QuickLinks — Click here to rapidly navigate through this document!

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2003

or

For the transition period from                  to                  

Commission file number 1-6035

THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)

3033 Science Park Road
San Diego, California 92121-1199
(Address of principal executive offices, zip code)

(Registrant's telephone number, including area code) (858) 552-9500

                                                                                                                                                   
(Former name, former address and former fiscal year, if changed since last report.)

      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 whether the registrant is an accelerated filer as defined in rule 12b-2 of the Securities Exchange Act of 1934.  Yes  x  No  o.

      The number of shares of registrant's common stock outstanding at October 24, 2003, was 81,462,655.

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements

THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

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

THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
  (in thousands, except share and per share data)

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

THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  (in thousands of dollars)

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

THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars, except per share data)

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

THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(in thousands, except share and per share data, or as otherwise noted)

Note (1) Basis of Financial Statement Preparation

      The accompanying consolidated financial information of The Titan Corporation and its subsidiaries ("Titan" or the "Company") should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-Kto the Securities and Exchange Commission for the year ended December 31, 2002, and as updated in the Company’s Report on Form 8-K dated July 9, 2003.  The accompanying financial information includes substantially all subsidiaries on a consolidated basis and all normal recurring adjustments which are considered necessary by the Company's management for a fair presentation of the financial position, results of operations and cash flows for the periods presented.  However, these results are not necessarily indicative of results for a full fiscal year.  Additionally, certain prior period amounts have been reclassified to conform to the current period presentation.

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

      Prior to the discontinuance of certain operations in 2002 and 2001, the Company grouped its businesses into five business segments – Titan Systems, Titan Wireless, Software Systems (including Cayenta), Titan Technologies and the SureBeam business.  As discussed in Note 5, Titan is no longer reporting the results of operations by these segments, however, reference may be made to these segments in discussions of other historical information.  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” substantially all of the Company’s operations are aggregated into one reportable segment given the similarities of economic characteristics between the operations and the common nature of the products, services, and customers.

Recent Accounting Pronouncements

      The Company has elected to adopt the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".  Accordingly, the Company accounts for its stock-based compensation plans under the provisions of APB No. 25.  The Company also follows the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS No. 123.

      As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value based method of accounting described in APB No. 25.  Compensation cost, if any, is measured as the excess of the quoted market price of the Company's stock on the date of grant over the exercise price of the grant.  Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value method under SFAS No. 123, the Company's results of operations would have been reduced to the pro forma amounts indicated below:

      The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. 

      In April 2002, The Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002”, which is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 rescinds SFAS No. 4 and SFAS No. 64, which required that all gains and losses from extinguishment of debt be aggregated, and if material, classified as an extraordinary item. As a result of changes in the criteria, gains and losses from debt extinguishment are to be classified as extraordinary only if they meet the criteria set forth in Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”  In accordance with SFAS 145 and APB 30, the deferred debt issuance costs and other extinguishment costs related to the HIGH TIDES were expensed upon extinguishment of that debt.  The charge is reflected in the results of continuing operations as Debt Extinguishment Costs in the accompanying consolidated statement of operations.  Also in accordance with SFAS No. 145, 2002 debt extinguishment costs associated with the termination of a senior credit facility have been reclassified from an extraordinary item to results from continuing operations.  See Note 6 for further discussion of the charges.

       In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002.  This standard requires Companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The standard replaces the existing guidance provided by the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The Company does not have any immediate plans to initiate any activities in 2003 that would be included within the scope of this standard.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities.  The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock.  SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The Company adopted SFAS No. 150 effective July 1, 2003, and the adoption did not have a material impact on its consolidated financial position or results of operations.

Note (2) Planned Merger with Lockheed Martin Corporation

      Lockheed Martin Corporation (“Lockheed Martin”) and Titan have entered into a definitive agreement for Lockheed Martin to acquire Titan.  Under the merger agreement, stockholders of Titan may elect to receive $22 per share in cash, an equivalent amount of Lockheed Martin common stock, or a 50/50 combination of cash and Lockheed Martin common stock.  Stockholders who elect to receive all cash or stock will be subject to pro-ration, so that the aggregate amount of cash and stock paid will each equal 50 percent of the merger consideration.  The total value of this transaction, including the assumption of about $550 million of Titan debt, is approximately $2.4 billion before accumulated tax benefits.  The transaction has been approved by the boards of directors of each company and is expected to close in the first quarter of 2004, subject to approval by Titan stockholders, government regulatory reviews and other closing conditions described in the merger agreement.

      Among other terms, the merger agreement provides that the exchange rate for stockholders who receive stock will be determined by dividing $22 per share by the average of the daily high and low sales prices per share of Lockheed Martin common stock on the New York Stock Exchange (“NYSE”) composite transaction tape for the 10 trading days preceding the third trading day prior to the effective date of the merger, subject to specified collars. If the average price exceeds $58 per share (the "Upper Collar"), then the exchange rate will be calculated using the Upper Collar instead of the average price. If the average price is less than $46 per share (the "Lower Collar"), then the exchange rate will be calculated using the Lower Collar instead of the average price.  On October 15, 2003, Lockheed Martin filed a registration statement on Form S-4 with the Securities and Exchange Commission related to the proposed merger.

      On September 16, 2003, Titan announced that it intends to redeem all outstanding shares of its cumulative convertible preferred stock.  The redemption is being undertaken in anticipation of and as a condition to the close of the proposed merger with Lockheed Martin.  Subject to any prior approvals, the convertible preferred shares are redeemable at Titan's option at a redemption price of $20 per share, plus cumulative dividends in arrears.  Titan intends to redeem such shares, using available cash balances, in advance of the date to be set for the Titan stockholders' meeting for consideration of the proposed merger between Titan and Lockheed Martin.  Titan expects to deliver the requisite notice of redemption to holders of record of the convertible preferred stock by December 31, 2003, subject to the progression of the merger as planned.  Titan's redemption of its outstanding convertible preferred stock is a condition to closing the proposed merger with Lockheed Martin.  In addition, Titan must obtain a waiver or amendment to remove certain restrictive covenants of the $200 million subordinated notes as a condition to close.  The preferred stock is listed on the New York Stock Exchange under the symbol "TTN_p" and closed at $20.16 per share on November 6, 2003.

      Holders of Titan's convertible preferred stock also have an existing right to convert each of their shares into 0.781 shares of Titan's common stock.  The right to convert the convertible preferred stock will terminate at the close of business on the date of redemption to be fixed by Titan in the notice of redemption.

      As of September 30, 2003, there were 688,029 shares of convertible preferred stock outstanding.  To the extent that all of these shares are converted, then approximately 537,351 shares of Titan common stock would be issued.  Any shares of convertible preferred stock that are not converted will be redeemed.  Refer to Note 6 for a discussion of the impact of the proposed merger on Titan’s outstanding debt.

      In the quarter and nine months ended September 30, 2003, the Company incurred $0.8 million in transaction costs related to the planned merger, which are reflected as merger related costs in the accompanying consolidated statements of operations.

Note (3) Exit and Restructuring Charges and Other

      Included in the results of operations for the quarter and nine months ended September 30, 2002 are $46.7 million and $50.1 million, respectively, of restructuring costs related to the merger of Titan Systems into Titan on September 25, 2002 and exit charges related to the shutdown of Cayenta’s headquarters office.  Approximately $38.7 million of restructuring charges for the quarter and nine months ended September 30, 2002 were related to the merger of Titan Systems into Titan and other associated reorganization and consolidation costs.  Approximately $8.0 million and $11.4 million, for the quarter and nine months ended September 30, 2002, respectively, of these exit charges are related to the shutdown of the Cayenta headquarters office and network operations center. 

      At September 30, 2003, accruals for all exit and restructuring charges totaled $29.7 million, comprised primarily of restructuring charges related to the merger of Titan Systems into Titan on September 25, 2002 and exit charges related to the shutdown of Cayenta’s headquarters office.  These exit and restructuring activities were accounted for under EITF Issue No. 94-3, which allowed accrual of restructuring costs upon commitment to a plan and certain other criteria.  Effective January 1, 2003, the Company was required to adopt SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”.  SFAS No. 146 requires companies to defer recognition of a liability for a cost associated with an exit or disposal activity until that liability is incurred and can be measured at fair value.   As these restructuring activities were entered into prior to the Company’s adoption of SFAS No. 146, the Company accounted for these activities under EITF 94-3.  A summary of the utilization of exit and restructuring accruals during the nine months ended September 30, 2003 is as follows:

      At September 30, 2003, $16.8 million of the exit and restructuring accruals are included in Other Accrued Liabilities on the consolidated balance sheet and $12.9 million are included in Other Non-current Liabilities.  The remaining accrual balance is primarily comprised of amounts due under the facilities consolidation, which requires payments in 2003 and 2004 for certain lease cancellation fees and other lease costs, net of assumed sublease income, with the remainder expected to be paid over the remaining lease terms, which expire in 2009.

Note (4) Cumulative Effect of Change in Accounting Principle

      Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets".  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”  

      SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a two step methodology.  The initial step requires the Company to assess whether indications of impairment exist.  If indications of impairment are determined to exist, the second step of measuring impairment is performed, wherein the fair value of the relevant reporting unit is compared to the carrying value, including goodwill, of such unit.  If the fair value exceeds the carrying value, no impairment loss is recognized.  However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit is impaired. 

      In connection with the initial adoption of this standard as of January 1, 2002, during the first quarter of 2002, the Company’s independent valuation consultant, Bearing Point, completed step one of the test for impairment, which indicated that the carrying values of certain reporting units exceeded their estimated fair values, as determined utilizing various evaluation techniques including discounted cash flow and comparative market analysis.  Thereafter, given the indication of a potential impairment, the Company completed step two of the test.  Based on that analysis, a transitional impairment loss of $40.1 million, which was net of a $10.0 million tax benefit, was recognized in the first quarter of 2002 as the cumulative effect of an accounting change.  The impairment charge resulted from a change in the criteria for the measurement of the impairment loss from an undiscounted cash flow method, as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to an estimated fair value analysis as required by SFAS No. 142.  The gross $50.1 million impairment charge recorded in the first quarter of 2002 was comprised of approximately $27.5 million in certain components of the Cayenta business, approximately $14.9 million in the AverCom business, which was previously reported in the Titan Technologies segment, both attributable to lower valuations and weakened outlook in commercial IT services, and approximately $7.7 million in the Titan Wireless business.  The entire $50.1 million charge was related to discontinued businesses; approximately $42.4 million of this charge pertained to businesses that were discontinued by the Company on March 1, 2002 with the remaining charge of $7.7 million related to the Company’s long distance telecommunications business that was discontinued in the third quarter of 2002.

      The Company performs its annual testing for impairment of goodwill and other intangible assets in the first quarter of each year.  Based on management’s assessments at September 30, 2003, there were no indications of impairment.

Note (5) Discontinued Operations

      In August 2002, the Company’s board of directors made the decision to sell or otherwise divest its LinCom Wireless business and to sell a remaining commercial information technology business, both of which were previously reported in the Company’s Titan Technologies segment.  Accordingly, Titan has reflected both operations as discontinued in accordance with SFAS No. 144.  In October 2002, the LinCom Wireless business was shut down.  Titan is currently in negotiations with a number of potential buyers to sell the remaining commercial information technology business.

      In July 2002, the Company’s board of directors made the decision to exit all of its international telecommunications business through a combination of selling or winding down its operations within its Titan Wireless segment.  Titan began implementing these actions immediately and expects to complete these actions during 2003.  The Company has reported this exit of the Titan Wireless segment as a discontinued operation in accordance with SFAS No. 144.  In the second quarter of 2003, Titan sold its interest in Ivoire Telecom.  In the third quarter of 2003, Titan completed the sale of its GlobalNet business.  Payments received for the sale of GlobalNet consisted of approximately $2 million in cash and the buyer’s assumption of all of the outstanding liabilities of GlobalNet, which aggregated to approximately $21 million at the time of the consummation of the sale.  Also during the third quarter of 2003, the Company settled and accelerated the collection of its receivable due from its customer in Nigeria, resulting in an aggregate cash collection of approximately $9.4 million and final payments expected in November 2003 of approximately $1.4 million, of which $0.6 million was collected in October 2003.  Finally, Titan executed a definitive agreement with its customer, the Office of Post and Telecommunications (OPT) of Benin, to transfer, among other things, the management and operation of the telecom project in Benin to the OPT.  As consideration for this settlement, Titan will be paid $29.5 million, of which $4.5 million was collected earlier this year, with the remaining $25 million required payment to be paid by the end of this year.  As part of this agreement, Titan will continue to have rights to share in the future net revenue stream generated by the project.  Titan’s rights to the net future revenue stream will commence after the net receipts of the project revenue stream have repaid in full the balance outstanding on the non-recourse loan owed to the syndicated bank.  In addition, the parties are currently in the process of restructuring the non-recourse debt to remove Titan as the borrower.  The parties expect that the restructuring should occur in the fourth quarter of 2003.  As of September 30, 2003, the remaining outstanding balance on the non-recourse loan was $35.5 million.   The gain from the disposition of the GlobalNet business was offset by impairment charges resulting from the terms of the agreements with the Company’s customers in Nigeria and Benin, and by charges accrued for the exit activities in Benin.

      During the first quarter of 2002, the Company’s board of directors made the decision to sell certain of its commercial information technology operations within its Cayenta segment and the AverCom business within the Titan Technologies segment.  In the third quarter of 2002, all of these operations were sold. 

      In accordance with SFAS No. 144, all commercial operations that have been sold or that are held for sale have been reflected as discontinued operations for all periods presented in Titan’s consolidated financial statements.   SFAS No. 144 contains criteria that must be met for businesses to be classified as held-for-sale and recorded as discontinued operations.  The Company periodically re-evaluates those criteria for businesses held-for-sale, and if such criteria are no longer met, the Company would be required to reclassify the operations and assets and liabilities of non-qualifying businesses into continuing operations.  Management believes that all businesses currently held-for-sale meet this criteria and, therefore, have been reported as discontinued operations in accordance with SFAS No. 144.

      On March 16, 2001, SureBeam Corporation, Titan's former subsidiary that provides electronic food irradiation systems and services, completed an initial public offering ("IPO") of 6,700,000 shares of Class A common stock at a price of $10 per share.  On October 16, 2001, Titan adopted a definitive plan to spin off SureBeam in the form of a tax-free dividend to Titan stockholders within the next 12 months from that date.  The plan involved filing a letter ruling request with the Internal Revenue Service ("IRS") to obtain approval of the tax-free distribution.  Titan received a favorable ruling in May 2002, and on August 5, 2002, Titan’s remaining ownership interest in SureBeam was spun-off to Titan stockholders as a tax-free stock dividend. 

      Prior to the spin-off of SureBeam Corporation, Titan and SureBeam entered into a number of agreements.  Titan extended a $50 million senior secured revolving credit line of which $25 million has been advanced and is outstanding as of September 30, 2003.  In addition, Titan has guaranteed certain lease obligations of SureBeam.  The aggregate amount of the lease obligations Titan has guaranteed as of September 30, 2003 is approximately $18.9 million.  The leases extend through periods ending in 2023.  In relation to SureBeam’s strategic alliance with Hawaii Pride, Titan has guaranteed up to the greater of SureBeam’s equity interest in Hawaii Pride (which is currently zero), or 19.9% of Hawaii Pride’s $6.8 million, 15-year loan from its lender, Web Bank.  As of September 30, 2003, Titan has guaranteed approximately $1.2 million, or 19.9% of the current loan balance of $5.9 million.  In the event that Hawaii Pride defaults on the loan, Titan currently expects to be obligated to cover any defaults on the entire outstanding balance of the loan.  Refer to Note 9 for further discussion of Titan’s agreements with SureBeam and related to Hawaii Pride.

      Following is a summary by original business segment of the income (loss) from discontinued operations for 2003:

      Included in the results above for Titan Technologies for the nine months ended September 30, 2003, is a tax benefit of $2.3 million recorded in the second quarter of 2003 to reflect the estimated tax impact of adjusting the carrying value of certain assets which are currently held for sale related to a part of the Company’s remaining commercial information technology business that was formerly reported in the Company’s Titan Technologies segment.  The net income in Titan Wireless in the three and nine months ended September 30, 2003, is primarily a result of the gain on the sale of the GlobalNet business, for which a tax provision was not provided due to prior losses, including asset impairment charges, that were not previously tax benefited.  The gain from the disposition of GlobalNet was offset by impairment and exit charges and operating losses, for which a tax benefit of $7.3 million was provided.

Balance Sheet Summary

      The current and non-current assets and liabilities of each discontinued operation are as follows:

      Included in the total assets of Titan Wireless as of September 30, 2003 are approximately $61.8 million of gross accounts receivable.  This balance includes approximately $25 million owed to Titan by the OPT, pursuant to the settlement agreement, plus approximately $35.5 million representing the amounts outstanding on the non-recourse loan drawn to cover subcontract costs on the project and $1.4 million due from Titan Wireless’s customer in Nigeria.  The $35.5 million that was drawn on the non-recourse loan facility with the bank syndicate is included in the non-current liabilities of discontinued operations.  During the nine months of 2003, there was approximately $5.1 million in payments made on the non-recourse debt from cash generated from the OPT project.  The current liabilities of $14.8 million of Titan Wireless include approximately $10.3 million of remaining exit costs.  As previously discussed, Titan expects to collect the remaining $1.4 million balance due from its customer in Nigeria in November 2003 and  expects to collect the $25 million due from the OPT by the end of 2003, pursuant to the terms of the settlement agreement.

      The current assets of Titan Technologies are primarily comprised of accounts receivable balances and prepaid assets.

Note (6) Debt

      At September 30, 2003, total borrowings outstanding under the Company's senior credit facility were $346.5 million at a weighted average interest rate of 4.45%.  Commitments under letters of credit were $9.5 million at September 30, 2003, which reduces availability of the senior credit facility, resulting in $125.5 million of borrowing availability on the senior revolver at September 30, 2003.  Of the total outstanding borrowings, $3.5 million was short-term.  At September 30, 2003, the Company was in compliance with all financial covenants under its various debt agreements.

Senior Subordinated Notes

      On May 15, 2003, the Company sold $200 million of 8% senior subordinated notes due May 15, 2011 in a private placement (the “Notes”).  The Company used the net proceeds from the issuance of the Notes, plus borrowings of $50 million made under its senior line of credit facility and additional cash on hand, to redeem all of the $250 million of the then-outstanding 5 3/4% HIGH TIDES convertible preferred securities.  The redemption of HIGH TIDES occurred on June 4, 2003.  In what it considered favorable corporate bond market conditions, the Company made the decision to refinance the HIGH TIDES to eliminate the interest rate risk and potential dilution to stockholders associated with the mandatory remarketing feature of the HIGH TIDES.

      The Company will pay interest on the Notes semi-annually in arrears on May 15 and November 15 at the rate of 8% per annum.  The first scheduled interest payment date for the outstanding Notes is November 15, 2003.  The Company may redeem the Notes, in whole or in part, on or after May 15, 2007 at the following redemption prices, plus accrued and unpaid interest and liquidated damages, if any:

      In addition, on or prior to May 15, 2006, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings at a redemption price of 108% of principal together with accrued and unpaid interest.  The Notes are unsecured and rank or will rank equally with our current or future senior subordinated indebtedness.  Each of the Company’s domestic subsidiaries other than Cayenta guarantees the Notes.  The guarantees are unsecured and rank equally with the guarantors' senior subordinated indebtedness.  The Notes and the guarantees are junior to all of the Company’s and the guarantors' senior indebtedness and senior to all of the Company’s and the guarantors' subordinated indebtedness.  Upon a change of control, the Company will be required to make an offer to purchase the Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase. 

      Prior to entering into the merger agreement with Lockheed Martin discussed in Note 2, the Company had filed a registration statement to offer a new series of 8% senior subordinated notes due 2011 that are registered under the Securities Act of 1933 for all of the currently outstanding Notes (“existing notes”).  On September 16, 2003, the Company terminated this exchange offer.  In connection with the proposed merger between Titan and Lockheed Martin, Titan and Lockheed Martin have agreed that they will commence a consent solicitation and a new offer to exchange, pursuant to which:

	·	Titan and Lockheed Martin will commence an offer to exchange the existing notes for a new series of 8% senior subordinated notes due 2011 which shall have substantially identical terms as the existing notes as such notes are amended as provided below, except that the new notes will be registered under the Securities Act and will be guaranteed by Lockheed Martin;
	·	the indenture governing the existing notes would be amended (i) so that the proposed merger between Titan and Lockheed Martin will not require a "change of control" offer to be made to the holders of the existing notes, (ii) to eliminate substantially all of the restrictive covenants contained in the indenture and (iii) to release all of the existing subsidiary guarantors of existing notes from their guarantee obligations;
	·	the registration rights agreement entered into in connection with the initial issuance of the existing notes would be amended to (i) eliminate the provisions that could cause Titan to pay liquidated damages for certain types of defaults thereunder and (ii) provide that the registration rights agreement would be terminated upon the effectiveness of the new offer to exchange.

Liquidated damages of 0.25% per annum per $1,000 whole dollars in principal amount of the existing notes began to accrue in October 2003 and will continue to accrue until the exchange and amendments described above become effective. 

      The new offer to exchange the existing notes will be contingent upon the consummation of the proposed merger. The new offer to exchange will only be made pursuant to a prospectus, copies of which will be sent to the holders of the Notes when the offer is commenced.

      In the second quarter of 2003, the Company recorded approximately $12.4 million in charges related to the extinguishment of the HIGH TIDES, comprised of the write-off of $8.1 million of remaining deferred debt issuance costs, a call premium of $3.6 million, and approximately $0.7 million of interest during the call period.  In accordance with SFAS No. 145, all extinguishment charges were recorded as a charge to income from continuing operations and are classified as Debt Extinguishment Costs in the accompanying consolidated statement of operations.  Also in accordance with SFAS No. 145, prior year debt extinguishment costs associated with the termination of a senior credit facility have been reclassified from an extraordinary item to results from continuing operations. 

Senior Credit Facility

      In connection with the issuance of the Notes, the Company entered into an amendment to its senior credit facility to permit, among other things, the issuance of the Notes and the redemption of the HIGH TIDES.

      General.      On May 23, 2002, the Company entered into an agreement with Wachovia Bank, National Association and Wachovia Securities for a $485 million senior credit facility from a syndicate of commercial banks including Wachovia Securities acting as sole lead arranger and Wachovia Bank, National Association, as Administrative Agent, The Bank of Nova Scotia and Comerica Bank as Co-Syndication Agents and Branch Banking and Trust Company and Toronto Dominion Bank as Co-Documentation Agents and other financial institutions.  The senior credit facility is comprised of an aggregate credit commitment of $485 million, consisting of a seven-year term loan in an aggregate principal amount of $350 million and a six-year $135 million revolving credit facility.

      Interest Rates; Fees.      As amended in connection with the issuance of the Notes, the senior credit facility provides for interest rates per annum applicable to amounts outstanding under the term loan and the revolving credit facility that are, at the Company’s option, either the administrative agent's most recently established base rate for U.S. dollars loaned in the United States (or, if greater, the Federal Funds Rate plus 0.5%) plus a margin of 0.75% per annum to 2.00% per annum, based on the Company’s ratio of total debt to EBITDA (as defined in the senior credit facility), or the LIBOR rate for the applicable interest period plus a margin of 2.00% per annum to 3.25% per annum, based on the Company’s ratio of total debt to EBITDA.  The Company’s interest rates for base rate and LIBOR revolving loans are generally 0.50% to 0.75% lower than its interest rates for base rate and LIBOR term loans at the same ratio of total debt to EBITDA.  The Company is required to pay the lenders under the senior credit facility a non-utilization fee ranging from 0.50% per annum to 1.00% per annum, payable quarterly in arrears, based on the applicable percentage of the undrawn portion of the revolving credit facility.  The Company is also required to pay letter of credit fees for outstanding letters of credit equal to 0.25% per annum of the stated amount of the letter of credit, plus the product of the applicable margin (from 2.00% to 2.75%, based on its ratio of total debt to EBITDA) for loans under the revolving credit facility maintained as LIBOR loans multiplied by the stated amount of the letter of credit.

      Amortization; Prepayments.      The Company’s seven-year term loan matures on June 30, 2009 and the revolving credit facility matures on May 23, 2008.  The seven-year term loan amortizes at 1.0% per year for years one through six (through the quarter ending June 30, 2008), with the remaining 94% due in four equal quarterly payments in year seven of the loan (through the quarter ending June 30, 2009).  The Company may prepay amounts borrowed under the term loan and the revolving credit facility at its option without any fee.  The Company is also required to make prepayments, subject to certain exceptions, of the outstanding amounts under the term loan and the revolving credit facility from asset sales, issuance of subordinated debt and equity securities, insurance or condemnation proceeds and from excess cash flows.  Any such prepayments will be applied first to reduce the amount of the term loan outstanding under the senior credit facility, and then to reduce revolving loans under the senior credit facility. Pursuant to the amendment to the senior credit facility that was entered into in connection with the issuance of the outstanding Notes, none of that offering's proceeds were subject to mandatory prepayments under the senior credit facility.

      Covenants.      The terms of the senior credit facility require the Company to provide certain customary covenants for a senior credit facility, including certain financial covenants.  As amended, these financial covenants, as defined per the senior credit agreement, are comprised of a maximum total debt to EBITDA ratio of 5.5 to 1, declining to 5.25 to 1 beginning with the quarter ending September 30, 2003 through the quarter ending March 31, 2004, a maximum total senior debt to EBITDA ratio of 3.75 to 1, declining to 3.5 to 1 beginning with the quarter ending December 31, 2003 through the quarter ending March 31, 2004, a minimum interest coverage ratio of 2.75 to 1 through the quarter ending March 31, 2004, a minimum fixed charge coverage ratio of 1.25 to 1 through the quarter ending March 31, 2004 and a minimum net worth. The maximum and minimum thresholds for compliance under the financial covenants in the senior credit facility will further adjust in the future in accordance with the terms of the senior credit facility.

      Deferred costs and expenses of $8.5 million related to the senior credit facility are included in Other Assets at September 30, 2003 and will be amortized over the remaining term of the senior credit facility.  Deferred costs and expenses of $5.9 million related to the issuance of the Notes are also included in Other Assets at September 30, 2003, and will be amortized over the term of the Notes.

Note (7) Other Financial Information

      The Company's only element of other comprehensive income resulted from foreign currency translation adjustments in all periods reported, which is reflected in the Consolidated Statements of Stockholders' Equity.

      In connection with the determination of the fair value of assets acquired in connection with acquisitions in 2001, 2000 and 1999, and pursuant to the provisions of SFAS No. 141, the Company has valued acquired contracts in process at contract price, minus the estimated costs to complete and an allowance for the normal industry profit on its effort to complete such contracts.  This adjustment has been reflected in the accompanying consolidated balance sheet as an increase to goodwill and a corresponding increase to deferred profit.  The Company recognized approximately $0.6 million and $0.1 million as a reduction of costs against the deferred profit in the three months ended September 30, 2002 and 2003, respectively, and recognized approximately $1.9 million and $0.1 million as a reduction of costs against the deferred profit in the nine months ended September 30, 2002 and 2003, respectively.  The remaining amount of deferred profit of approximately $0.7 million at September 30, 2003 is estimated to reduce costs through 2007.

Earnings Per Share

      The following data summarize information relating to the per share computations for income from continuing operations before the cumulative effect of a change in accounting principle:

      In the three months ended September 30, 2003, options and warrants to purchase approximately 1,576,300 shares of common stock at prices ranging from $15.88 to $29.74 per share were not included in the computation of diluted EPS, as the effect would have been anti-dilutive due to the exercise price.  For the three month period ended September 30, 2002, options and warrants to purchase approximately 2,870,000 shares of common stock at prices ranging from $1.04 to $10.37 per share were not included in the computation of diluted EPS due to the loss from continuing operations, and approximately 4,353,900 shares at prices ranging from $10.54 to $29.74 per share were not included in the computation as the effect would have been anti-dilutive due to the exercise price.

      In the nine months ended September 30, 2003, options and warrants to purchase approximately 3,195,800 shares of common stock at prices ranging from $11.57 to $29.74 per share were not included in the computation of diluted EPS as the effect would have been anti-dilutive due to the exercise price.  For the nine month period ended September 30, 2002, options and warrants to purchase approximately 3,648,300 shares of common stock at prices ranging from $1.04 to $13.72 per share were not included in the computation of diluted EPS due to the loss from continuing operations, and approximately 2,060,400 shares at prices ranging from $13.85 to $29.74 per share were not included in the computation as the effect would have been anti-dilutive due to the exercise price.

      Approximately 3,879,500 shares in the nine months ended September 30, 2003, that could have been issued from the potential conversion of remarketable term income deferrable equity securities (HIGH TIDES) were not included in the computations as their effect was anti-dilutive.  Approximately 6,776,500 shares in the three months and nine months ended September 30, 2002, that could have been issued from the potential conversion of the HIGH TIDES were not included in the computations, as their effect was anti-dilutive.  Approximately 537,400 shares of common stock in the three and nine month periods in 2003 and approximately 538,500 shares of common stock in the three and nine month periods in 2002 that could have been issued from the potential conversion of cumulative convertible preferred stock were not included in the computations of diluted EPS, as the effect would have been anti-dilutive.  The primary change in potential dilution from 2002 to 2003 for the HIGH TIDES and preferred stock is the change in conversion ratios due to the SureBeam spin-off (see Note 5) and the extinguishment of the HIGH TIDES on May 15, 2003.

Select Balance Sheet Data

      Following are details concerning certain balance sheet data:

Supplemental Cash Flow Information

      Supplemental disclosure of cash flow information:

      In July 2003, the Company issued 350,000 shares of common stock and paid $0.2 million in cash of additional consideration related to the receipt of certain contract awards and the achievement of defined earnings levels on all contracts, respectively, related to the acquisition of International Systems in February 2002.  The value of the shares, in addition to the cash paid, were recorded as an increase to goodwill.  Also in the third quarter of 2003, the Company paid $1.8 million in cash related to the acquisition of Atlantic Aerospace Corporation in 1999, in full satisfaction of contingent consideration earned on contract awards in 2002.  This amount had been previously accrued.

      In 2002, the Company issued 172,153 shares of Titan common stock valued at $3.8 million as consideration for the purchase of assets of a company which became part of the Cayenta business, now reported in discontinued operations.  In the second quarter of 2003, the indemnification period as defined per the asset purchase agreement expired, and as provided for in the purchase agreement, the Company elected to exchange all of the Titan common stock for cash of $2.0 million and the extinguishment of notes receivable of $1.8 million for cash advances made in 2002.

      In addition, net cash proceeds of $27.9 million resulting from the acquisition of businesses, net of cash acquired, was reported for the nine months ended September 30, 2002.  This was primarily the result of cash acquired from Jaycor, which was a stock-for-stock merger completed in March 2002.

Note (8) Commitments and Contingencies

       During the first quarter of 2003, the Company entered into new long-term lease and sublease agreements for office space in Virginia and Maryland as part of the Company’s restructuring efforts to consolidate various facilities of its government business into centralized locations (see Note 3).  The lease and subleases in Virginia require future minimum lease payments of approximately $100.4 million over approximately 13 years, commencing at various dates from May 2003 through May 2004.  The lease in Maryland requires future minimum lease payments of approximately $45.8 million over 10 years, commencing approximately July 1, 2004.

       On August 16, 2002, Perimex International Corporation (“Perimex”) filed a complaint against Titan, our subsidiary, Titan Wireless, and a former Titan Wireless employee in San Diego Superior Court in San Diego, California.  The complaint alleged breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with existing contractual relationships and prospective business advantage and violation of the California unfair competition law arising from an alleged failure of Titan Wireless to enter a joint venture with Perimex to provide wireless telecommunication services in Argentina and other related alleged misconduct.  The complaint sought damages of $52.65 million and sought injunctive relief prohibiting Titan and Titan Wireless from transferring any of Titan Wireless's assets.  The court denied Perimex's request for a preliminary injunction, sustained Titan’s and Titan Wireless's demurrer as to all causes of action in the complaint and granted Perimex leave to amend the complaint.  Perimex dismissed its complaint voluntarily without prejudice.  On May 22, 2003, however, Perimex filed a new complaint in the United States District Court for the Southern District of California alleging substantially similar causes of action and claiming a similar amount of damages.  The Company believes that Perimex's claims are without merit and the Company intends to defend its position vigorously.

      The Company has received a grand jury subpoena from the Antitrust Division of the Department of Justice requesting the production of documents relating to information technology services performed for the Air Force at Hanscom Air Force Base in Massachusetts.  The Company has been informed that other companies who have performed such services have received subpoenas as well.  The Company has been and will continue to cooperate fully with the investigation.

      The Company received a subpoena from the office of Inspector General for the National Aeronautics and Space Administration, or NASA, seeking certain records relating to billing for labor services in connection with the Company’s contracts with NASA.  The Company also received a subpoena from the office of Inspector General for the General Services Administration, or GSA, seeking similar records relating to billing for labor categories in connection with contracts with GSA.  The Company is fully cooperating with the government’s inquiries in these areas.

      Titan and members of Titan’s board of directors have been named as defendants in a purported class action lawsuit filed by a holder of Titan common stock in California Superior Court, San Diego County on September 18, 2003 challenging the proposed merger of Titan with Lockheed Martin:  Norman v. The Titan Corporation, et al.  The complaint alleges that the defendants breached fiduciary duties.  The complaint contains a request for the court to prevent the completion of the merger.  Titan plans to contest vigorously the allegations contained in the complaint.

      In addition, on September 10, 2003, Titan was named as a defendant in a purported class action lawsuit filed by a holder of common stock of SureBeam Corporation, Titan’s former subsidiary.  The complaint alleges that Titan, as a “control person” of SureBeam within the meaning of the Securities Act, should be held liable for allegedly false and misleading statements contained in the prospectus issued in connection with SureBeam’s initial public offering, for which the plaintiffs seek statutory damages from Titan.  Certain of Titan’s current directors were also named as defendants in their capacity as directors of SureBeam.  Titan plans to contest vigorously the allegations contained in the complaint.

      The Company is involved in legal actions in the normal course of the Company’s business, including audits and investigations by various governmental agencies that result from the Company’s work as a defense contractor.  The Company and its subsidiaries are named as defendants in legal proceedings from time to time and may assert claims from time to time.  In addition, the Company acquires companies from time to time that have legal actions pending against them at the time of acquisition. 

      Based upon current information available to the Company, in the opinion of management, the amount of ultimate liability or recovery with respect to these actions is not expected to materially affect our consolidated financial position or results of operations taken as a whole.   However, our evaluation of the likely impact of these actions could change in the future, and an unfavorable outcome, depending upon the amount and timing, could have a material adverse effect on the Company’s results of operations or cash flows in a future period.

      Titan has guaranteed certain lease obligations of SureBeam, and SureBeam is obligated to reimburse Titan for any payments Titan makes under these guarantees.  Any guarantee payments Titan makes reduce amounts available for future borrowing under the credit agreement.  The aggregate amount of the lease obligations Titan has guaranteed as of September 30, 2003 is approximately $18.9 million.  The leases extend through periods ending in 2023.

      In relation to SureBeam's strategic alliance with Hawaii Pride, Titan has guaranteed up to the greater of SureBeam's equity interest in Hawaii Pride (which is currently zero), or 19.9% of Hawaii Pride's $6.8 million, 15-year loan from its lender, Web Bank.  As of September 30, 2003, Titan has guaranteed approximately $1.2 million, or 19.9% of the current loan balance of $5.9 million.  In the event that Hawaii Pride defaults on the loan, Titan currently expects to be obligated to cover any defaults on the entire outstanding balance of the loan if the default is not cured within 90 days.  In late October 2003, Titan was notified by Hawaii Pride that Hawaii Pride did not have sufficient cash resources to make its monthly principal and interest payment of $.05 million due in early November 2003.  Refer to Note 9 for further discussion of Titan’s guarantees related to Hawaii Pride and SureBeam.

Note (9) Related Party Transactions

Agreements With Executive Officers

      Change in Control Agreements. In March 2000, Titan entered into executive agreements with the Company’s Chairman of the Board, President and Chief Executive Officer (hereinafter referred to as the “CEO”) and the Company’s General Counsel, which provide special benefits after a change in control. The parties subsequently amended these agreements on September 14, 2003 to clarify certain terms and conditions as they related to the change in control caused by the proposed merger with Lockheed Martin.  Effective as of August 20, 2003, Titan also entered into an executive agreement with the Company’s Chief Financial Officer, which mirrors the executive agreement, as amended, for the Company’s General Counsel. Pursuant to these agreements, as amended, if (1) there is a change in control of Titan (which will occur at the effective time of the proposed merger with Lockheed Martin) and (2) the executive is terminated by Titan (or, after the merger, by Lockheed Martin) other than for “Cause” (as defined in the agreements) or such executive terminates his employment for “Good Reason” (as defined in the agreements) within three years following such change in control or if the executive is terminated prior to a change in control and the executive reasonably believes that his termination arose in connection with or anticipation of a change in control, the terminated executive will be entitled to a lump sum payment amount equal to three times the sum of his base salary and his “Highest Annual Bonus” (as defined in the agreements). Each executive will have a right under these agreements to resign for “Good Reason” at the effective time of the merger by virtue of the fact that Titan will cease to be a publicly traded company. Also, the executive will receive a prorated bonus for the year of termination and continuation of the executive’s and his family’s welfare benefits (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) for three years after the later of the executive’s date of termination or, as applicable, the expiration of the executive’s continuation coverage period under the Consolidated Omnibus Budget Reconciliation Act, referred to as COBRA. In addition, all options that have been previously granted to the executive to acquire shares of Titan or any affiliate of Titan that have not previously been forfeited or exercised will vest and become exercisable in full and will remain exercisable for the remainder of their original terms. Based on current compensation levels, the total estimated cost of the severance payments and continued welfare benefits payable to the CEO, the Company’s General Counsel and the Company’s Chief Financial Officer is, respectively, $5.5 million, $2.1 million and $2.0 million.  These estimates do not include any tax gross up payment which Titan (or, after the merger, Lockheed Martin) might be required to make pursuant to these agreements. Titan (or, after the merger, Lockheed Martin) will be obligated under these agreements to reimburse the CEO, the Company’s General Counsel and the Company’s Chief Financial Officer for all legal fees and all expenses which they incur in asserting or in defending their rights under these agreements.

Certain Relationships And Related Transactions

      In conjunction with Titan’s plan to exit its international telecommunications business, Titan entered into an agreement with Geolutions, Inc. (“Geolutions”) to assume and perform all of Titan Wireless’s outstanding warranty obligations.  Geolutions is a newly formed company, founded by a former executive of Titan Wireless and former officer of Titan.  Titan has a fixed price contract of $1.9 million, plus incidental expenses of up to $0.6 million and other third party costs of an aggregate maximum of $1.4 million, which is payable through mid 2004, the period over which Titan’s warranty obligations exist on its existing customer contracts.  The contract is cancelable by Titan under certain circumstances of non-performance by Geolutions.  In conjunction with Titan’s agreement with Geolutions, Titan has assigned its existing warranty obligations in its international telecommunications business with its existing customers to Geolutions.  If Geolutions fails to perform these contracted obligations, Titan Wireless remains obligated to perform them and may incur costs in excess of these contracted amounts.  In connection with Titan’s agreement in the third quarter of 2003 with its customer in Nigeria to settle and accelerate payment of the outstanding receivable balance due, Titan also amended its agreement with Geolutions to reduce its contract by $0.5 million for the remaining warranty obligations.

      In March 2002, our Board of Directors adopted a stock option relinquishment program, the primary purpose of which was to align the interests of our directors and senior executives more closely with our stockholders' interests by allowing directors and senior executives to participate in the appreciation in our equity value:

		·		without requiring our Directors and executive officers to trade shares of our common stock obtained through the exercise of options on the open market; and
			·	without the dilutive and potentially stock-price depressive effects associated with the exercise and subsequent sale of stock option shares.

        The program also was intended to assist the participants with their individual financial planning.  Under the program, a participant was allowed to relinquish eligible, in-the-money stock options in exchange for a loan, the principal amount of which was 150% of the difference between the aggregate exercise price of the options and the product of (i) the number of shares issuable upon exercise of the options and (ii) a 20 day trailing average of the daily high and low sales price of our common stock prior to relinquishment.  The loans bear interest at a rate equal to the applicable federal rate as published by the Internal Revenue Service for the month in which the loan was made.  The loans were made contingent upon the participant's utilizing a portion of the loan proceeds to purchase a life insurance policy with a death benefit sufficient to repay the loan and accrued interest thereon upon maturity. 

        Under the program the following transactions occurred (in whole shares and dollars):

		·		Dr. Ray, Chairman of the Board and Chief Executive Officer: 222,380 options relinquished on June 18, 2002, $3,985,725 principal amount of loan, 5.48% interest per annum;
			·	Mr. Fink, Director: 15,000 options relinquished on June 27, 2002, $336,337.50 principal amount of loan, 5.48% interest per annum; and
			·	Mr. Alexander, Director: 19,972 options relinquished effective June 19, 2002, $499,999 principal amount of loan, 5.48% interest per annum.

      The amount of the stock options relinquished under the program do not reflect any adjustment as a result of the spin-off of our subsidiary SureBeam Corporation on August 5, 2002, since the relinquishment occurred before the date for said adjustment.  Titan has recorded interest income of $0.2 million to date related to the accrued interest on the outstanding loans due from the directors noted above. 

      As of the effective date of the Sarbanes-Oxley Act in July 2002, which precludes such loans to company officers and directors, the Stock Option and Relinquishment Plan is no longer available to our Directors and executive officers.

SureBeam Agreements

      Prior to the spin-off of SureBeam Corporation, Titan and SureBeam entered into a number of agreements.

      Credit Agreement.  The Company has extended a $50 million senior secured revolving loan commitment to SureBeam that allows SureBeam to borrow up to $12.5 million per quarter beginning in the fourth quarter of 2002 through the fourth quarter of 2003, subject to the $50 million limitation on borrowing.  The loan is secured by a first priority lien on all of SureBeam’s assets.  The amount available for borrowing in the second, third and fourth quarters of 2003 is based upon SureBeam’s earnings before interest, taxes, depreciation and amortization (EBITDA) for the prior quarter as a percentage of the EBITDA target in its financial plan submitted to Titan.  Under the credit agreement, there are no funds available for borrowing during the fourth quarter of 2003, as SureBeam has not met the requisite financial covenants required for further advances under the credit agreement.  As of September 30, 2003, SureBeam had borrowed $25 million on this facility, of which $10.3 million is reflected as a non-current asset in Other Assets and $14.7 million is reflected as a current asset in Prepaid Expenses and Other on the consolidated balance sheet, in accordance with the payment terms of the credit agreement.  In October 2003, Titan advanced approximately $0.9 million to SureBeam under a factoring arrangement with SureBeam for a receivable due from SureBeam’s customer in Vietnam.  Titan will be repaid upon SureBeam’s collection from its customer, which is expected to be in the fourth quarter of 2003.

      SureBeam is obligated to make quarterly principal payments on the credit facility as follows:  13.75% of the outstanding principal balance as of December 31, 2003 during each quarter in 2004; 25% of the outstanding principal balance as of December 31, 2004 during each quarter in 2005; and all remaining principal by December 31, 2005.  In March 2003, SureBeam and Titan entered into an agreement amending the credit agreement.  That amendment waived, subject to certain conditions, SureBeam’s obligation to use net proceeds from the sale of up to $25 million of its equity securities to make mandatory payments under the credit agreement during the period of March 2003 through September 2004.  In connection therewith, SureBeam agreed to provide for certain change orders and the furnishing of maintenance services under an Equipment Services Agreement between the Company and SureBeam executed in February 2002.

      Titan has subleased to SureBeam approximately 63,800 square feet used for its service center in Sioux City, Iowa, as well as facilities in Dublin, California.  Generally, SureBeam is paying Titan sublease payments equal to Titan’s monthly expense under these leases plus a 10% markup.  SureBeam is obligated to continue to seek to have itself substituted as the direct lessee under each master lease so that the sublease can be terminated.  The aggregate amount due to Titan as of September 30, 2003 for future obligations under these sublease agreements for periods through 2010 is approximately $5.1 million.

      In addition, Titan has guaranteed certain lease obligations of SureBeam, and SureBeam is obligated to reimburse Titan for any payments Titan makes under these guarantees.  Any guarantee payments Titan makes reduce amounts available for future borrowing under the credit agreement.  The aggregate amount of the lease obligations Titan has guaranteed as of September 30, 2003 is approximately $18.9 million.  The leases extend through periods ending in 2023.

      In relation to SureBeam's strategic alliance with Hawaii Pride, Titan has guaranteed up to the greater of SureBeam's equity interest in Hawaii Pride (which is currently zero), or 19.9% of Hawaii Pride's $6.8 million, 15-year loan from its lender, Web Bank.  As of September 30, 2003, Titan has guaranteed approximately $1.2 million, or 19.9% of the current loan balance of $5.9 million.  In the event that Hawaii Pride defaults on the loan, Titan currently expects to be obligated to cover any defaults on the entire outstanding balance of the loan if the default is not cured within 90 days.  In late October 2003, Titan was notified by Hawaii Pride that Hawaii Pride did not have sufficient cash resources to make its monthly principal and interest payment of $.05 million due in early November 2003.  Titan management is currently evaluating the possible courses of action that might result from this uncertainty including, among other things, making bridge loans to Hawaii Pride if and when needed, or allowing the bank to exercise its rights under the debt guarantee from Titan.  In the latter instance, Titan would acquire the operating assets of Hawaii Pride.  The current operating forecasts provided by Hawaii Pride indicate that it will generate sufficient cash flow from operations by the end of 2004 to service the debt payments due to Web Bank.  However, there can be no assurance that Hawaii Pride will be able to generate sufficient cash flow to service its debt obligations.  If unsuccessful, Titan might be required to record liabilities for its guarantees, and record assets related to any operating assets of Hawaii Pride which it acquires.

      Under Financial Interpretation No. 45, Titan is required to assess and record the fair value of all such guarantees made.  As of September 30, 2003, Titan has not assigned any fair value to these guarantees.  Based on preliminary evaluations, the fair value of all guarantees appears to be immaterial.

      On October 22, 2003, SureBeam filed a Form 8-K with the Securities and Exchange Commission (SEC) wherein SureBeam stated, among other things, that as of September 30, 2003 it had cash and cash equivalents of approximately $3.6 million, as compared with $27.3 million at December 31, 2002 and $11.8 million at June 30, 2003.  SureBeam disclosed that it has implemented a cost reduction plan and is studying its business model to identify further non-essential expenditures; however, it expects to sustain continued losses and negative cash flow from operations through 2004 or longer.  As a result of its continued losses and current cash resources, SureBeam stated that it would need to raise additional funds through public or private equity or debt financings.  On October 23, 2003, SureBeam filed a Form 8-K/A with the SEC stating that it entered into agreements to issue 673 shares of newly created Preferred Stock for an aggregate sales price of $5 million, with expected net proceeds of $4.6 million.  Including the anticipated net proceeds of the offering, as of October 23, 2003, SureBeam reported it had available cash of approximately $7.6 million.  On October 27, 2003, SureBeam announced that its stock would be delisted from the NASDAQ Stock Market because it failed to file its quarterly earnings report as required.  SureBeam also had disclosed that being delisted could hurt its ability to raise additional cash by issuing stock.

      SureBeam also disclosed that is was pursuing efforts to raise additional funds through public or private equity or debt financings, collaborative relationships or other arrangements within the next few months in order to execute its business strategy and continue its operations.  In the event that SureBeam is unsuccessful in its efforts to raise additional funds, SureBeam may be unable to make payments in accordance with the payment terms on its credit facility from Titan.  Consequently, Titan may be required to record impairment charges on the carrying value of its loan to SureBeam and may be required to make payments on leases it has guaranteed on behalf of SureBeam and may be unable to collect amounts due from SureBeam under sublease agreements.  At this time, Titan cannot determine whether or not SureBeam will be successful in its endeavors to raise additional funds.  However, it is anticipated that the outcome of SureBeam’s efforts to raise funds will become known in the next several months.  When known, Titan will then be able to assess the effects of such outcome.  However, there can be no assurance that SureBeam will be successful in these endeavors, and if unsuccessful, Titan might be required to record asset impairments and/or liabilities for guarantees.  Also, SureBeam cannot sell additional equity without Titan’s consent.  Titan does not currently believe it will withhold such consent. 

      Tax Allocation Agreement and Tax Disaffiliation and Tax Sharing Agreement.  Titan has agreed to pay SureBeam for any tax benefits we realized through our use of net operating losses generated by SureBeam while it was a member of Titan’s consolidated group for federal income tax purposes.  Through 2001, Titan utilized net operating losses previously generated by SureBeam which resulted in an estimated liability of approximately $6.2 million.  For 2002, the Company has utilized net operating losses previously generated by SureBeam resulting in a liability of approximately $1.4 million.  As of September 30, 2003, all amounts have been accrued related to the estimated liability related to the utilization of the net operating losses previously generated by SureBeam.  Payment is due the earlier of the first year in which SureBeam could have used those losses to reduce its taxes or when the net operating losses expire.  SureBeam has not generated taxable income since its inception, and Titan does not know if and when SureBeam will generate taxable income and, accordingly, when such payment will become due.  The net operating losses generated in 2001 and 2002 expire in 2021 and 2022, respectively.

      Other Agreements.  In connection with the license Titan purchased to use SureBeam’s intellectual property, the remaining unamortized balance of $7.1 million at September 30, 2003, is reflected as a non-current asset in Other Assets in the consolidated balance sheet.  The license is being amortized over a 15 year life, the average life of the related patents.

      Titan has agreed to purchase all of its requirements for electron beam accelerators from SureBeam through December 31, 2003 unless SureBeam does not offer competitive pricing or cannot meet required delivery schedules.  The equipment and services are priced at SureBeam’s cost plus a 20% markup, unless Titan agrees to an alternative pricing arrangement for a purchase order. 

Note (10) Guarantor Condensed Consolidating Financial Statements

      As discussed in Note 6, on May 15, 2003, the Company sold $200 million of 8% senior subordinated notes in a private placement.  The Company used the net proceeds from the issuance of the 8% senior subordinated notes, plus borrowings of $50 million made under our revolving credit facility and additional cash on hand, to redeem all of the $250 million of the then-outstanding 5³/₄% HIGH TIDES convertible preferred securities.  The redemption of HIGH TIDES occurred on June 4, 2003.

      Following are consolidating condensed balance sheets as of December 31, 2002 and September 30, 2003 (unaudited), and unaudited statements of operations for the three months and nine months ended 2002 and 2003, and statements of cash flows for the nine months ended September 30, 2002 and 2003 for the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as defined below.  The following consolidated condensed financial statements present financial information for:

      Parent:  The Titan Corporation on a stand-alone basis.

      Guarantor Subsidiaries:  All directly and indirectly owned domestic subsidiaries of Parent other than Cayenta Inc. on a stand-alone basis.

      Non-Guarantor Subsidiaries:  Cayenta Inc. and all direct and indirect subsidiaries of Parent that are not organized under the laws of the United States, any state of the United States or the District of Columbia and that conduct substantially all business operations outside the United States.

      Reclassifications and Eliminations:  Entries that eliminate the investment in subsidiaries and intercompany balances and transactions.

      The Titan Corporation and Subsidiaries:  The financial information for The Titan Corporation on a condensed consolidated basis.

      The classification of operating entities within each of the columns is based on the legal status of the entity as of September 30, 2003.  Accordingly, certain legal entities that existed in prior years that have been merged into Titan as of September 30, 2003 have been reclassified in the prior year condensed financial statements to conform with the current year presentation.

Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended September 30, 2003
(Unaudited)
(In thousands)

Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Nine Months Ended September 30, 2003
(Unaudited)
(In thousands)