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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2004

OR

Commission File Number 333-13105

Firearms Training Systems, Inc.

(Exact name of registrant as specified in its charter)

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

Name of exchange on which registered:

None

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

Class A Common Stock, $0.000006 par value per share

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

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

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

The aggregate market value of the 9,853,598 shares of common stock held by non-affiliates of the registrant computed by reference to the last sale price on the Over-The-Counter Bulletin Board as of September 30, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter) was $3,842,903.

As of June 25, 2004, there were issued and outstanding 70,153,139 shares of common stock, par value $0.000006 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Part III—The Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders’ presently scheduled to be held in September, 2004, is incorporated by reference in Part III to the extent described therein.

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PART I

You should carefully review the information contained in this Report, and should particularly consider any risks and other factors that we set forth in this Annual Report and in other reports or documents that we file from time to time with the SEC. In this 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 Report include, but are not limited to:

Company Overview

Firearms Training Systems, Inc. (referred to in this Report as “FATS”, the “Company”, “we” or “our”) incorporated as a Delaware corporation in 1984 and we are celebrating our 20^th year in the virtual simulation industry. FATS^® continues to be a leader in terms of product and market, 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. FATS is a world leader in virtual

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training solutions designed to provide state-of-the-art training for military, law enforcement, and security personnel in:

Keeping pace with national and international concerns, FATS has added improvements to courseware and software that focus on situations that require extraordinary judgment including operations in peace keeping/making, crowd control and hostage negotiations. Additional emphasis has been placed on night operations in all environments in most cases allowing the customers to utilize their organic night vision equipment.

FATS’ software and hardware technologies have evolved along with advances in the computer industry. Recognizing that commercial technological capabilities are moving faster than any one company can replicate, the Company takes advantage of commercially available off-the-shelf (COTS) components that 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 is the best technical and economical solutions for their training needs while providing options for life cycle management of their systems. 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.

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

Our facilities in Atlanta, Georgia serve as the operational base for a wide array of products servicing markets throughout the world. Complimenting our vertically integrated manufacturing operations in Atlanta are engineering resources located in Atlanta and Montreal supported by sales and service operations in the United States, United Kingdom, Netherlands, Australia, Singapore, and Canada. By consolidating key functional groups in Atlanta such as Marketing and Sales, Business Development, Program Management, Contracts, Finance, and Supply Management, the Company can more readily execute a “one FATS” approach worldwide.

Industry Overview

The virtual simulations training market is comprised of hardware, software, and courseware that are used by military, law enforcement and security professionals worldwide. The products are used to hone a variety of skills, including individual marksmanship, tactical engagement, indirect fire, combined arms, and judgmental decision making for lethal and non-lethal use of force. Within the overall training market, simulation training accounted for approximately $2.3 billion of training dollars spent worldwide in 2001, of which U.S. military forces accounted for approximately one half. FATS products are targeted to a segment that has an estimated value of approximately $450 million in annual revenues.

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We believe recent world events, and the continuing war on terrorism, have increased the dependence on, and the demand for, simulations training. Operational tempo, time, and increasing environmental issues are key drivers that make simulations training extremely attractive. Additionally, there are training events that are almost cost prohibitive if restricted to live solutions only. An example is close air support where the cost of a live aircraft sortie with ordinance is in the tens of thousands of dollars. Simulation training solutions, such as FATS Indirect-Forward Air Controller (I-FACT), provide robust and meaningful training, which is transferable to the live environment and provides substantial savings in both time and dollars.

Over the last decade, military and law enforcement organizations have increasingly embraced firearms simulation training as an important supplement to live fire training. We believe the following factors favor the use of simulated firearms training systems:

Judgmental Training: Homeland security assignments and the rising number of non-traditional law enforcement and military missions, such as joint-force peacekeeping, peacemaking actions, and urban warfare situations require a heightened level of judgment regarding the appropriate use of measured force. Training in simulation enables law enforcement and military organizations to test and hone judgment and demonstrate appropriate responses to simulated complex situations with the ability to provide after action review.

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 training and judgmental/use of force requirements. FATS has developed low cost simulators with high fidelity graphics that provide training in highly 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.

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

Products

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

FATS’ product offering represents a comprehensive set of training systems, weapons, and courseware. Technology advancements have enabled FATS to build on the basic fundamentals of marksmanship training. FATS technology, 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 databases that represent real world mission locations and the technically advanced features embedded in FATS training systems result in the opportunity for military organizations to conduct meaningful simulation training that leads to advanced readiness.

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

The following table illustrates the progression of the Company’s training platforms from its FATS I system developed in 1984 to the planned continuous enhancements to our FATS IV platform originally introduced in 1998.

Evolution of FATS^® Training Platforms

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

Simulators

The Company’s simulators represent the core of FATS’ product set. Simulators are integrated training devices that combine COTS components, the latest technologies available such as Windows XP^® operating system, 3D graphics, digital video encoding and decoding technologies, and LCD projectors. FATS proprietary technologies such as the hit detection system, software and courseware create a versatile training solution. Of significant interest is the embedded “after-action-review” capability allowing a thorough examination of key actions/tasks of each trainee.

The following list identifies the system capabilities, and training available in a FATS platform:

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Weaponry

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

FATS simulated weapons offer a number of training advantages over live fire training. Our weapons provide diagnostic information not available with live fire weapons, such as trigger sqeeze, 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.

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

Our weapons are available with various levels of sensor diagnostics and can be custom-designed and manufactured for each customer’s specific installation. Currently, the Company is developing un-tethered, wireless weapons using Bluetooth radio frequency technology. FATS BLUEFIRE^® weapons will provide the end user with all of the diagnostics and capabilities present in the current FATS tethered weapons, but will be without the hard wire connection to the system.

Our weapons arsenal currently includes simulated revolvers; semi-automatic pistols; shotguns; bolt-action, semi-automatic, and automatic rifles; submachine and machine guns; anti-tank/anti-personnel rocket launchers; single-shot and automatic grenade launchers; automatic cannons; and mortars.

Training Software

The Company’s training software provides interactive engagements to meet specific training objectives using real-world imagery or computer generated imagery (CGI). FATS’ scenario library includes: terrain scenes

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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.

FATS has developed over 1,200 customized scenario programs. The Company offers a comprehensive set of scenarios covering basic and advanced marksmanship, judgmental/measured response, collective and combined arms training, and numerous other training requirements.

FATS has also become an industry leader in interoperability with similar and dissimilar training systems. Projects with the USMC and the USN have resulted in our ability to communicate via high-level architecture (HLA), with multiple systems and with live fire training. We believe this capability makes FATS technically ahead of its competition and has brought the Company new opportunities that will provide growth in both its market and product offerings.

Related Products and Services

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

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

FATS is 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 has signed a Teaming Agreement with the Memphis Police Training Academy with a view to establishing a FATS Regional Training Center. This center will deliver two-day training courses in basic and advanced marksmanship and judgmental/use of force training to law enforcement and security firms. The first courses are scheduled to commence in the late summer of 2004. In addition, management is currently conducting a market survey with a view to establishing a Regional Training Center in the Caribbean.

Management continues to explore opportunities to deliver operator refresher training and advanced system operator training. FATS continues to deliver five-day, in-plant, operator and instructor courses, and courses are scheduled throughout the upcoming fiscal year.

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

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

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Target Markets

FATS targets two markets globally: military and law enforcement/security. The Company has 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:

Military

The military market makes up approximately 85% of annual revenue for the Company. International military organizations have procurement structures similar to that of domestic military organizations.

Training requirements vary among countries but quite often the foundation is similar to U.S. military doctrine and procedure. Major differences typically exist in weaponry used and marksmanship training standards. FATS has secured exclusive agreements with strategic sales agents to provide a local presence in those markets in which such a presence is essential to the Company’s success. These agents assist in defining requirements and providing clarification to tenders and solicitations.

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

The U.S. military continues to provide FATS with long-term opportunities. As it pertains to training in a simulations environment, we believe the U.S. military clearly sets the standards to which other countries model. U.S. military customers recognize training simulation as a viable teaching method and means of preparation for live fire training. Simulation training’s inherent advantages in cost, flexibility, diagnostics, safety, and diminished environmental impact are recognized attributes by military organizations, both in the United States and abroad.

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

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

Law Enforcement

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

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There are over 17,000 law enforcement departments in the United States. Research indicates that approximately 850 of these organizations employ more than 80 officers and approximately 3,600 organizations employ 25 or more officers. FATS’ strategy is to target the 850 organizations, which, in the opinion of management, reflect the high-end market with budget and product interest.

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

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

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. Additionally, training practices in many of the international law enforcement organizations is live fire centric and, as such, virtual training is not yet in high demand. FATS and our agents are attempting to cultivate the simulation training philosophy and are closely monitoring any change in attitude favoring our products.

Homeland Security

Homeland security (HLS) is a sub-segment of both the domestic military and law enforcement markets. The majority of domestic HLS organizations are currently FATS customers. Operational requirements (including personnel and structure) have, to date, consumed the majority of new funding associated with HLS. FATS remains in constant contact with its customer base, and HLS training requirements are included in these discussions. Management expects that, in addition to judgmental training, decision-making for first responders will be given a high priority.

We can, however, provide no assurance the Company’s operations and financial position will benefit from additional spending for homeland security.

Sales and Marketing

FATS’ sales and marketing organization was recently restructured and is controlled, coordinated, and directed from our Atlanta headquarters. FATS’ sales and marketing strategy includes identifying customer simulation training needs at an early stage, and influencing requirements.

FATS’ longstanding history in simulation training is a primary key to our success within the global marketplace. Our field sales representatives, the FATS engineering staff, a core staff of SMEs, marketing operations and program management work as a team to respond to customer requirements, design the best approach and deliver what we believe is the best virtual training solution possible for the customer. 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 customer locations to maintain close, on-the-ground contact with end-users and decision-makers.

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Management believes that 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 FATS to maintain its market position.

Customers

Our customer base represents a global footprint of significant proportion. With over 5,200 fielded platforms, and over 60,000 simulated weapons, FATS customers are found throughout the world. The following table provides a partial presentation of FATS’ strategic customers:

In fiscal 2002, the Company’s five largest customers accounted for approximately 50.5% of the Company’s revenues, with four customers each accounting for more than 10% of revenues. In fiscal 2003, the Company’s five largest customers accounted for approximately 49.7% of the Company’s revenues, with two customers each accounting for more than 10% of revenues. In fiscal 2004, the Company’s five largest customers accounted for approximately 49.6% of the Company’s revenues, with three customers each 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 our growth objectives, we Company will be required to seek contracts from new domestic and international customers as well as orders from existing customers for additional types of virtual 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 the Company’s results of operations or financial condition. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 7 of Notes to Consolidated Financial Statements.

Research and Development

Our research and development expenditures totaled approximately $5.6 million, $6.8 million and $7.2 million in fiscal 2002, 2003, and 2004, respectively. Of these amounts, approximately $1.5 million, $4.0 million and $4.3 million was funded under customer contracts, resulting in net research and development expenses to FATS of $4.1 million, $2.8 million and $2.9 million in fiscal 2002, 2003, and 2004, respectively.

We believe FATS has a proven track record of developing new technologies to create more realistic and effective simulated training environments. In addition, FATS makes a substantial investment in the continuous

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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.

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

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

Supplementing the technical capabilities of the Company is a cadre of strategic relationships with “best of breed” suppliers. We believe this combination of internal and external capabilities solidifies leading edge technology for FATS.

Manufacturing Operations

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

Systems Manufacturing

Systems 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-

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established quality requirements have been identified through supplier source inspection consistent with a comprehensive ISO-9000 quality assurance plan.

Due to our internal efficiencies and external capabilities, we believe FATS’ production capacity is extremely elastic which takes this process out of the critical path for future growth.

Weapons Manufacturing

The 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 complimented 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.

Operational Improvements

Beginning in the fall of 2001, we undertook a number of operational initiatives focused on implementing lean manufacturing and reorganizing production processes. By implementing these state of the art techniques, FATS has moved from traditional “batch” production to a more efficient “pull” process. Work cells have been established in both systems set-up and the weapons assembly areas. The use of common tools and processes combined with a cross trained workforce has not only increased efficiencies but elevated our quality standards. A continuous improvement process has enhanced the effectiveness of the manufacturing group thus reducing time to market deliveries.

Quality has become a built-in-process, which is monitored by key performance metrics and a cross-functional quality council. Performance results are visible on a real time basis that makes corrective action a part of daily routines.

Numerous adjustments have been made to the management of the supply chain with improvements being realized in supplier on time delivery and as received quality. The improvements have led to the creation of several “strategic supply agreements” which also address ongoing cost improvement. The Company continues to evaluate in house competencies or core processes that ultimately lead to sound “make/buy” decisions, which improve operating efficiencies.

Product Support

FATS is committed to providing outstanding customer service. We deliver global after-sales customer service via a number of strategically located Customer Service Departments that are centrally controlled from our corporate headquarters in Atlanta, Georgia. Customer Service Technicians/Engineers are located in:

In addition to technical support, all FATS Customer Service Departments offer accessories, parts, system upgrades/enhancements and training. Also, the majority of our Customer Service Departments administer Depots containing government owned spare equipment and components. Depot customers include the United States Marine Corps, the US Navy, the US Air National Guard, the Canadian Department of National Defense, the Australian Defense Force, the British Ministry of Defense and the Royal Netherlands Army. Depot support

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includes shipping spare equipment and components to customers within 24 hours of notification of a weapon or system failure. Our Customer Service Departments offer website, hotline and after hours support, and are committed to rapid turnaround times when customers’ equipment is received for repair. All repairs conducted by FATS technicians/engineers undergo a final quality test prior to being shipped back to the customer.

Proprietary Operating System; Raw Materials and Suppliers

The Company currently purchases from numerous suppliers on both a competitive bid and long-term contract basis. Our current products use a Microsoft Windows-based operating system; however, some of FATS’ earlier model simulators use a software operating system known as OS-9, which is an operating system developed and owned by Microware Corporation. We 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 and we believe FATS has enough licensed copies of the OS-9 software in inventory to cover any future new sales or warranty replacements for existing customers. We believe that there are viable alternative sources for all of our 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 flexibility to produce a large portion of our principal components if they become unavailable or it becomes economically advantageous to do so.

Backlog

As of March 31, 2004, the Company had a backlog of approximately $59.3 million compared with $64.3 million as of March 31, 2003. Our backlog as of March 31, 2004 consisted of $35.9 million from international customers, $22.4 million from U.S. military customers and $1.0 million from U.S. law enforcement customers. Management expects that approximately $48.4 million of backlog will be delivered in fiscal 2005. The U.S. and other government customers may generally terminate contracts, 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 plus a reasonable profit through the date of termination.

A summary of changes in the Company’s backlog for the years ended March 31, 2002, 2003, and 2004 is as follows (in thousands):

Competition

The recent increase in sales and acceptance of small arms simulation products has brought about an increase in competition from both domestic and international companies. We compete with divisions or subsidiaries of larger companies solely dedicated to simulation for sales of FATS’ small and supporting arms simulation products.

FATS faces a number of major competitors. They include 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.

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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.

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 potential 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, 2004, the Company and its subsidiaries employed 420 employees, of which 310 were employed at our corporate headquarters in Atlanta. Unions represent none of the Company’s employees. We consider relations with our employees to be satisfactory with employee turnover well below industry averages.

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 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 rather than as sole source contracts may affect our profit margins. There can be no assurance that changes in the type of government contracts and other contracts entered into by FATS in the future will not have a material adverse effect on our future results of operations or financial condition. See Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We are 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 o