in transportation, whether caused by strike, work stoppage, lock-out, slowdown or otherwise, could adversely impact our business, results of operations and financial condition.

~~Revenue~~If ~~from extended warranty sales and customer logistics support sales~~ we are ~~recorded~~unable asto ~~deferred~~protect ~~revenue~~our ~~and~~intellectual ~~are recognized ratably as income over the lives of the related service agreements~~property, ~~which~~our ~~generally~~competitive ~~range from~~position ~~one~~would tobe ~~three~~adversely ~~years~~affected. ~~Costs associated with these sales are recorded in the period incurred.~~

~~Cash~~We rely on patent, trademark and ~~Cash~~copyright ~~Equivalents~~law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property. Unauthorized third parties may copy our services or reverse engineer or obtain and use information that we regard as proprietary. End-user license provisions protecting against unauthorized use, copying, transfer and disclosure of any licensed program may be unenforceable under the laws of certain jurisdictions and foreign countries. We may seek to patent certain processes or equipment in the future. We do not know if any of our patent applications will be issued with the scope of the claims we seek, if at all. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. If we fail to protect our intellectual property and proprietary rights, our business, financial condition and results of operations would suffer.

~~Cash~~We ~~and~~believe ~~cash~~that ~~equivalents~~we ~~include~~do not infringe upon the proprietary rights of any third party. It is possible, however, that such a claim might be asserted successfully against us in the future. Our ability to provide our services depends on our freedom to operate. That is, we must ensure that we do not infringe upon the proprietary rights of others or have licensed all ~~highly~~such ~~liquid~~rights. ~~investment~~A ~~instruments~~party ~~with~~making an ~~original~~infringement ~~maturity~~claim could secure a substantial monetary award or obtain injunctive relief that could effectively block our ability to provide services in the United States or abroad. We may be unaware of ~~three~~intellectual ~~months~~property rights of others that may, or ~~less~~may be claimed, to cover our technology. Current or future claims could result in costly litigation and divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements to the extent necessary for the conduct of our business. However, we may be unable to obtain royalty or license agreements on terms acceptable to us or at all.

~~Restricted~~30 ~~Cash~~

RestrictedTable cash represents escrow accounts at financial institutions to collateralize letters of credit to ensure contract performance by the Company under specific contracts, which are for the most part substantially completed within one year. As each contract is completed, the restricted cash related to that contract becomes unrestricted. Approximately $279,000 of the cash is invested in certificates of deposit yielding from 0.75% to 1.25% with maturity dates ranging from June 28, 2003 to September 9, 2003, unless otherwise extended. Contents

InventoriesIndex to Financial Statements

~~Inventories consist primarily of simulators, computer hardware, projectors,~~ ~~and~~We ~~component~~also ~~parts.~~may ~~Inventories~~be ~~are~~subject ~~valued~~to atsignificant ~~the~~damages ~~lower of cost on a moving weighted average basis~~ or ~~market.~~an ~~Cost~~injunction ~~includes~~against ~~materials,~~use labor, and factory overhead. Market is defined as net realizable value. During the fiscal year ended March 31, 2002, the Company increased its reserve for excess and obsolete inventory, based on its analysis of ~~existing~~our ~~inventory~~proprietary inor ~~conjunction~~licenses ~~with future estimated sales demand, by $3~~systems.5 ~~million.~~A ~~The~~successful ~~Company~~claim ~~completed a full assessment~~ of ~~inventory~~patent onor ~~hand~~other ~~during~~intellectual ~~the~~property ~~year~~infringement ~~ended~~against ~~March~~us ~~31,~~could ~~2003~~materially ~~and~~adversely ~~scrapped~~affect aour ~~significant~~business ~~portion~~and ~~of the inventory deemed to be obsolete at March 31, 2002~~profitability. ~~This resulted in a significant decrease in the inventory reserve during 2003.~~

~~Inventories~~Control ~~consist~~ of ~~the~~our ~~following~~stock (is concentrated in ~~thousands):~~a few existing stockholders.

	March 31,
	2003			2002
Raw materials	$	5,962		$	8,874
Work in process		2,436			2,668
Finished goods		2,870			1,412
Inventories, gross		11,268			12,954
Reserve for excess and obsolete inventory		(1,209	)		(3,520	)
Inventories, net	$	10,059		$	9,434

A group of institutional lenders including several entities affiliated with Centre Partners Management beneficially own or have voting control over approximately 85% of the total outstanding shares of common stock with the Centre Partners affiliates Entities owning approximately 67%. Additionally, three of our directors are affiliated with Centre Partners. Such concentration of ownership may have the effect of delaying or preventing certain types of transactions involving an actual or potential change in control of the Company, including transactions in which the holders of the common stock might receive a premium on their shares over a prevailing market price. Moreover, such concentration of ownership could result in the Company undertaking certain types of transactions, including a potential change of control transaction that it might not otherwise pursue. In addition, by virtue of ownership of a majority of the outstanding voting stock of the Company, the institutional lenders and the Centre Partners affiliates will be able to control all elections of the directors as well as all other matters submitted to a vote of stockholders, including amendments to the certificate of incorporation, mergers and sales of substantially all assets, going private transactions and other extraordinary transactions.

40Provisions of our governing documents could discourage acquisition proposals or delay a change in control.

~~FIREARMS~~Our ~~TRAINING~~Board ~~SYSTEMS~~of Directors is classified into three classes, ~~INC~~each of which will serve for three years, with one class being elected each year. ~~AND~~In ~~SUBSIDIARIES~~addition, our Board of Directors is empowered to issue, without stockholder action, preferred stock having the terms designated by the Board of Directors. The structure of the Board of Directors and the existence of this “blank check preferred” could render more difficult an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock and could adversely affect the rights and powers, including voting rights, of the holders of common stock.

~~NOTES~~Investor TOinterest ~~CONSOLIDATED~~in ~~FINANCIAL~~our ~~STATEMENTS—(Continued)~~common stock may be negatively affected by our continued trading on the Over-the-Counter Bulletin Board.

~~Long~~Our stock continues to trade on the NASD-~~Term~~operated ~~Contracts~~Over-the-Counter (“OTC”) Bulletin Board. The OTC Bulletin Board market is generally considered to be less efficient and not as liquid as NASDAQ’s National Market. Continued trading in this market may decrease the market value and liquidity of our stock, which could materially and adversely affect our ability to attract additional investment to finance our operations. Numerous factors including announcements of fluctuations in the Company’s or its competitors’ operating results could have a significant impact on the future price of our common stock. In addition, in recent years, the equity market has experienced extreme price and volume fluctuations that have affected the market price for many growth companies and that frequently have been unrelated to the operating performance of those companies. Such market fluctuations may materially and adversely affect the market price of the common stock.

~~Costs~~We ~~and~~have ~~estimated~~no ~~earnings~~present onintention ~~uncompleted~~to ~~contracts~~pay ~~and~~dividends ~~related amounts billed as of March 31, 2003~~ and ~~March~~our ~~31,~~credit ~~2002,~~facility ~~respectively,~~restricts ~~are~~our asability ~~follows~~to (pay dividends in ~~thousands):~~the future.

	March 31,
	2003			2002
Costs incurred on uncompleted contracts	$	26,727		$	14,305
Estimated earnings		12,087			6,536
		38,814			20,841
Less: billings to date		(35,394	)		(19,310	)
	$	3,420		$	1,531
Such amounts are included in the following accounts (in thousands):
Costs and estimated earnings in excess of billings on uncompleted contracts	$	4,697		$	1,816
Billings in excess of costs and estimated earnings on uncompleted contracts		(1,277	)		(285	)
	$	3,420		$	1,531

We currently intend to retain all available funds to finance the operation and expansion of our business and therefore do not anticipate paying any dividends on the common stock in the foreseeable future. In addition, the New Credit Agreement prohibits the payment of any dividends in respect of the common stock. See Liquidity and Capital Resources.

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

~~Property~~Our ~~and~~major ~~equipment~~market ~~are~~risk ~~stated~~exposure atarises ~~cost. Major~~from ~~property~~changes ~~additions,~~in ~~replacements,~~interest ~~and~~rates ~~improvements are capitalized, while maintenance~~ and ~~repairs~~its ~~that~~impact doon ~~not~~variable ~~extend~~rate ~~the~~debt ~~useful lives of these assets are expensed currently~~instruments. ~~Depreciation~~Our isobjectives ~~provided~~in ~~using~~interest ~~the straight-line method for financial~~rate ~~reporting~~risk ~~purposes~~management ~~and~~are ~~accelerated~~to ~~methods~~limit ~~for income tax purposes. Estimated service lives of~~ the ~~principal~~impact ~~items~~ of ~~property~~interest ~~and~~rate ~~equipment~~changes ~~range~~on ~~from three to five years. Total depreciation expense for the years ended March 31, 2003, 2002, and~~ ~~2001 was $1,089,000, $1,591,000 and $2,042,000, respectively.~~

~~Property~~31 ~~and equipment consists of the following (in thousands):~~

	March 31,
	2003			2002
Machinery and equipment	$	3,702		$	5,331
Demonstration equipment		3,138			2,988
Software		1,210			768
Furniture and fixtures		616			455
Vehicles, including approximately $200 under capitalized leases for 2003		528			291
Leasehold improvements		348			185
		9,542			10,018
Accumulated depreciation		(7,524	)		(8,439	)
Property and equipment, net	$	2,018		$	1,579

ImpairmentIndex of Long-Livedto AssetsFinancial Statements

~~SFAS~~ earnings ~~No.~~and ~~144~~cash flows, ~~Accounting~~and ~~for~~to ~~the Impairment~~lower oroverall ~~Disposal~~borrowing ofcosts. ~~Long-Lived~~To ~~Assets~~achieve these objectives, ~~requires~~we ~~that~~borrow ~~long-lived~~at ~~assets~~fixed rates when we have the opportunity and ~~certain~~believe it ~~identifiable~~is ~~intangibles~~in the Company’s best interests to bedo ~~held~~so, and ~~used~~may byenter aninto ~~entity~~derivative befinancial ~~reviewed~~instruments, ~~for~~such ~~impairment~~as ~~whenever~~interest ~~events~~rate orswaps ~~changes~~and caps, in ~~circumstances~~order ~~indicate~~to ~~that~~limit ~~the~~our ~~carrying amount~~exposure ofto aninterest ~~asset~~rate ~~may~~fluctuations. ~~not~~We bedo ~~recoverable.~~not ~~When~~enter ~~events~~into derivative or ~~changes~~interest rate intransactions ~~circumstances~~for ~~occur~~speculative ~~related~~purposes. toThere ~~long-lived~~were ~~assets,~~no ~~the~~derivative ~~Company~~contracts ~~compares~~in ~~the~~effect ~~estimated~~at March 31, 2005 or 2004.

41As of March 31, 2005, we had a total of approximately $29.1 million in variable rate debt at differing interest rates tied to the prime rate. 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 or cash flow. See Note 4 of the Notes to Consolidated Financial Statements.

~~FIREARMS~~ Item ~~TRAINING~~8. Financial ~~SYSTEMS,~~Statements ~~INC.~~and ~~AND~~Supplementary ~~SUBSIDIARIES~~Data

~~NOTES~~The TOconsolidated ~~CONSOLIDATED~~financial ~~FINANCIAL~~statements ~~STATEMENTS—(Continued)~~of the Company, including notes thereto, and the report of independent registered public accounting firm are included in this Report beginning at page F-1 and are incorporated herein by reference.

~~future~~Quarterly ~~undiscounted~~Results ~~cash flows expected to result from the use~~ of ~~the~~Operations asset, and the proceeds from its eventual disposition, with the assets carrying value. In the event the assets carrying value exceeds the estimated future undiscounted cash flows, an impairment loss is recorded for the difference between the carrying value and the fair value of the asset.

~~During~~As ~~fiscal~~previously reported ~~years~~on ~~2003,~~Form ~~2002,~~8-K ~~and~~filed ~~2001~~on June 29, 2005, the Company ~~recorded~~determined ~~impairment losses~~that ofit ~~$0,~~was ~~$971,000~~necessary ~~and~~to ~~$1,244,000,~~restate ~~respectively,~~its ~~which~~previously isissued ~~discussed~~consolidated infinancial ~~the~~statements ~~following~~to ~~paragraphs.~~correct ~~There~~for ~~were~~certain noerrors ~~other~~in ~~instances where~~ the ~~sum~~application of ~~expected~~SFAS ~~future~~52, ~~cash~~for ~~flows~~fiscal ~~(undiscounted~~years ~~and~~ended ~~without~~March 31, ~~interest~~2003 ~~charges)~~and ~~was~~2004, ~~less~~as ~~than~~well as the ~~carrying value~~financial data of the ~~asset~~quarters ended June 30, ~~accordingly~~September 30 and December 31, ~~management~~2004 ~~believes~~and ~~that~~2005 and the ~~remaining~~quarter ~~long-lived~~ended ~~assets~~March in31, ~~the~~2004. ~~accompanying~~See ~~balance~~Management’s ~~sheets~~Discussion ~~are~~and ~~appropriately~~Analysis ~~valued~~of Financial Condition and Results of Operations-Restatement.

~~Throughout~~The ~~fiscal~~following ~~year~~table ~~2002,~~presents certain ~~the~~unaudited ~~Company~~quarterly ~~assessed~~statements ~~the carrying value~~ of ~~its~~operations ~~goodwill~~data ~~recorded~~for ~~upon~~each ~~acquisition~~ of ~~certain~~the ~~assets~~eight ~~from~~quarters ~~SBS~~beginning ~~Technologies during~~April ~~the~~1, ~~fiscal~~2003 ~~year~~and ~~ended~~ending March 31, ~~1998,~~2005. ~~which~~Such ~~was~~information, ~~substantially~~in ~~dependent upon additional business from a certain customer. During~~ the ~~quarter~~opinion ~~ended~~of ~~March 31~~management, ~~2002,~~includes itall ~~became~~adjustments ~~apparent~~necessary ~~that~~for ~~the~~a ~~Company’s~~fair ~~relationship~~presentation ~~with this customer had~~of ~~diminished and~~ that ~~expected~~information, ~~margins~~as onwell as the ~~related~~adjustments ~~product~~for ~~would not be realized, and~~ the ~~Company~~restatement ~~recorded~~discussed anabove. ~~impairment~~The ~~loss~~results of ~~$971,000.~~operations ~~The~~for ~~impairment~~any ~~loss~~quarter isare ~~included~~not innecessarily ~~operating~~indicative ~~expenses~~of in the ~~accompanying~~results ~~statements~~to ofbe ~~operations~~expected for ~~the fiscal~~any ~~year~~future ~~ended March 31, 2002~~quarter.

During the third quarter of fiscal year 2001, management began an evaluation of the operations of Simtran, in response to Simtran’s declining customer order backlog and the strategic repositioning plan for Simtran. Management assessed the recoverability of the assets of Simtran by estimating the future undiscounted cash flows expected to result from future Simtran operations and determined that an impairment of long-lived assets had occurred. Management recorded an impairment loss of $1,244,000, comprised of $608,000 of certain fixed assets and $636,000 of unamortized goodwill. The impairment loss is included in operating expenses in the accompanying statements of operations for the fiscal year ended March 31, 2001.


	Year Ended March 31, 2004
	Quarter Ended
	(Amounts in thousands, except per share amounts)
	June 30						September 30						December 31						March 31
	Previously						Previously						Previously						Previously
	Reported			Restated			Reported			Restated			Reported			Restated			Reported			Restated
Revenue	$	15,618		$	15,823		$	12,931		$	13,135		$	16,479		$	16,799		$	26,826		$	27,332
Gross margin		4,271			4,476			3,903			4,107			6,209			6,530			12,725			13,230
Gross margin%		27	%		28	%		30	%		31	%		38	%		39	%		47	%		48	%
Operating expenses		3,545			3,545			3,842			3,842			4,029			4,029			5,048			5,048

Operating income		726			931			61			265			2,180			2,501			7,677			8,182
Interest expense		1,761			1,761			2,058			2,058			2,094			2,094			2,131			2,131
Other (income) expense		(42	)		(53	)		58			62			(166	)		(161	)		43			27

Income (loss) before (benefit) provision		(993	)		(777	)		(2,055	)		(1,855	)		252			568			5,503			6,024
(Benefit) provision for income taxes		(103	)		(35	)		(458	)		(388	)		332			462			(2,102	)		(1,910	)

Net income (loss)	$	(890	)	$	(742	)	$	(1,597	)	$	(1,467	)	$	(80	)	$	106		$	7,605		$	7,934

Earnings (loss) per common share
Basic	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	0.00		$	0.00		$	0.11		$	0.11

Diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	0.00		$	0.00		$	0.10		$	0.11

~~Accrued~~32 ~~Liabilities~~

AccruedTable liabilities consist of the following (in thousands): Contents

	March 31,
	2003		2002
Sales commissions, bonuses and agents’ commissions	$	929	$	554
Salaries and related expenses		1,437		1,237
Professional fees		173		994
Severance costs		26		116
Business taxes		585		169
Licenses and contract obligations		525		600
Other		1,151		1,383
Accrued liabilities	$	4,826	$	5,053

Index to Financial Statements


	Year Ended March 31, 2005
	Quarter Ended
	(Amounts in thousands, except per share amounts)
	June 30						September 30						December 31						March 31
	Previously						Previously						Previously
	Reported			Restated			Reported			Restated			Reported			Restated
Revenue	$	18,012		$	18,365		$	20,130		$	20,475		$	21,029		$	21,521		$	28,005
Gross margin		6,146			6,499			6,366			6,711			6,949			7,441			10,275
Gross margin%		34	%		35	%		32	%		33	%		33	%		35	%		37	%
Operating expenses		4,469			4,469			4,529			4,529			4,385			4,385			5,314

Operating income		1,677			2,030			1,837			2,182			2,564			3,056			4,961
Interest expense		2,161			2,161			2,392			2,392			935			935			970
Other (income) expense		90			85			312			315			287			274			64

Income (loss) before (benefit) provision		(574	)		(216	)		(867	)		(525	)		1,342			1,847			3,927
(Benefit) provision for income taxes		40			123			(53	)		71			569			711			1,529

Net income (loss)	$	(614	)	$	(339	)	$	(814	)	$	(596	)	$	773		$	1,136		$	2,398

Earnings (loss) per common share
Basic	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.01		$	0.02		$	0.03

Diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.01		$	0.02		$	0.03

~~FIREARMS~~ Item ~~TRAINING~~9. Changes ~~SYSTEMS,~~in ~~INC.~~and ~~AND~~Disagreements ~~SUBSIDIARIES~~With Accountants on Accounting and Financial Disclosure

~~NOTES~~None ~~TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Warranty~~ Item 9A. Controls and ~~Contracts~~Procedures ~~Cost Provision Reserve~~

~~Warranty~~Evaluation ~~and contract cost provision reserves consist~~ of ~~the~~Disclosure ~~following~~Controls ~~(in thousands):~~Procedures

	March 31,
	2003			2002
Contract cost provision reserve	$	1,926		$	3,175
Warranty provision reserve		704			550
		2,630			3,725
Current portion		(2,015	)		(2,258	)
Noncurrent portion	$	615		$	1,467

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its chief executive and chief financial officers, as appropriate, to allow timely decisions regarding required disclosure. It should be noted, however, that because of inherent limitations, the Company’s disclosure controls and procedures, however well designed and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met.

~~Contract~~The ~~Cost~~Company carried out an evaluation, under the supervision and with the ~~Provision~~participation ~~Reserve~~of its management, including its chief executive and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Report. Based on the evaluation of these disclosure controls and procedures, the chief executive and chief financial officer of the Company concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this Report were effective at a reasonable assurance level.

~~Management~~Changes ~~routinely assesses the Company’s performance and estimated cost to complete ongoing sales contracts. 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~~Internal ~~costs~~Controls ~~in excess of contracted revenues in the period in which such information becomes apparent. Excess costs are then charged against the reserve as incurred.~~

~~Warranty~~There ~~Cost~~were ~~Provision~~no ~~Reserve~~changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the Company’s fiscal year ended March 31, 2005 that have materially affected, or are reasonably likely to materially effect, the Company’s internal control over financial reporting. However, due to errors identified in the accounting for certain percentage-of-completion contracts denominated in foreign currencies giving rise to the restatements identified elsewhere in this Report, management has concluded that it had a material weakness in controls over the application of generally accepted accounting principles with respect to these contracts. This weakness was mitigated by annual closing controls which identified the error. Subsequent to year end, the Company has implemented additional controls to review on a monthly basis all percentage-of-completion contracts denominated in foreign currencies to ensure that they are being accounted for in accordance with generally accepted accounting principles.

~~Management~~33 periodically estimates expected warranty costs under the Company’s standard product warranty and adjusts the warranty cost provision reserve to the current estimate. Warranty costs associated with contracts included in the estimate are then charged against the reserve as incurred.

Stock-BasedTable Compensationof Plans Contents

TheIndex Company accounts for stock incentives available to employeesFinancial and non-employee directors under its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees as allowed under FAS No. 123, Accounting for Stock-Based Compensation. The Company has adopted the provisions of FAS No. 123 and FAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which require disclosure of the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. Statements

43 Item 9B. Other Information

~~FIREARMS TRAINING SYSTEMS, INC~~None. ~~AND SUBSIDIARIES~~

~~NOTES~~ PART TOIII ~~CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~The~~ Item ~~Company did not grant options during the fiscal years ended March 31, 2003 or 2002~~10. Directors ~~However,~~and ~~for purposes~~Executive ofOfficers ~~the required pro forma disclosures, the estimated fair value~~ of ~~options granted in prior years are amortized to expense over~~ the ~~options’~~Registrant ~~vesting periods. The Company’s pro forma information follows:~~

	Years Ended March 31
	2003			2002			2001
	(in thousands, except per share amounts)
Net income (loss) applicable to common shareholders
As reported	$	7,032		$	4,336		$	(14,108	)
Fair value based compensation cost, net of taxes		(12	)		(785	)		(2,076	)
Pro forma net income (loss) applicable to common shareholders	$	7,020		$	3,551		$	(16,184	)
Basic income (loss) per share
As reported	$	0.10		$	0.06		$	(0.26	)
Pro forma	$	0.10		$	0.05		$	(0.30	)
Diluted income (loss) per share
As reported	$	0.10		$	0.06		$	(0.26	)
Pro forma	$	0.10		$	0.05		$	(0.30	)

Our business affairs are managed under the direction of the Board of Directors, or the Board, consisting of six persons, divided into three classes. Members of each class serve for a term of three years and structured so that only one class of directors is elected each year. Class I directors, consisting of Scott Perekslis and Ronald C. Whitaker, are currently serving under a term that will expire at the Annual Meeting of Stockholders in 2006. Class II directors, consisting of Ronavan Mohling and Darrell Oyer, are currently serving under a term that will expire at the Annual Meeting of Stockholders in 2007. Class III directors, consisting of Mary Ann Gilleece and Cameron Brightner, are currently serving under a term that will expire at the Annual Meeting of Stockholders in 2005.

~~Certain~~Below ~~other disclosures~~ are ~~required~~the ~~with~~names ~~respect~~and toages ~~stock~~of ~~compensation~~our directors and executive officers, the ~~assumptions~~years ~~used~~they tobecame ~~determine~~directors or executive officers of the ~~pro~~Company, ~~forma~~their principal ~~effects~~occupations ofor ~~SFAS~~employment ~~No.~~for ~~123~~at ~~(see~~least ~~Note~~the 5)past five years and certain of their other directorships, if any.

~~Research~~Ronavan Mohling, age 63, 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, ~~Activities~~responsible for acquisitions and divestitures, for Bristol-Meyers’ Consumer Medicines Division and, from 1992 to 1995, was President of its 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 that company’s Consumer Products Division.

~~The~~Cameron ~~Company~~Breitner, ~~expenses~~age ~~research~~30, ~~and~~was ~~development~~named as ~~costs~~a asDirector ~~incurred.~~of ~~Research~~the ~~and~~Company ~~development~~in ~~costs~~December ~~included~~2004 into fill a vacancy resulting from the ~~accompanying~~expansion ~~statements~~of the Class III directors to a total of ~~operations~~two members. Mr. Breitner has been a principal of Centre Partners Management LLC since 2002. He has served in ~~include~~various ~~salaries,~~capacities ~~wages,~~for ~~benefits,~~Centre ~~general~~Partners ~~and~~since ~~administrative,~~1998. ~~prototype~~Prior ~~equipment~~to Centre, ~~project~~Mr. ~~supplies~~Breitner worked in mergers and ~~other~~acquisitions ~~related~~at ~~costs~~Bowles ~~directly~~Hollowell ~~associated~~Conner ~~with~~& ~~research~~Co. He received a B.A. magna cum laude from Duke University. He is also a director of Bumble Bee Seafoods, L.P., Garden Fresh Holdings, Inc. and ~~development~~Bravo ~~activities~~Sports.

~~Advertising~~Mary ~~Costs~~Ann Gilleece, age 64, was named as a Director of the Company in March of 2001. Ms. Gilleece is a partner with Holland & Knight in the Public Policy & Regulation Group. She was formerly Managing Director with Van Scoyoc Kelly PLLC, a law firm that specializes in government contracts and procurement law. From 1972 to 1975, Ms. Gilleece was an Assistant Attorney General for the Commonwealth of Massachusetts. She was Counsel to the House of Representatives Committee on Armed Services from 1977 to 1983 and then in 1983 was appointed Deputy Undersecretary of Defense Research and Engineering (Acquisition Management) and served in that capacity until August, 1985 after which she returned to private practice. Ms. Gilleece was a partner in the law firm of Manatt Phelps Phillips LLP from June 1997 to June 2002. Ms. Gilleece is a member of the Compensation Committee and the Stock Options Subcommittee of the Board of Directors.

~~The~~Darrell Oyer, age 64, was named as a Director of the Company ~~expenses~~in December ~~all~~2004 ~~advertising~~to ~~costs~~fill a vacancy with respect to the Company’s Class II directors. Prior to forming his own firm in 1991, Mr. Oyer was a partner with Deloitte & Touche. He has over ten years experience in public company accounting through employment with the international accounting firms Deloitte & Touche, Touche Ross and Peat Marwick. He also has approximately twenty years experience working with the federal government including serving as ~~incurred~~Assistant Director of the Defense Contract Audit Agency. Mr. Oyer received a B.S. in Accountancy from the University of

~~Financial~~34 ~~Instruments~~

SFASTable No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the following information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. Contents

TheIndex financial instruments of the Company consist primarily of cash and cash equivalents, accounts receivable, accounts payable and long-term debt at March 31, 2003 and 2002. In management’s opinion, the carrying amounts of these financial instruments, with the exception of the long-term debt, approximate their fair values due to theFinancial immediate or short-term maturity of these financial instruments. A portion of long-term debt bears interest at a fluctuating rate based on the prime rate. The Company therefore believes that the carrying amount of fluctuating rate debt approximates fair value. The remaining portion of the Company’s long-term debt is fixed at 10%. As of March 31, 2003, the Company believes the carrying amount of the fixed rate debt approximates fair value due to the close proximity to its maturity date of September 30, 2003. Subsequent to March 31, 2003, the Company negotiated an extension of the maturity date of the fixed rate debt with an increase in the rate until the extended maturity date. See Note 3. Statements

44 Illinois and an MBA from American University. He is a Certified Public Accountant in Arizona and Virginia and is a member of the National Defense Industrial Association (NDIA) and Chairman of the NDIA Procurement Division. He is a member of the Board of Directors of Schiebel Technology, Inc. and a member of the Procurement Roundtable, a non-profit organization whose members are former government procurement and contract administration executives. Mr. Oyer is a member of the Audit Committee of the Board of Directors.

~~FIREARMS~~Scott ~~TRAINING~~Perekslis, ~~SYSTEMS~~age 37, ~~INC~~has served as a Director of the Company since July 31, 1996. ~~AND~~Mr. ~~SUBSIDIARIES~~Perekslis also served as a Vice President of the Company from July 31, 1996 through July 18, 1997. Mr. Perekslis has been a Managing Director at Centre Partners Management LLC since 2001. He has served in various capacities for Centre Partners and its affiliates since 1991. Mr. Perekslis also serves as a Director of American Seafoods, L.P., Maverick Media LLC, Bumble Bee Seafoods, L.P. and as Chairman of the Board of Hyco International, Inc. Mr. Perekslis is a member of the Compensation Committee and the Stock Options Subcommittee of the Board of Directors.

~~NOTES~~Ronald TOC. ~~CONSOLIDATED~~Whitaker, ~~FINANCIAL~~age ~~STATEMENTS—~~57, has served as a Director of the Company since October 2000. Mr. Whitaker has been President and CEO of Hyco International, Inc. (~~Continued~~an industrial equipment manufacturer) since January 2003. He was President and CEO of Strategic Distribution Inc. (a supply chain management company) from September of 2000 through December 2002. Prior to joining SDI, he was an Operating Partner with Pegasus Investors (a private equity funds group) from 1999 to 2000. Previous operational positions held by Mr. Whitaker include President and CEO of Johnson Worldwide Associates (a sporting goods manufacturer) from 1996 to 1999, President and CEO of EWI, Inc. (an automotive tier 1 supplier) from 1995 to 1996, Chairman, President and CEO of Colt’s Manufacturing Company (a designer and producer of military firearms) from 1992 to 1995, and President and CEO of Wheelabrator Corporation (an industrial equipment manufacturer). In addition to Strategic Distribution Inc., he served on the Board of Directors of Weirton Steel Corporation and Precision Navigation, Inc., and was a member of the Board of Trustees for The College of Wooster. Mr. Whitaker is a member of the Audit Committee of the Board of Directors.

~~Income~~David ~~Taxes~~W. McGrane, age 54, was named Chief Operating Officer 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.

~~The~~Gregory ~~Company~~A. isTon, aage C53, ~~corporation~~was ~~for~~named ~~U.S.~~Chief ~~federal~~Financial ~~income~~Officer ~~tax~~in ~~reporting~~August ~~purposes~~2004. ~~and~~Mr. ~~accounts~~Ton ~~for~~previously ~~income~~served ~~taxes~~as ~~under~~Chief ~~the provisions~~Operating Officer of ~~SFAS~~Benchmark NoBrands, Inc. ~~109,~~from ~~Accounting~~2001-2004. ~~for~~Prior ~~Income~~to ~~Taxes,~~joining ~~which~~Benchmark ~~requires~~Brands, ~~the~~Mr. Ton ~~use~~had ofa an20-year ~~asset~~career ~~and~~at ~~liability~~Schering-Plough ~~method~~Healthcare ofProducts ~~accounting~~including ~~for~~as ~~deferred~~Vice ~~income~~President ~~taxes.~~of ~~Under~~Logistics ~~SFAS No. 109~~(1995-1998), ~~deferred~~Vice ~~tax~~President ~~assets~~of orFinance ~~liabilities~~(1991-1994) atand ~~the~~other ~~end~~senior ofand managerial ~~each~~positions ~~period~~in ~~are determined~~finance ~~using~~(1978-1990). ~~the~~Mr. ~~tax~~Ton ~~rate~~is ~~expected~~a toCertified ~~apply~~Public toAccountant ~~taxable~~and ~~income~~has inan ~~the~~Executive ~~period~~MBA indegree ~~which~~from ~~the~~University ~~deferred~~of ~~tax~~Memphis, ~~asset~~and ora ~~liability~~BBA isin ~~expected~~Accountancy tofrom beUniversity ~~settled~~of ~~or realized~~Mississippi.

~~Recent~~There ~~Accounting~~are ~~Pronouncements~~no family relationships among the executive officers or directors. There are no arrangements or understandings pursuant to which any of these persons were elected as an executive officer or director.

InThe ~~November~~Securities ~~2002,~~and ~~the~~Exchange ~~Financial~~Commission ~~Accounting~~has ~~Standards~~adopted ~~Board~~rules ~~(FASB)~~to ~~issued~~implement ~~Interpretation~~certain ~~45,~~requirements ~~Guarantor’s~~of ~~Accounting and~~the ~~Disclosure~~Sarbanes-Oxley ~~Requirements~~Act ~~for~~of ~~Guarantees,~~2002 ~~Including~~pertaining ~~Indirect~~to ~~Guarantees~~public ofcompany audit ~~Indebtedness of Others~~committees. ~~The~~One ~~Interpretation~~of ~~elaborates on~~ the ~~existing~~rules ~~disclosure~~adopted ~~requirements~~by ~~for~~the ~~most~~SEC ~~guarantees,~~requires ~~including~~a ~~product~~company ~~warranties~~to ~~and~~disclose ~~loan~~whether ~~guarantees~~the ~~such as~~members ~~standby letters~~ of ~~credit.~~its ItAudit ~~also~~Committee ~~clarifies~~are ~~that~~“independent”. atSince ~~the~~we ~~time~~are anot ~~company issues~~ a ~~guarantee,~~“listed” ~~the~~ company, ~~must~~we ~~recognize~~are annot ~~initial~~subject ~~liability~~to ~~for~~rules requiring the members ~~fair~~of ~~value,~~our orAudit ~~market~~Committee ~~value,~~to ofbe ~~the~~independent. ~~obligations~~The itSEC ~~assumes~~also ~~under~~requires ~~the~~a ~~guarantee~~company ~~and~~to ~~must~~ disclose ~~that~~ ~~information~~whether init ~~its~~has ~~interim~~an ~~and~~“Audit ~~annual~~Committee ~~financial~~Financial ~~statements.~~Expert” ~~The~~serving ~~provisions~~on ~~related~~its toaudit ~~recognizing~~committee. aBased ~~liability~~on atits ~~inception~~review of the ~~guarantee~~listing standards for the ~~fair~~Nasdaq Stock ~~value~~Market, ofInc. ~~the~~governing ~~guarantor’s~~audit ~~obligations~~committee ~~does~~membership, ~~not~~the ~~apply~~Board todoes ~~product~~believe ~~warranties~~that orboth ~~to guarantees accounted for as derivatives~~Mr. ~~The~~Oyer ~~initial recognition~~ and ~~initial~~Mr. ~~measurement~~Whitaker ~~provisions~~are ~~apply~~“independent” onwithin athe ~~prospective~~meaning ~~basis~~of tosuch ~~guarantees~~rules. ~~issued~~In oraddition, ~~modified~~based ~~after~~on ~~December~~its ~~31,~~review ~~2002.~~of ~~The~~the ~~Company’s~~criteria ~~disclosure~~ of ~~guarantees~~an isAudit ~~included in~~Committee ~~Note~~Financial 10Expert ofunder the ~~Notes~~rule toadopted ~~Financial~~by ~~Statements.~~the ~~The~~SEC, ~~Company~~the ~~believes~~Board does believe that ~~adoption~~Mr. ofOyer ~~the~~would ~~recognition~~be ~~and~~described ~~measurement~~as ~~provisions~~an ofAudit ~~Interpretation~~Committee 45Financial ~~will~~Expert. ~~not~~The ~~have~~Board abelieves ~~material~~that ~~impact~~Mr. onOyer’s ~~its~~prior ~~financial~~experience ~~statements.~~in public

In35 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.

InTable 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 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. Contents

InIndex 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 supportFinancial 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 Statements

45 company accounting through his employment with the international accounting firms described above and his continuing demonstration that he is capable of (i) understanding generally accepted accounting principles (“GAAP”) and financial statements, (ii) assessing the general application of GAAP principles in connection with the accounting for estimates, accruals and reserves, (iii) analyzing and evaluating our financial statements, (iv) understanding internal controls and procedures for financial reporting and (v) understanding audit committee functions, sufficiently meet the requisite attributes of an Audit Committee Financial Expert under the rule adopted by the SEC.

~~FIREARMS~~Section ~~TRAINING~~16(a) ~~SYSTEMS~~Beneficial Ownership Reporting Compliance. Section 16(a) of the Exchange Act requires the Company’s executive officers, ~~INC~~directors and 10% stockholders to file reports regarding initial ownership and changes in ownership with the SEC and any exchange upon which the Company’s securities are listed. ~~AND~~Executive ~~SUBSIDIARIES~~officers, directors and 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. The Company’s information regarding compliance with Section 16(a) is based solely on a review of the copies of such reports and written representations furnished to the Company by the Company’s executive officers, directors and 10% stockholders. The Company believes that, during the fiscal year ending March 31, 2005, each of the Company’s executive officers, directors and 10% stockholders made all Section 16(a) filings as required.

~~NOTES~~Code TOof ~~CONSOLIDATED~~Business ~~FINANCIAL~~Conduct ~~STATEMENTS—(Continued)~~and Ethics. The Company has adopted a Code of Business Conduct that applies to every director, officer and employee, with additional policies applying to the Chief Executive Officer and Senior Financial Officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. The Code of Business Conduct is available on the Company’s website, www.fatsinc.com. In the event that we make changes in, or provide waivers from, the provisions of the Code of Business Conduct that the SEC requires us to disclose, we intend to disclose these events on our website.

~~the~~36 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.

InTable 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. Contents

UseIndex ofto EstimatesFinancial and Accruals Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and ~~liabilities~~Item ~~and contingent amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period~~11. Executive ~~Actual~~Compensation ~~results could differ from those estimates.~~

~~Employee~~SUMMARY ~~Benefit~~COMPENSATION ~~Plan~~TABLE

The ~~Company~~following ~~has~~summary acompensation ~~defined~~table ~~contribution~~sets ~~profit~~forth ~~sharing~~information ~~plan~~concerning (the ~~Plan)~~annual ~~that covers~~and ~~substantially~~long-term ~~all~~compensation ~~company~~earned ~~employees. The Plan provides for annual contributions~~ by ~~the~~each ~~Company~~person atwho ~~the~~served ~~discretion of the board of directors. The Plan also contains a 401(k) feature, which allows participants to contribute up to 15% of their eligible compensation,~~ as ~~defined,~~Chief ~~and~~Executive ~~provides~~Officer ~~for~~during ~~discretionary~~fiscal ~~employer~~2005 ~~matching contributions of cash~~ and ~~Company~~each ~~stock. Matching~~ of ~~contributions~~the ~~with~~other ~~Company~~highly ~~stock~~compensated executive ~~ended~~officers inwhose ~~May~~annual ~~2001.~~salary ~~Total~~and ~~contributions~~bonus byduring ~~the~~fiscal ~~Company~~2005 toexceeded ~~the Plan were approximately~~ $~~238~~100,000, ~~$168,000,~~(the ~~and~~persons ~~$182,000~~included ~~for~~in the ~~years ended March 31~~table, ~~2003~~collectively, ~~2002,~~the ~~and~~“Named ~~2001~~Executive ~~respectively~~Officers”).

Shipping and Handling Expenses


	Annual Compensation					Other Annual Compensation	Long-Term Compensation
Name of Individual and Principal Position	Year	Salary		Bonus		Other Annual Compensation	Securities Underlying Options (a)	Other Compensation (b)
Ronavan Mohling (CEO)	2005 2004 2003	$	300,579 280,592 167,192	$	150,400 135,000 135,000	* * *	2,100,000 2,100,000 —	$	4,973 6,537 —

David W. McGrane (COO)	2005 2004 2003		249,770 229,711 148,846		125,000 107,500 107,500	* * *	1,400,000 1,400,000 —		5,101 5,513 —

Gregory A. Ton (CFO)(c)	2005 2004 2003		125,385 — —		100,000 — —	* * *	750,000 — —		— — —

John A. Morelli (former CFO)(d)	2005 2004 2003		237,602 144,808 135,000		— 50,000 50,000	* * *	150,000 100,000 —		1,878 2,692 2,492

~~All~~* ~~shipping~~The aggregate amount of certain perquisites and ~~handling~~other ~~fees~~benefits ~~charged~~provided to ~~customers~~each ~~are~~of ~~included~~the asofficers alisted ~~component~~above did not exceed the lesser of ~~revenues.~~$50,000 ~~Shipping~~or ~~and~~10% ~~handling~~of ~~costs~~his ~~are~~total ~~included~~annual assalary aand ~~part~~bonus in any of the ~~cost~~ ofyears ~~revenues~~reported and so is not required to be included in the table.

~~Reclassifications~~(a) Represents the number of options granted under Stock Option Agreements.

~~Certain~~(b) ~~reclassifications~~Includes ~~have~~matching ~~been~~contributions made into ~~the~~a ~~prior~~401(k) ~~year~~plan ~~financial statements~~on tobehalf ~~conform~~of tosuch ~~the 2003 presentation~~officers.

46(c) Mr. Ton began serving as the Company’s Chief Financial Officer in August 2004, following the resignation of Mr. Morelli.

~~FIREARMS~~(d) ~~TRAINING~~Mr. ~~SYSTEMS~~Morelli resigned from serving in these capacities in August 2004. In connection with his resignation, ~~INC~~Mr. ~~AND~~Morelli ~~SUBSIDIARIES~~received the following severance payment: $150,000.

~~NOTES~~37 ~~TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

3. Long-TermTable Debtof Contents

Long-termIndex debtto consistsFinancial of the following (in thousands): Statements

	March 31,
	2003			2002
Working capital borrowings	$	130		$	130
Long-term debt—Senior		12,000			12,000
Long-term debt—Junior		28,010			27,335
Debt discount		—			3,512
Capital lease obligations		175			—
		40,315			42,977
Due within one year		(457	)		—
Long-term debt	$	39,858		$	42,977

OPTIONS GRANTED IN FISCAL 2005

InCertain ~~August~~executive ~~2000,~~officers ~~the Company entered into a Second Amended and Restated Credit Agreement (the New Credit Agreement) and Partial Exchange Agreement with its lenders and its largest shareholders (a group~~ of ~~entities affiliated with Centre Partners Management LLC (~~the ~~Centre~~ ~~Entities).~~Company Inreceive ~~accordance~~stock ~~with~~options ~~the New Credit Agreement, the unpaid principal~~ and ~~accrued~~other ~~interest~~awards under the ~~old~~Company’s ~~facility was converted into shares of Common~~ Stock, ~~shares~~Option ~~of Series B mandatory redeemable preferred stock, Senior Secured Loans,~~Plan and ~~Junior~~Stock ~~Secured~~Compensation ~~Loans~~Plan. ~~The~~Stock ~~New~~options ~~Credit~~are ~~Agreement~~generally ~~also~~exercisable ~~provides~~over ~~for~~ a ~~New~~1 ~~Revolving~~to ~~Credit~~7 ~~Commitment~~year ~~comprised~~period offrom ~~available~~the ~~Revolving~~date ~~Loans and Letters~~ of ~~Credit.~~grant ~~Aggregate~~at ~~borrowings~~a ~~under~~price ~~the~~that ~~New~~equals ~~Revolving Credit Commitment are limited to $882,000, with borrowings under~~ the ~~Letters~~fair ofmarket ~~Credit~~value ~~subject to a sub limit~~ of ~~$828,000. During March, 2002,~~ the ~~Company~~stock ~~and~~at ~~its lenders further amended~~ the ~~New~~date ~~Credit~~of ~~Agreement~~grant. ~~to,~~All ~~among~~options ~~other~~expire ~~amendments,~~7 ~~provide~~years afrom ~~$2,200,000 Support Letter of Credit Facility and extend~~ the ~~maturity~~ date of ~~the~~grant. The ~~Senior~~following ~~Secured~~table ~~Loans,~~provides ~~Junior~~information ~~Secured~~about ~~Loans~~stock ~~and~~options ~~New~~we ~~Revolving~~granted ~~Loans from March 31, 2003~~ to ~~September~~the ~~30,~~Named ~~2003.~~Executive AsOfficers ofduring ~~March~~our ~~31,~~2005 ~~2003,~~fiscal ~~outstanding~~year. ~~Revolving~~No ~~Loans~~stock ~~totaled~~appreciation ~~$130,000~~rights ~~and~~have ~~outstanding Letters~~been ofgranted ~~Credit~~to ~~totaled~~these ~~$2,884,000, with $68,000 in available unused funds~~officers.

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


Name	Number of Securities Underlying Options Granted in Fiscal 2005	Percent of Total Options Granted to Employees in Fiscal 2005		Exercise or Base Price per Share ($1/sh)		Expiration Date	Grant Date Present Value (1)
Ronavan Mohling	—	—			—	—		—
David W. McGrane	—	—			—	—		—
Gregory A. Ton	750,000	100	%	$	0.64	August 4, 2011	$	450,000
John A. Morelli	—	—			—	—		—

The exchange of the old credit facility and note for the new loans, preferred stock, and common stock was accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (~~SFAS 15~~1). ~~Accordingly,~~These ~~the~~values ~~new~~were ~~obligation~~determined ~~was~~based ~~recorded~~on at the ~~carrying~~Black-Scholes ~~amount~~option ofpricing ~~the~~model ~~prior~~using ~~obligation at~~ the ~~time~~following ofassumptions ~~the restructuring, less the fair value of equity interest issued. Therefore, the common stock issued was recorded~~ at ~~its market value at~~ the ~~time~~date 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 issued and face values of the new debt and preferred stock, resulted in a debt restructuring liability of approximately $14.6 million. The debt restructuring liability was allocated to the new debt and mandatory redeemable preferred stock based on the relative face values of the instruments and was amortized against interest expense and accretion of preferred stock dividends grant:

47• The exercise price is the same as the market price of our stock on the grant date

~~FIREARMS~~• ~~TRAINING~~The ~~SYSTEMS,~~options ~~INC.~~will ~~AND~~be ~~SUBSIDIARIES~~exercised in 3.5 years

~~NOTES~~• TOAn ~~CONSOLIDATED~~expected ~~FINANCIAL~~price ~~STATEMENTS—(Continued)~~ volatility of 221.58%

~~through~~• ~~the~~A ~~original~~risk-free ~~maturity~~rate ~~dates~~ of ~~the~~return ~~instruments~~ of ~~March 31~~2.28%, ~~2003.~~which Asreflects ~~a result,~~ the ~~Company~~yield ~~has recorded interest expense and accretion of preferred stock~~ on a discounted basis. Interest expense was reduced by approximately $3,512,000, $3,513,000 and $2,049,000 during each of the years ended March 31, 2003, 2002 and 2001, respectively. The reduction in the liability allocated to longzero-~~term~~coupon ~~debt and~~bond ~~corresponding reduction in interest expense is shown as amortization of debt discount~~ on the ~~accompanying~~grant ~~statements~~date ofwith ~~cash~~a ~~flows.~~maturity Asdate ofsimilar ~~March 31, 2003, the debt restructuring liability related~~ to the ~~new~~expected ~~debt~~life ~~has~~of ~~been fully amortized and future interest expense will be reported without~~ the ~~related~~stock ~~offsetting amortization.~~ options

AsOption ofExercises March 31, 2003, all borrowings under the amended agreements matured on September 30, 2003. The New Credit Agreement, as amended, provides an option, at the Company’s discretion if no default events then exist, to extend the maturity date of the Senior and ~~the~~Holdings Junior Secured Loans to March 31, 2004 for a fee equal to 1% of the outstanding principal balance of the Senior and Junior Secured Loans at the time of the extension. The Senior Secured Loans bear interest at prime plus 1%, (5.25% at March 31, 2003), payable quarterly in cash or by delivery of additional Junior Secured Loans. The Junior Secured Loans bear interest at 10%, payable quarterly in notes with the same terms or in cash if the Company’s EBITDA exceeds 120% of the amount necessary for payment of interest on the loans, excluding the Junior Secured Loans. During the year ended March 31, 2003 and 2002 the Company issued additional Junior Secured Loans as payment in kind of junior interest totaling approximately $675,000 and $3,634,000, respectively. The additional Junior Secured Loans issued are included in the total Junior Secured Loan amount above. The Revolving Loans and Support Letters of Credit bear interest at the Prime Rate plus 2% (6.25% at March 31, 2003), payable quarterly in cash. As of March 31, 2003, the effective future interest rate on all borrowings under the new credit agreement was approximately 0.2%.

The ~~borrowings~~following ~~under~~table sets forth the ~~New~~name ~~Credit~~of ~~Agreement~~the ~~are~~optionee, ~~collateralized~~number byof shares ~~substantially~~received ~~all~~upon ofexercise, the ~~Company’s~~dollar ~~assets~~value realized, athe ~~pledge~~total number of ~~all~~unexercised ofoptions ~~the~~held ~~common~~at ~~shares~~March of31, ~~the~~2005 ~~operating~~separately ~~subsidiary,~~identified as exercisable and aunexercisable ~~pledge~~and ofthe ~~65%~~aggregate dollar value of “in-the-money” ~~capital~~unexercised ~~stock~~options, separately ofidentified ~~the~~as ~~Company’s~~exercisable ~~foreign~~and ~~subsidiaries~~unexercisable. The ~~New~~value ~~Credit~~of ~~Agreement~~unexercised ~~also contains restrictive covenants~~options, which, ~~among~~are ~~other~~exercisable ~~things~~and unexercisable, ~~limit~~is ~~borrowings~~based ~~and~~on ~~capital~~the ~~expenditures~~stock ~~and~~price ~~require~~of ~~certain~~$1.34 ~~interest~~per ~~coverage ratios~~share, asthe ~~defined,~~market toprice beof ~~maintained.~~the AsCompany’s ofshares at March 31, ~~2003~~2005, less the ~~Company~~exercise ~~was~~price ~~in compliance with the covenants~~ of the ~~New Credit Agreement as amended~~option.

OnOPTION ~~June~~EXERCISES ~~26,~~IN ~~2003, the Company and its~~LAST ~~lenders~~FISCAL ~~agreed~~YEAR 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.

~~Under~~AND ~~the~~FISCAL ~~terms~~YEAR ofEND ~~the~~OPTION ~~amendment,~~VALUES 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.


Name	Shares acquired on exercise	Value Realized		Number of Securities Underlying Unexercised Options at Fiscal Year End		Value of Unexercised In- the-Money Options at Fiscal Year End
Name	Shares acquired on exercise	Value Realized		Exercisable	Unexercisable	Exercisable		Unexercisable
Ronavan Mohling	—	$	—	420,000	1,680,000	$	394,800	$	1,579,200
David W. McGrane	—		—	280,000	1,120,000		263,200		1,052,800
Gregory A. Ton	—		—	—	750,000		—		525,000
John A. Morelli (1)	303,162		75,790	—	150,000		—		199,500

4(1) The options exercised had a weighted average exercise price of $0. ~~Mandatorily~~53 ~~Redeemable~~per ~~Preferred~~share ~~Stock~~and the weighted average of the fair market value of the common stock on the date of exercise was $0.78 per share.

~~Series~~38 ~~A Preferred Stock~~

InTable November 1998, the board of directors created a new class of Series A preferred stock with 38,000 authorized shares. The Company then entered into a Securities Purchase Agreement with Centre Entities whereby Contents

48Index to Financial Statements

~~FIREARMS~~EMPLOYMENT ~~TRAINING SYSTEMS, INC.~~ AND ~~SUBSIDIARIES~~RELATED MATTERS

~~NOTES~~On TOJune ~~CONSOLIDATED~~27, ~~FINANCIAL~~2005, ~~STATEMENTS—(Continued)~~the Company entered into a new employment agreement with Ronavan R. Mohling who serves as the Company’s Chairman and Chief Executive Officer. The new agreement provides for a term of three years beginning June 27, 2005. Under the terms of the renewal agreement, Mr. Mohling is entitled to an annual base salary of $325,000 and an annual bonus of up to 50% of his base salary. In addition, in the event of a transaction in which 51% or more of the Company’s Common Stock is acquired by a single party, Mr. Mohling will be entitled to receive the maximum annual bonus of 50% of base salary so long as he remains employed by the Company through the remainder of the fiscal year in which the change of control takes place or is terminated by the Company other than for cause. In addition, upon Mr. Mohling’s termination without cause or upon his voluntary termination for good reason, both as defined in the agreement, he would be entitled to an amount equal to his current annual base salary payable in 12 equal monthly installments following his termination. Mr. Mohling’s base salary under this agreement is reviewed annually by the Compensation Committee of the Board of Directors and subject to adjustment. The employment agreement also contains customary confidentiality, non-competition and non-solicitation provisions.

~~Centre~~On ~~Entities~~June ~~purchased~~27, ~~for $3~~2005,~~000,030,~~ ~~securities~~the ~~comprised~~Company also entered into a new employment agreement with David W. McGrane who serves as the Company’s Chief Operating Officer. The new agreement provides for a term of ~~Series~~three Ayears ~~preferred~~beginning ~~stock~~June ~~and~~27, ~~nondetachable~~2005. ~~warrants~~Under tothe ~~purchase~~terms ~~Class~~of Bthe ~~Nonvoting~~renewal ~~Common~~agreement, Mr. ~~Stock~~McGrane ~~with~~is entitled to an ~~exercise~~annual ~~price~~base salary of $1275,000 and an annual bonus of up to 50% of his base salary.03 As is the case with Mr. ~~The~~Mohling’s ~~securities~~employment ~~bore~~agreement, ~~dividends~~in atthe 8event of a transaction in which 51% ~~per~~or ~~year~~more ~~and~~of ~~were~~the ~~subject~~Company’s Common toStock ~~mandatory~~is ~~redemption~~acquired onby ~~November~~a 13single party, ~~2003~~Mr. ~~The~~McGrane will be entitled to receive the maximum annual bonus of 50% of base salary so long as he remains employed by the Company ~~recorded~~through ~~accretion~~the remainder of the ~~dividends~~fiscal year in which the change of ~~approximately~~control takes ~~$110~~place or is terminated by the Company other than for cause. In addition,~~000~~ upon Mr. McGrane’s termination without cause or upon his voluntary termination for good reason, ~~and~~both ~~$254~~as defined in the agreement,~~000~~ ~~for~~he would be entitled to an amount equal to his current annual base salary payable in 12 equal monthly installments following his termination. Mr. McGrane’s base salary under this agreement is reviewed annually by the ~~years~~Compensation Committee of the Board of Directors and subject ~~ended~~to ~~March~~adjustment. ~~31,~~The ~~2001~~employment agreement also contains customary confidentiality, non-competition and ~~2000,~~non-solicitation ~~respectively~~provisions.

In ~~August~~March ~~2000~~1999, the Company entered into aan ~~Securities~~employment ~~Exchange~~agreement ~~and Release Agreement~~ with ~~Centre~~John ~~Entities~~A. InMorelli, ~~accordance with~~ the ~~agreement,~~Company’s ~~all~~former ~~shares~~Chief ofFinancial ~~Series~~Officer. AThis ~~mandatorily~~agreement ~~redeemable~~at the ~~preferred~~time ~~stock~~of ~~and~~Mr. ~~related~~Morelli’s ~~non-detachable~~resignation, ~~warrants~~provided ~~were redeemed~~ for ~~6,695,212~~ ~~shares~~payment of ~~Common Stock,~~ an ~~amended~~amount ~~warrant~~equal to ~~purchase~~his ~~3,246,164~~then ~~shares~~current ofannual ~~Common~~base ~~Stock~~salary atpayable ~~$1.00~~in ~~per~~12 ~~share,~~equal ~~and~~monthly ainstallments ~~new~~following ~~warrant~~his totermination ~~purchase~~without ~~2,000,000~~cause ~~shares~~or ofvoluntary ~~Common~~termination ~~Stock~~for atgood ~~an exercise price of $0.25 per share. The common stock issued was~~reason, ~~recorded~~both atas ~~the~~defined ~~market~~in ~~value at~~ the ~~time of issuance~~agreement. ~~The~~As ~~warrants were recorded at fair value~~ of ~~approximately~~March ~~$613~~31,~~000~~ ~~calculated~~2005, ~~using the Black Scholes method. The resulting gain of approximately~~ $157,~~729,~~000 was ~~recorded~~due ~~as an adjustment~~ to ~~Net income~~Mr. ~~(loss)~~Morelli. toHis ~~arrive~~base salary at ~~Net~~the ~~income~~time ~~(loss)~~of ~~attributable~~his toresignation ~~common~~was ~~shareholders~~$150,000.

~~Series~~In BAugust ~~Preferred~~2004, ~~Stock~~the Company engaged Gregory A. Ton to serve as its Chief Financial Officer. While the parties did not execute a formal employment agreement, the Company has agreed to pay Mr. Ton a biweekly salary of $7,692 and he is eligible for an annual bonus of up to 50% of his base salary. Mr. Ton also received stock options to purchase 750,000 shares of the Company’s stock, which vest over a five-year period beginning August 2005.

InEach ~~August 2000, the board~~ of directors approved an amendment to the articles of incorporation to change the number of authorized shares of preferred stock to 100,000. The board of directors then created a new class of Series B preferred ~~stock~~our ~~with~~executive ~~50,000~~officers ~~authorized shares. Holders of the Series B preferred stock~~ are entitled to ~~receive~~participate ~~cumulative~~in ~~dividends equal to 10% of~~ the ~~liquidation~~Company’s ~~preference~~employee ~~payable~~benefit ~~quarterly~~plans inthat ~~additional~~are ~~shares~~generally ofavailable ~~Series~~from Btime ~~preferred~~to ~~stock.~~time ~~The preferred stock is subject~~ to ~~mandatory~~executives ~~redemption on the latest maturity date (September 30, 2003, as~~ of ~~March 31, 2003) of~~ the ~~Senior Secured Loans (Note 3) at the liquidation value thereof. The~~ Company ~~issued 21~~,~~361.113~~ ~~shares~~including ofgroup ~~Series B preferred stock with a liquidation value of $1~~medical,~~000~~ ~~per share (approximately $21.4 million) in August 2000 in conjunction with its debt restructuring (Note 3). Accretion related to dividends earned during the year ended March 31~~dental, ~~2003~~life, ~~2002~~accidental ~~and~~death ~~2001 totaled approximately $2,597,000, $2,353,000~~ and $1dismemberment,~~416,000.~~ short-term ~~As discussed in Note 3~~disability, ~~this~~long-term ~~amount was offset by the reduction of approximately $2~~disability,~~299,000,~~ ~~$2,083,000~~business ~~and~~travel ~~$1,156,000~~accident ~~in the debt restructuring liability allocated to the preferred stock~~plans, ~~resulting~~ insick ~~net accretion of approximately $298~~leave,~~000,~~ ~~$270~~vacation,~~000~~ and ~~$260,000 for~~ the ~~years~~profit ~~ended~~sharing ~~March~~retirement ~~31, 2003, 2002 and 2001, respectively~~plan. As of March 31, 2003, the debt restructuring liability related to the preferred stock has been fully amortized and future accretion of preferred stock dividends will be reported without the related offsetting amortization.

AsDIRECTORS ~~discussed~~COMPENSATION in Note 3, subsequent to March 31, 2003, the Company and its lenders agreed to amend the New Credit Agreement to extend the maturity date of the Senior Secured Loans to October 15, 2004. Accordingly, the date on which the Series B preferred stock is subject to redemption was also extended to October 15, 2004.

5Each director of the Company who is not an employee of the Company is entitled to receive annual compensation of $20,000, payable quarterly. ~~Stock-Based~~ ~~Compensation~~In ~~Plans~~addition, directors of the Company are reimbursed for their reasonable expenses incurred in attending meetings of the Board of Directors or committees thereof. Directors

~~Stock~~39 ~~Option Plan~~

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

49Index to Financial Statements

~~FIREARMS~~ who ~~TRAINING~~are ~~SYSTEMS~~also employees of the Company are not separately compensated for their services as directors. Additionally, ~~INC~~on May 1, 2003, three directors of the Company who are not employees of the Company were granted options to purchase 300,000 shares of the Company’s stock at the $0.40 ~~AND~~per ~~SUBSIDIARIES~~share market value of the stock on the grant date. One-third of the options are exercisable per year on a cumulative basis beginning on the first anniversary of the grant date, and the options expire on the seventh anniversary of the grant date.

~~NOTES~~COMPENSATION TOCOMMITTEE ~~CONSOLIDATED~~INTERLOCKS ~~FINANCIAL~~AND ~~STATEMENTS—(Continued)~~ INSIDER PARTICIPATION

~~Series~~Ms. AGilleece ~~Options~~and Mr. Perekslis currently serve and were members of the Compensation Committee during the Company’s 2005 fiscal year. None of the Company’s Compensation Committee members has ever been an officer or employee of the Company. In addition, none of the Company’s executive officers serve as a member of a board of directors or compensation committee of any entity that has one or more executive officers who serve on our Compensation Committee. During the Company’s 2005 fiscal year, the Company incurred legal fees of $215,496 for services by Van Scoyoc Kelly PLLC, a law firm in which Ms. Gilleece, until recently, served as Managing Director.

~~Options~~REPORT ~~under~~OF ~~this series are available for grant to officers and other employees. During the years ended March 31, 2003 and~~THE ~~2002,~~COMPENSATION noCOMMITTEE ~~Series~~ON AEXECUTIVE ~~options~~COMPENSATION were issued. The options are generally exercisable as follows: (i) 50% on the third anniversary of the option issue date (the option date), (ii) 25% on the fourth anniversary of the option date, and (iii) 25% on the fifth anniversary of the option date. The options expire on the seventh anniversary of the option date. In the event of termination of the optionee’s employment for any reason other than cause (as defined in the Plan) prior to the third anniversary of the option date, 16.7% of the options shall be exercisable for each anniversary of the option date prior to the optionee’s termination date. In the event of termination of the optionee’s employment for cause, all of the optionee’s outstanding options shall be forfeited.

~~Series~~The following BReport ~~Options~~of the Compensation Committee on Executive Compensation is provided in accordance with the rules and regulations of the SEC. Pursuant to such rules and regulations, this report does not constitute “soliciting materials” and should not be deemed filed with or incorporated by reference into any other Company filings with the SEC under the Securities Act of 1933 or the Securities Exchange Act of 1934 or subject to the liabilities of Section 18 of the Exchange Act, except to the extent the Company specifically incorporates such information by reference.

~~Options under this series are available for grant to officers and other employees. During the years ended March 31, 2003 and 2002, no Series B options were issued.~~ The ~~options~~compensation ~~are~~policies ~~generally~~of ~~exercisable on~~ the ~~ninth~~Company ~~anniversary~~have ~~but~~been ~~are~~developed ~~subject~~ to ~~acceleration~~link ~~based on defined earnings targets. The options expire after~~ the ~~ninth~~compensation ~~anniversary~~ of ~~the~~executive ~~option~~officers ~~date.~~with In the ~~event~~development of ~~termination~~enhanced ofvalue for the ~~optionee~~Company’s ~~employment~~stockholders. ~~for~~Through ~~any~~the ~~reason~~establishment ~~other~~of ~~than~~both short-term ~~cause~~and ~~(as~~long-term ~~defined~~incentive inplans ~~the~~and ~~Plan), options shall be exercisable to~~ the ~~extent they~~use ~~are~~of ~~vested~~base onsalary ~~the~~and ~~effective~~performance ~~date~~bonus ofcombinations, the ~~optionee’s~~Company ~~termination.~~seeks Into align the ~~event~~financial ofinterests ~~termination~~ of ~~the~~its ~~optionee’s~~executive ~~employment~~officers ~~for~~with ~~cause,~~those ~~all~~ of ~~the~~its ~~optionee’s outstanding options shall be forfeited~~stockholders.

~~Series~~PHILOSOPHY CAND ~~Options~~COMPONENTS

~~Options~~In ~~under~~designing ~~this~~its ~~series~~compensation ~~are~~programs, ~~available~~the ~~for~~Company ~~grant~~has tofollowed ~~nonemployee~~its ~~directors.~~belief ~~During~~that ~~the~~compensation ~~years~~should ~~ended~~reflect ~~March~~both ~~31,~~the ~~2003~~Company’s ~~and~~recent ~~2002,~~performance noand ~~Series~~the Cvalue ~~options~~created ~~were~~for ~~issued.~~stockholders, ~~The~~while ~~options~~also ~~are~~supporting ~~generally exercisable one-third per year on a cumulative basis beginning on~~ the ~~first~~broader ~~anniversary~~business ofstrategies ~~the~~and ~~option~~long-range ~~date.~~plans ~~The options expire on the seventh anniversary~~ of the ~~option date~~Company. In ~~the~~doing ~~event~~so, the ~~optionee~~compensation ~~ceases~~programs ~~to be a director, options shall be exercisable to~~ for the ~~extent~~last ~~they~~fiscal ~~are~~year ~~vested~~reflected on the ~~effective~~following ~~date~~general ~~the~~characteristics: ~~optionee ceases to be a director.~~

~~Series~~• DThe ~~Options~~Company’s financial performance and, in particular, that of the individual.

~~Options~~• ~~under~~An ~~this~~annual ~~series~~incentive ~~are~~arrangement ~~available~~that ~~for~~generates ~~grant to officers and other employees. During the years ended March 31, 2003 and 2002, no Series D options were issued. The options are generally exercisable one-third per year on~~ a ~~cumulative~~portion ~~basis beginning on the first anniversary~~ of ~~the~~compensation ~~option~~based ~~date. The options expire~~ on ~~the~~ ~~seventh anniversary of~~ the ~~option~~achievement ~~date. In the event~~ of ~~termination~~specific ofperformance ~~the~~goals ~~optionee’s employment for any reason other than cause (as defined~~ in ~~the~~relation ~~Plan), options shall be exercisable~~ to the ~~extent they are vested on the effective date of the optionee~~Company’s ~~termination.~~internal Inbudget ~~the~~and ~~event~~strategic ~~of termination of the optionee’s employment for cause~~initiatives, ~~all~~with ofsuperior ~~the~~performance ~~optionee’s~~resulting ~~outstanding~~in ~~options~~enhanced ~~shall~~total ~~be forfeited~~compensation.

~~Series~~The ECompany’s ~~Options~~executive compensation was based upon the components listed below, each of which is intended to serve the overall compensation philosophy:

~~Options~~Base ~~under this series are available for grant to officers and other employees~~Salary. ~~During the years ended March 31, 2003 and 2002, no Series E options~~ Base ~~were~~salary ~~issued.~~is ~~The~~intended ~~options~~to ~~are~~be ~~generally~~set ~~exercisable~~at ~~one-third~~a onlevel ~~September~~that ~~30,~~approximates ~~2000, one-third on March 31, 2001 and one-third on September 30, 2001. The options expire on~~ the ~~seventh~~competitive ~~anniversary~~amounts ofpaid ~~the~~to ~~option~~executive ~~date.~~officers ~~In the event~~ of ~~termination~~similar ofbusinesses ~~the optionee’s employment for any reason other than cause (as defined~~ in ~~the~~structure, ~~Plan)~~size, ~~options~~and ~~shall~~industry beorientation. ~~exercisable~~Salaries ~~to the extent they~~ are ~~vested~~determined oninformally ~~the~~through ~~effective~~a ~~date~~review of ~~the optionee’s termination. In the event of termination of the~~published ~~optionee’s~~compensation ~~employment~~surveys ~~for~~and ~~cause,~~proxy ~~all~~statements of ~~the~~other ~~optionee’s~~similar ~~outstanding options shall be forfeited~~companies.

5040

FIREARMSTable TRAININGof SYSTEMS, INC. AND SUBSIDIARIES Contents

NOTESIndex TOto CONSOLIDATEDFinancial FINANCIAL STATEMENTS—(Continued) Statements

~~Series~~Incentive FCompensation. In ~~Options~~accordance with the Company’s philosophy of tying a substantial portion of the overall compensation of its executive officers to the achievement of specific performance goals, an incentive plan has been developed for the executive officers. The Company’s incentive plan is designed to reward superior performance with total compensation above competitive levels. On the other hand, if performance goals are not achieved and the Company suffers as a result, compensation of affected executive officers may fall below competitive levels.

Stock Options. The Company ~~under~~periodically ~~this~~considers ~~series~~awards ~~are~~to ~~available~~its ~~for~~executive ~~grant~~officers toof ~~executive~~stock ~~officers.~~options ~~During~~granted under the ~~years~~terms ~~ended~~of ~~March~~its ~~31,~~Stock ~~2003~~Option ~~and~~Plan. ~~2002,~~Options ~~no Series~~are Fawarded ~~options~~by ~~were~~the ~~issued.~~Stock ~~The~~Options ~~options~~Subcommittee ~~are~~to ~~generally~~selected ~~exercisable~~executive ~~one-third~~officers ~~per~~and ~~year~~other onpersons ain ~~cumulative~~recognition of ~~basis~~outstanding ~~beginning~~contributions onthey ~~the~~may ~~first~~have ~~anniversary~~made of(or ~~the~~are ~~option~~being ~~date.~~motivated ~~The~~to ~~options~~make) ~~expire~~to on the ~~seventh~~Company’s ~~anniversary~~growth, ofdevelopment, ~~the~~or ~~option~~financial ~~date~~performance. InThe ~~the~~awarding ~~event~~ of ~~termination~~ ofoptions ~~the~~is ~~optionee’s~~designed ~~employment~~to ~~for~~encourage ~~any~~ownership ~~reason~~of ~~other~~the ~~than~~Company’s ~~cause~~Common ~~(as~~Stock ~~defined~~by its inexecutive ~~the Plan)~~officers, ~~options~~thereby ~~shall~~aligning betheir ~~exercisable~~personal tointerests ~~the~~with ~~extent~~those ~~they~~of ~~are~~our ~~vested~~stockholders. onDuring the ~~effective~~Company’s ~~date~~2005 offiscal ~~the~~year, ~~optionee’s~~options ~~termination.~~to Inpurchase ~~the~~a ~~event~~total of ~~termination~~ 750,000 shares of the ~~optionee~~Company’s ~~employment~~stock ~~for~~were ~~cause,~~awarded ~~all~~to ofGregory A. Ton, the ~~optionee~~Company’s ~~outstanding~~Chief ~~options~~Financial ~~shall be forfeited~~Officer.

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

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

~~During~~Effective June 27, 2005, the ~~years~~Company ~~ended~~reappointed ~~March~~Mr. ~~31,~~Ronavan ~~2003~~R. ~~and~~Mohling ~~2002,~~as noChief ~~Series~~Executive GOfficer ~~options~~and ~~were~~entered ~~issued~~into ~~and~~an atemployment ~~March~~agreement ~~31,~~with ~~2003,~~Mr. ~~150,000~~Mohling. ~~Series~~The Gbase ~~options~~salary ~~were~~provided ~~outstanding~~to Mr. ~~During~~ Mohling was consistent with what the ~~year~~Compensation ~~ended~~Committee ~~March~~believed ~~31,~~was competitive ~~2001,~~in ~~390~~the Company’s industry,~~000~~ ~~Series~~opportunities Gfor ~~options~~bonus compensation were ~~issued~~tied to ~~executive officers of~~ the Company’s ~~with~~performance, anand ~~exercise~~options ~~price~~granted ofto $0Mr.~~50.~~ ~~Under~~Mohling ~~APB~~were ~~No.~~subject ~~25,~~to ~~the~~vesting ~~Company~~over isa ~~required~~period toof ~~make~~time ~~estimates~~consistent in terms of ~~the~~value ~~number~~to ofits stockholders. ~~shares~~The ~~expected~~bonus provided to beMr. ~~earned~~Mohling at for 2005 was directly tied to the ~~end~~Company’s ofsubstantially ~~each~~improved ~~reporting~~performance ~~period~~for the year. ~~The~~This ~~estimated~~leadership ~~shares~~resulted toin beincreased ~~earned~~revenues ~~are~~of ~~multiplied~~10% byin ~~the~~2004 ~~excess,~~and if21% ~~any~~in 2005, ofwhile the ~~fair~~gross margin ~~market~~increased ~~value~~32% ofin ~~the~~2004 ~~common~~and ~~stock~~9% atin ~~period-end~~2005. ~~over~~In ~~the~~addition, ~~$0.50~~cash ~~exercise~~flows ~~price.~~from ~~This~~operations ~~amount~~increased ~~will~~from be$1.1 ~~recognized~~million asin ~~stock~~2004 ~~compensation expense~~to ~~over~~$14.7 ~~the~~million ~~performance~~in ~~period~~2005. The Compensation ~~expense~~Committee ~~totaled~~specifically ~~$0,~~considered ~~$652~~this ~~and~~performance $0in ~~during~~establishing the ~~fiscal~~salary increase, ~~years~~bonus, ~~ending~~and ~~March~~stock ~~31,~~option ~~2003,~~awards ~~2002~~granted ~~and~~to ~~2001,~~Mr. ~~respectively~~Mohling.

~~Series~~The HCompensation ~~Options~~Committee Mary Ann Gilleece Scott Perekslis

~~Options~~41 under this series are available for grant to executive officers. The options are vested upon the sale of the Company, with certain limitations and multipliers based on the fair market value per share sale price of the Company. The options expire on the seventh anniversary of the option date. In the event of termination of the optionee’s employment for any reason other than cause (as defined in the Plan), options shall be exercisable to the extent they are exercisable on the effective date of the optionee’s termination. In the event of termination of the optionee’s employment for cause, all of the optionee’s outstanding options shall be forfeited.

DuringTable the years ended March 31, 2003 and 2002, no Series H options were issued and at March 31, 2003, 390,000 Series H options were outstanding. During the year ended March 31, 2001, 390,000 Series H options were issued to executive officers of the Company with an exercise price of $0.01. The value of these options computed as the excess of the fair market value of the common stock over the exercise price will be recorded at the time the contingency is resolved upon the sale of the Company. Contents

51Index to Financial Statements

~~FIREARMS~~STOCK ~~TRAINING~~PERFORMANCE ~~SYSTEMS,~~GRAPH ~~INC. AND SUBSIDIARIES~~

~~NOTES~~Set TOforth ~~CONSOLIDATED~~below ~~FINANCIAL~~is ~~STATEMENTS—~~a line graph comparing the percentage change in the cumulative total stockholder return on the Company’s Common Stock against the cumulative total return of The Nasdaq National Market (~~Continued~~U.S.) and the cumulative total return for an industry peer group, selected in good faith, for the period commencing March 31, 2000 and ending on March 31, 2005. The comparison assumes $100 was invested after the close of business on March 31, 2000 in the Company’s Common Stock and in each of the foregoing indices and assumes reinvestment of dividends. The stockholder returns shown on the performance graph are not necessarily indicative of the future performance of the common stock or of any particular index.

LOGO

~~Changes~~42 ~~in outstanding options during the years ended March 31, 2001, 2002, and 2003 are as follows:~~

	Options		Exercise Price					WeightedAverageExercise Price
Outstanding, March 31, 2000	2,214,054		$	0.50	—	$	12.00	$	2.51
Granted	1,206,900			0.01	—		0.69		0.35
Cancelled	(457,540	)		0.01	—		12.00		2.92
Outstanding, March 31, 2001	2,963,414			0.01	—		12.00		1.76
Granted	—			—	—		—		—
Cancelled	(945,921	)		0.19	—		12.00		2.65
Outstanding, March 31, 2002	2,017,493			0.01	—		12.00		1.35
Granted	—				—
Cancelled	(327,350	)		0.69	—		12.00		3.81
Outstanding, March 31, 2003	1,690,143		$	0.01	—	$	11.75	$	0.87
Shares available for future grants	5,567,178

AsIndex of March 31, 2003, 2002, and 2001, options to purchaseFinancial approximately 1,417,000, 1,637,000, and 1,175,000 shares, respectively, were exercisable with weighted averages prices of $0.93, $1.50, and $3.25, respectively. Statements

~~The Company has elected to account for its stock-based compensation plans~~ ~~under~~Item ~~APB No~~12. Security ~~25;~~Ownership ~~however, the Company has computed for pro forma disclosure purposes the value~~ of ~~all~~Certain ~~options~~Beneficial ~~using~~Owners ~~the~~and ~~Black-Scholes~~Management ~~option~~and ~~pricing~~Related ~~model~~Stockholder asMatters ~~prescribed by SFAS No. 123 using the following assumptions:~~

	Years Ended March 31
	2003	2002	2001
Risk-free interest rate	N/A	N/A	5.00	%
Expected dividend yield	N/A	N/A	0
Expected lives (in years)	N/A	N/A	4.0
Expected volatility	N/A	N/A	150.00	%

OWNERSHIP OF STOCK BY DIRECTORS, EXECUTIVE OFFICERS

NoAND ~~options~~PRINCIPAL ~~were granted~~STOCKHOLDERS ~~during the years ended March 31, 2003 or 2002, and accordingly, the assumptions are not applicable for those years.~~

The ~~total~~following ~~value~~table ofsets ~~options~~forth ~~granted~~certain ~~during~~information regarding the ~~year~~beneficial ~~ended~~ownership ~~March~~of ~~31,~~our ~~2001~~Common ~~was~~Stock ~~computed~~ as ~~approximately~~of ~~$194~~July 6,~~000.~~ ~~That~~2005 ~~value~~by: ~~and~~(i) each person (or group of affiliated persons) who is known by the ~~value~~Company ~~computed~~to ~~for~~own beneficially more than 5% ~~unvested~~of ~~options~~the ~~granted~~outstanding inshares ~~prior~~of ~~years~~Common isStock; ~~being~~(ii) ~~amortized~~each onof athe ~~pro~~Company’s ~~forma~~directors ~~basis~~and ~~over~~director nominees; (iii) the ~~vesting~~Company’s ~~period~~chief executive officer and each of the ~~options.~~other ~~Pro~~executive ~~forma~~officers ~~information~~included ~~regarding~~in ~~net~~the ~~earnings~~section entitled “Summary Compensation Table”; and ~~earnings~~(iv) ~~per~~the ~~share~~Company’s current directors and executive officers as ifa group. Except as indicated in the ~~Company~~footnotes ~~had~~to ~~accounted~~the ~~for~~table, ~~options~~the ~~using~~persons named in the ~~fair~~table have sole voting and investment power with respect to all ~~value~~shares ~~method~~of isCommon ~~included~~Stock inindicated ~~Note~~as 2being beneficially owned by them.


Name of Beneficial Owner	Number of Shares of Common Stock Beneficially Owned	Percent Of Class %(1)
Dominion Resources, Inc. c/o First Source Financial, LLP (2)	9,467,188	12.4	%
U.S. Bank National Association (First Bank, N.A.)(3)	4,260,375	5.6	%
Centre Capital Investors II, L.P. (4)(5)	34,781,278	45.7	%
Centre Capital Tax-Exempt Investors II, L.P. (4)(5)	3,888,163	5.1	%
Centre Capital Offshore Investors II, L.P. (4)(5)	6,892,143	9.1	%
Centre Partners Coinvestment L.P. (4)(5)	5,058,638	6.7	%
Centre Partners II, L.P. (4)(5)	45,561,584	59.9	%
Centre Partners II, L.L.C. (4)(5)	51,261,219	67.4	%
Centre Partners Management LLC (4)(5)	51,567,919	67.8	%
Ronavan Mohling (6)	420,000	*
David W. McGrane (7)	280,000	*
Gregory A. Ton (8)	150,000	*
John A. Morelli (9)	—	*
Scott Perekslis (10)	224,643	*
Ronald C. Whitaker (11)	200,000	*
Mary Ann Gilleece (12)	200,000	*
Darrell Oyer (13)	6,600	*
Cameron Breitner	—	*
All current directors and executive officers as a group (14)	1,481,243	1.9	%

~~FIREARMS~~a) ~~TRAINING~~* ~~SYSTEMS,~~Less ~~INC.~~than ~~AND SUBSIDIARIES~~ 1%

~~NOTES~~(1) TOBased ~~CONSOLIDATED~~on ~~FINANCIAL~~76,095,337 ~~STATEMENTS—~~shares of Common Stock outstanding on July 6, 2005. Calculation of percentage of beneficial ownership assumes the exercise of all options exercisable within 60 days of such date only by the respective named stockholder. Information relating to beneficial ownership of common stock is based upon “beneficial ownership” concepts set forth in rules of the SEC under Section 13(~~Continued~~d) of the Securities Exchange Act of 1934, as amended. Under such rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any security of which that person has the right to acquire beneficial ownership within sixty (60) days. Under the rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he has no beneficial interest. For instance, beneficial ownership

~~The~~43 following table sets forth the Company’s outstanding options and options exercisable, including the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date as of March 31, 2003:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number ofOptions	Weighted AverageRemainingContractual Life	Weighted AverageExercise Price		Number ofOptions	Weighted AverageExercise Price
$0.01 - $0.50	936,900	3.4	$	0.29	694,467	$	0.33
$0.51 - $0.75	414,100	7.0	$	0.69	414,100	$	0.69
$0.76 - $1.00	800	6.4	$	0.95	800	$	0.95
$1.01 - $2.00	144,750	5.6	$	1.23	144,750	$	1.23
$2.01 - $3.00	300	4.3	$	2.54	300	$	2.54
$3.01 - $4.00	172,093	1.5	$	3.25	141,519	$	3.25
$4.01 - $8.00	17,600	1.9	$	7.33	17,600	$	7.33
$8.01 - $10.00	100	2.0	$	9.00	100	$	9.00
$10.01 - $12.00	3,500	—	$	11.75	3,500	$	11.75
	1,690,143	4.3	$	0.87	1,417,136	$	0.93

StockIndex Compensation Planto Financial Statements

~~The~~includes ~~Company~~stock ~~adopted~~owned ~~the~~by ~~Firearms Training Systems~~spouses, ~~Inc.~~ ~~Employee~~minor ~~Stock~~children ~~Compensation~~and ~~Plan~~other ~~(the~~relatives ~~Stock~~residing Plan) on July 1, 1997. The Company has reserved a total of 1,000,000 shares of Common Stock for issuance under the Plan. As of March 31, 2003, 189,733 shares were available for future grant under the Stock Plan. The Stock Plan provides for antidilution in the ~~event~~same ~~of certain defined circumstances. Under the Plan~~household, the Company may issue shares of Common Stock for compensation, including issuances to make Company matching contributions under the Company’s 401(k) Profit Sharing Plan. During the years ended March 31, 2003, 2002 and ~~2001~~trusts, ~~the Company issued 0~~partnerships, ~~68,536,~~corporations ~~and~~or ~~332,875~~deferred ~~shares,~~compensation ~~respectively,~~plans ofwhich ~~Common~~are ~~Stock~~affiliated towith the ~~401 (k) plan as matching contributions~~principal.

~~During~~(2) ~~the~~The ~~year~~address ~~ended~~of ~~March~~Dominion 31Resources, ~~2000,~~Inc. ~~the~~is ~~Company~~120 ~~also~~Tredegear ~~granted~~Street, ~~272~~Richmond,~~500~~ ~~shares of~~Virginia ~~restricted~~23219. ~~stock~~Dominion ~~with~~Resources is a ~~fair~~holding ~~value~~company atand ~~the~~its ~~date~~subsidiaries ofinclude ~~grant~~Dominion ofCapital, $0Inc.69, ~~per~~whose ~~share~~subsidiaries toinclude ~~various~~Virginia ~~employees~~Financial ~~under~~Ventures, ~~the Stock Plan~~Inc. ~~The shares vest~~ and ~~became~~N.H. ~~unrestricted~~Capital, ~~50% on September 30~~Inc., ~~2000~~the ~~and~~general ~~50%~~partners onof ~~March~~First 31Source Financial, ~~2001~~LLP. ~~Employee~~Information ~~terminations~~regarding ~~prior~~ownership ~~to vesting resulted in the forfeiture~~ of ~~32,500~~Common ~~shares~~Stock ~~during~~included ~~the~~herein ~~year~~is ~~ended~~in ~~March~~reliance ~~31,~~on ~~2001.~~information ~~The~~set ~~Company~~forth ~~recorded~~in ~~deferred~~a ~~compensation~~Schedule ~~equal~~13D tofiled ~~the~~on ~~fair~~September ~~value~~6, of2000 ~~these~~with ~~shares on~~ the ~~date of grant~~SEC, ~~which~~reflecting ~~was~~ownership ~~amortized~~as ~~to expense over the vesting period~~ of ~~the~~August ~~stock.~~25, 2000.

~~Management~~(3) ~~Shares~~The ~~Agreement~~address of U.S. Bank National Association is U.S. Bank Place, 601 Second Avenue South, Minneapolis, Minnesota. Information regarding ownership of Common Stock included here is in reliance on information set forth in a Schedule 13D filed on September 6, 2000 with the SEC, reflecting ownership as of August 25, 2000.

In(4) ~~September~~Centre ~~1996~~Partners II, ~~the~~L.P. ~~Company~~is ~~entered~~the ~~into~~general apartner ~~management~~of ~~shares~~Centre ~~agreement (Management~~Capital ~~Shares~~Investors ~~Agreement)~~II, ~~with~~L.P., Centre ~~Partners~~Capital ~~Management~~Tax-Exempt ~~LLC~~Investors II, ~~the~~L.P. and Centre ~~Entities~~Capital Offshore Investors II, L.P. and ~~those~~has ~~executive~~shared ~~officers~~voting ~~who~~and ~~either:~~investment ~~(i)~~authority ~~have~~with ~~been~~those ~~awarded~~entities. ~~options~~Centre ~~pursuant~~Partners toII, L.L.C. is the ~~Plan;~~general ~~(ii)~~partner ~~have~~of ~~been~~Centre ~~awarded~~Partners ~~shares~~Coinvestment ofL.P. ~~common~~and ~~stock;~~Centre orPartners ~~(iii)~~II, ~~have purchased~~L.P. ~~shares~~and ofhas ~~common~~shared ~~stock~~voting ~~from~~and ~~the~~investment ~~Company~~authority ~~(the~~with ~~Management~~those ~~Holders)~~entities. ~~Pursuant~~Also, toCentre ~~the~~Partners ~~Management~~II, ~~Shares~~L.L.C. ~~Agreement~~has been delegated voting and investment authority with respect to an additional 640,997 shares of Common Stock. Centre Partners Management LLC, onhas ~~behalf~~a ofmanagement ~~the~~agreement with Centre ~~Entities~~Partners II, ~~has~~L.P. ~~bring~~and ~~along~~Centre ~~rights~~Partners II, ~~pursuant~~L.L.C. tothrough which itCentre ~~has~~Partners ~~the right to require the~~ Management ~~Holders~~LLC toobtained ~~sell~~shared avoting ~~pro~~and ~~rata~~investment ~~portion~~authority ofwith ~~their~~those ~~shares~~entities. inIn ~~connection~~addition, ~~with~~Centre aPartners ~~sale~~Management toLLC anhas ~~unaffiliated~~sole ~~third~~voting ~~party~~and ofinvestment 5%authority orfor ~~more~~106,700 shares of ~~the~~Common ~~common~~Stock ~~stock~~subject ~~held~~to bycertain ~~the~~management ~~Centre~~options ~~Entities.~~currently ~~The~~exercisable ~~Management~~and ~~Holders~~300,000 ~~have~~shares ~~similar~~of ~~tag~~Common ~~along~~Stock ~~rights pursuant~~subject to ~~which~~additional ~~they~~director ~~can~~options, ~~participate~~200,000 inof awhich ~~sale~~are bycurrently exercisable and the ~~Centre~~remaining ~~Entities~~100,000 of 5%which orbecome ~~more~~exercisable ofon ~~the~~May ~~outstanding~~1, ~~shares~~2006. All of ~~common~~these ~~stock~~entities are referred to anherein ~~unaffiliated~~as ~~third~~the ~~party.~~Centre Entities.

53(5) The address of the Centre Entities is 30 Rockefeller Plaza, New York, New York 10020, except that the address of Centre Capital Offshore Investors II, L.P. is c/o Reid Management, Cedar House, 41 Cedar Avenue, Box HM 1179, Hamilton, Bermuda. Information regarding ownership of Common Stock by the Centre Entities included herein is in reliance on information set forth in a Schedule 13D/A filed on April 1, 2005 with the SEC reflecting ownership as of March 31, 2005 and on information provided by Centre Management.

~~FIREARMS~~(6) ~~TRAINING~~Includes ~~SYSTEMS~~420,000 ~~INC.~~options, ~~AND~~which ~~SUBSIDIARIES~~are currently exercisable.

~~NOTES~~(7) TOIncludes ~~CONSOLIDATED~~280,000 ~~FINANCIAL~~options, ~~STATEMENTS—(Continued)~~ which are currently exercisable.

~~The~~(8) ~~Centre~~Includes ~~Entities~~150,000 also have agreed to assist the Management Holders in registering proportionate amounts of the common stock held by such Management Holders if the Centre Entities exercise any rights to register common stock under a registration rights agreementoptions, which ~~granted~~are ~~Centre Entities certain demand registration rights~~ exercisable onwithin no60 ~~more~~days ~~than ten occasions as well as certain piggyback registration rights. The Management Shares Agreement terminates: (i) with respect to the Centre Entities, at such time as they hold less than 10%~~ of ~~the~~July ~~outstanding shares of common stock and (ii) ten years from the date of the agreement~~6, if ~~not sooner terminated~~2005.

~~6. Income~~(9) ~~Taxes~~ Number of shares based on transfer records of Equiserve.

~~The~~(10) ~~provision~~Includes ~~for~~24,643 ~~income~~shares ~~taxes~~of ~~consists~~Common ofStock, over which Mr. Perekslis has delegated voting and investment authority to the ~~following components~~Centre ~~(in~~Entities ~~thousands):~~pursuant to certain co-investment arrangements, and exercisable options for 200,000 shares.

	Years Ended March 31
	2003			2002			2001
Current provision
Federal income taxes	$	(790	)	$	(4,877	)	$	(999	)
Foreign income taxes		(55	)		186			43
State income taxes		—			—			—
		(845	)		(4,691	)		(956	)
Deferred provision		(22	)		(201	)		(96	)
	$	(867	)	$	(4,892	)	$	(1,052	)

(11)	Includes 200,000 options, which are currently exercisable.

A(12) ~~reconciliation~~Includes ~~of the~~200,000 ~~recorded~~options, ~~income~~which ~~tax~~are ~~provision~~currently ~~with amounts computed at statutory rates is as follows (in thousands):~~ exercisable.

	Years Ended March 31
	2003			2002			2001
Tax provision at statutory rates	$	2,262		$	(97	)	$	(5,654	)
State taxes, net of federal benefit		189			(7	)		—
International tax rate differences		(669	)		—			—
Nondeductible goodwill		—			—			22
Impairment of goodwill		—			—			216
Taxable discount of accretion		105			105			393
Increase (decrease) in valuation allowance		(2,760	)		(5,047	)		3,904
Other		6			154			67
Provision for income taxes	$	(867	)	$	(4,892	)	$	(1,052	)

(13)	Includes 5,000 shares directly owned and 1,500 shares owned by Mr. Oyer’s spouse.

54(14) See notes (6) through (13) above.

~~FIREARMS~~Changes ~~TRAINING~~in ~~SYSTEMS,~~Control. The ~~INC~~Centre Entities identified above collectively own over 67% of our Common Stock. ~~AND~~Based ~~SUBSIDIARIES~~on a Schedule 13D/A filed April 1, 2005, the Centre Entities have considered, are considering, and may consider in the future certain strategic options, including a sale or recapitalization of the Company and/or any of its subsidiaries.

~~NOTES~~44 ~~TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

PrimaryTable components of deferred tax assets and liabilities are as follows (in thousands): Contents

	March 31,
	2003			2002
Deferred tax assets:
Inventory reserves	$	311		$	1,242
Accrued liabilities		976			270
Warranty and contract cost reserve		634			1,989
Deferred revenue		886			—
Deferred gain on restructuring		—			1,366
Loss on impairment of property and equipment		—			139
Net operating loss carryforwards		3,003			2,583
Other		601			664
		6,411			8,253
Valuation allowance		(4,962	)		(7,722	)
Total deferred tax assets		1,449			531
Deferred tax liabilities:
Accelerated depreciation		5			—
Inventory basis differences		1,380			485
Other		64			68
Total deferred tax liabilities		1,449			553
Net noncurrent deferred tax liabilities	$	—		$	(22	)

Index to Financial Statements

~~The~~EQUITY ~~debt~~COMPENSATION ~~restructuring completed~~PLAN byINFORMATION the Company in August 2000 resulted in a gain for tax purposes. However, due to the fact that the sum of all future principal and interest payments due under the new agreements exceeded the carrying value of the old debt, no gain was recognized on the transaction for book purposes in accordance with SFAS 15. The excess of the carrying amount of the old borrowings exceeded the fair value of the new borrowings, common stock, and mandatory redeemable preferred stock by approximately $14.6 million and was allocated proportionately to the new debt and preferred stock based on their relative carrying values. During the years ended March 31,2003, 2002 and 2001, the excess amount allocated to debt was reduced by approximately $3,512,000, $3,513,000, and $2,049,000 resulting in a corresponding reductions of interest expense. The excess amount allocated to preferred stock was reduced by approximately $2,299,000, $2,083,000 and $1,156,000 resulting in a corresponding reductions of accretion of preferred stock. The deferred tax asset for the gain related to the cancellation of indebtedness above represents the difference between the gain recognized for tax purposes and the gain recognized for book purposes through the reductions in interest expense and accretion. The taxable discount of accretion included in the rate reconciliation represents the tax effect of the accretion discount recorded.

The ~~Company~~following ~~recorded~~table agives ~~federal~~information ~~income~~as ~~tax~~of ~~benefit~~March of31, ~~$784~~2005,~~000~~ ~~for~~about the ~~fiscal~~Company’s Common Stock that may be issued upon ~~year~~the ~~ended~~exercise ~~March~~of 31options, ~~2003~~warrants ~~related~~and torights under the ~~refund~~Company’s ~~received~~Stock Option Plan and Employee Stock Compensation Plan, which are the Company’s only outstanding equity compensation plan. The Company does not have any equity compensation plans that were not approved by its stockholders. The Stock Option Plan was approved by the Company’s ~~subsequent~~Board toof ~~March~~Directors ~~31,~~and ~~2003,~~its ~~for~~stockholders ~~carrybacks~~in

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