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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

COMMISSION FILE NUMBER 333-13105

FIREARMS TRAINING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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

Name of exchange on which registered: NONE

     Securities pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $0.000006 PAR VALUE PER SHARE

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

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

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

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

     THIS ANNUAL REPORT ON FORM 10-K INCLUDES UNAUDITED FINANCIAL STATEMENTS IN LIEU OF AUDITED FINANCIAL STATEMENTS BECAUSE THE REGISTRANT DISMISSED ITS PRIOR PUBLIC ACCOUNTANTS, ARTHUR ANDERSEN LLP, IN APRIL 2002 AND ELECTED NOT TO HAVE ARTHUR ANDERSEN LLP ISSUE A MANUALLY SIGNED AUDIT REPORT IN RESPECT OF THESE FINANCIAL STATEMENTS. SEE “ITEM 6. SELECTED FINANCIAL DATA” AND “ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.”

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PART I

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

ITEM 1. BUSINESS

Restructure Transaction

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

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

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

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

     On December 31, 2001 and March 29, 2002, the Company and its lenders amended the Company’s senior credit agreement (the “Credit Agreement”)

     See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources ” and “Item 13. Certain Relationships and Related Transactions.”

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Change of Control

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

     All of the foregoing shares are held pursuant to a Voting and Stock Restriction Agreement dated as of April 1, 2000 (the “Voting Agreement”) and entered into on August 25, 2000 whereby the Lenders agreed to vote such shares as determined by Lenders holding a majority of the commitments to provide revolving credit advances (the “Required Lenders”) and granted an irrevocable proxy to Bank of America, N.A., the Agent, to vote as so directed. In addition, three of the four Directors of the Company affiliated with the Centre Entities resigned. The Required Lenders agreed for so long as the Voting Agreement was in effect to vote their shares for election of one qualified person affiliated with the Centre Entities nominated by the Centre Entities to the Board of Directors such that one such person was serving on the Board at all times. The Centre Entities also agreed to cooperate with the Lenders to identify and urge the selection of mutually acceptable, qualified candidates to constitute a majority of the current Board of Directors to serve in the interim before the next election of Directors. In addition, all parties agreed to cooperate to identify and urge the selection of a mutually acceptable, qualified candidate to serve as an active Chairman of the Board of Directors and to give due consideration in that regard to selection of a representative of the management consultant required to be retained by the Company pursuant to the Senior Credit Agreement.

Company Overview

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

     FATS software and hardware technologies have evolved along with advances in the computer industry. Recognizing that commercial technological capabilities are moving faster than any one company can replicate, the Company takes advantage of commercially available off the shelf (“COTS”) components that ensure reuse and upgrade capability as well as commonality and the ability to integrate with other simulation systems. This philosophy seeks to provide each customer the best technical and economical solutions for its training needs while providing options for life cycle management of their systems. FATS also partners with each customer to ensure that each training solution is complete, integrated and functional from the embedded technology and courseware to the unique language requirements. The goal is to ensure that each simulated firearm or weapons

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system is integrated and compatible with the customer’s training programs and replicates precise weapon ballistic data, desired environmental effects, and target damage realism. The Company has focused its sales efforts for small arms simulators primarily in the U.S. and international military and law enforcement market through its principal facilities near Atlanta, Georgia. Larger gunnery simulation systems are developed and manufactured by its Canada based subsidiary, Simtran Technologies, Inc. (“Simtran”) located in Montreal, Canada. Simtran contracts to develop and deliver five unique products: an air defense missile trainer; an appended armored vehicle crew trainer; a stand-alone armored vehicle crew trainer: and, an appended light armored vehicle crew trainer. Other smaller subsidiaries located in the United Kingdom, the Netherlands, Singapore and Australia provide sales, service and limited manufacturing support.

Industry Overview

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

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

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

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

Products

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

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

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

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

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

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

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

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

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

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Target Markets

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

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

     For fiscal 2002, 40.1% of the Company’s total revenues were attributable to sales to military and law enforcement authorities outside the U.S. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 8 of Notes to Consolidated Financial Statements.

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

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

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holds the prime, or direct, contract with the U.S. Government; FATS is the sole provider of weapon simulators to ECC for this contract.

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

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

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

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

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

Sales and Marketing

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

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

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

Customers

     The Company’s principal customers historically have been in the public sector of the U.S., including the federal, state and local governments, and in the public sectors of a number of other countries. Approximately 40.1% of the Company’s revenues for fiscal 2002 were attributable to sales to military and law enforcement authorities internationally, 47.3% were attributable to sales to military authorities in the U.S. and 11.3% were attributable to sales to law enforcement authorities in the U.S. Sales to public sector customers are subject to a multiplicity of detailed regulatory requirements and public policies. Such contracts may be conditioned upon the continuing availability of public funds, which in turn depends upon lengthy and complex budgetary procedures, and may be subject to certain pricing constraints. Moreover, U.S. government contracts and those of many international government customers may generally be terminated for a variety of factors when it is in the best interests of the government. There can be no assurance that these factors or others unique to government contracts will not have a material adverse effect on the Company’s future results of operations and financial condition.

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

     In fiscal 2002, the Company’s five largest customers accounted for approximately 40.0% of the Company’s revenues, with two customers accounting for more than 10% of revenues. In fiscal 2001, the Company’s five largest customers accounted for approximately 34.9% of the Company’s revenues, with no customer accounting for more than 10% of revenues. Given the nature of the Company’s contracts, revenues attributable to specific customers are likely to vary from year to year, and a significant customer in one year may not be a significant customer in a subsequent year. In order to reach its growth objectives, the Company will be required to seek contracts from new domestic and international customers as well as orders from existing customers for additional types of simulated firearms or increased quantities of previously ordered systems and simulated weapons. A significant decrease in demand by or the loss of one or more significant customers could have a material adverse effect on the Company’s results of operations or financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 8 of Notes to Consolidated Financial Statements.

Research and Development

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

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

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

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

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

     Audio-visual R&D focuses on the production of specialized audio-visual programs and a range of media support activities, from full production of training programs to customer assistance in user-produced programs. The Company’s audio-visual technology is very important for creating a life-like training environment. The Company has assembled a team of experienced audio-visual engineers, cinematographers and specialists who have pioneered the use of multi-screen projection in small arms simulation.

Manufacturing Operations

     The Company’s manufacturing operations are conducted primarily at its Suwanee headquarters near Atlanta, Georgia, and to a limited extent at the facility of its U.K. subsidiary, Firearms Training Systems Ltd. in Lincolnshire, England. Simtran’s products are manufactured at its facility in Montreal, Canada. Atlanta manufacturing operations are divided into two groups, systems manufacturing and weapons manufacturing. The systems manufacturing group assembles the simulator components of the FATS systems. As the components are completed, they are tested for both function and durability and are subjected to a comprehensive ISO 9000 certified, quality assurance program. Systems manufacturing occur at the Company’s headquarters where electrical assemblers and technicians can assemble 30 primary simulation computers and other unique simulator components per month on a single-shift basis. The Company believes that this capacity can be expanded to 75 simulation computers per month by adding additional personnel, using a second shift or to an even greater capacity by acquisition of the requisite workstations and floor space for manufacturing and warehouse operations.

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

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Product Support

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

Proprietary Operating System; Raw Materials and Suppliers

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

Backlog

     As of March 31, 2002, the Company had a backlog of approximately $59.6 million compared with $55.4 million as of March 31, 2001. Management expects that approximately $28.3 million of backlog will be delivered in fiscal 2003. Revenue from sales of standard products is recorded when title transfers, which is typically upon shipment. Revenue from development programs under contract is recorded on the percentage-of-completion method of accounting, which approximates contract performance to date (see Note 3 to the accompanying consolidated financial statements). Contracts with U.S. and other governments may generally be terminated by the customer, in whole or in part, for default or convenience if such termination would be in the best interest of the customer. Accordingly, there can be no assurance that the Company’s backlog will result in future revenues. However, these contracts generally provide for reimbursement of actual cost incurred through the date of termination.

Competition

     The recent increase in sales and acceptance of small arms simulation products has brought about an increase in competition from both domestic and international companies. The Company competes with divisions or subsidiaries of larger companies solely dedicated to simulation for sales of the Company’s small and supporting arms simulation products, which currently include indirect fire, air defense and armored vehicles. In the military market, FATS faces a number of major competitors. They are Thales, CAE and ECC International. The Thales product is a combination of Thales Training and Simulation, formerly Thomson Training and Simulation of the UK, Cergy of France, Thales Air Defence of Northern Ireland, formerly Shorts and Thales Elektronic Systeme in Koblenz, Germany. CAE, a Canadian owned company, has a subsidiary operating out of the UK, which specializes in indirect fire training systems. In the U.S. law enforcement and commercial component of the market, the Company’s principal competitors include, among others, Advanced Interactive Systems and I.E.S.,

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Incorporated. The international law enforcement component of the market has also seen an increase in competition from small European companies. The growing awareness of simulation budgets, combined with the competitive nature of the marketplace, have contributed to the formation of teaming arrangements by competitors that present potent competitive challenges. Many of the Company’s current and potential competitors have significantly greater financial, technical and marketing resources than FATS.

Employees

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

Government Contracts and Regulation

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

     The U.S. Government or the relevant agency in whole or in part for its convenience may generally terminate government contracts if such termination would be in the best interest of the U.S. Government. Furthermore, any contractor who is suspected of, or found to have engaged in, commission of fraud or a criminal offense in connection with a government contract or subcontract, a serious violation of the terms of a government contract or subcontract, unfair trade practices, or any other offense indicating moral turpitude or a lack of business integrity or business honesty faces the possibility of being suspended or debarred from all further government contracting. The decision to suspend or debar a contractor is generally at the discretion of the government. Any such suspension or debarment could have a material adverse effect on the Company’s future results of operations and financial condition. See “Legal Proceedings.”

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

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

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

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

ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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PART II

ITEM 5. MARKET COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

Quarterly Stock Price Range

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

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ITEM 6. SELECTED FINANCIAL DATA

(In thousands, except per share data)

     The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth below and the financial statements of the Company included elsewhere in this Report and referred to in the “Index to Financial Statements” (together with the notes and other reports relating to such financial statements).

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