TITAN CORP - 10-Q Quarterly Report

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

THE TITAN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

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 ý No o.

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

The number of shares of registrant's common stock outstanding as of April 29, 2005, was 85,307,245.

THE TITAN CORPORATION

CONSOLIDATED INCOME STATEMENTS

(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 of dollars, 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

March 31, 2005

(in thousands, except share and per share data, or as otherwise noted)

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 our Annual Report on Form 10-K to the Securities and Exchange Commission (SEC) for the year ended December 31, 2004. 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.

Reclassifications. Certain reclassifications have been made to the prior year presentation to conform to the 2005 presentation.

Stock-Based Compensation. As allowed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," Titan has elected to continue to apply the intrinsic value based method of accounting for stock options and has adopted the disclosure only provisions of the fair value method contained in SFAS No. 123. Compensation cost, if any, is measured as the excess of the quoted market price of Titan's stock on the date of grant over the exercise price of the grant. Had compensation cost for Titan stock-based compensation plans been determined based on the fair value method at the grant dates for awards under those plans, our results of operations would have been reduced to the pro forma amounts indicated below:

			Three months ended March 31,
			2005			2004
Net income, as reported			$	19,012		$	3,059
Add:		Total stock-based compensation expense in reported net income, net of tax related benefits		11			290
Less:		Total stock-based employee compensation expense determined under fair value method for all awards, net of tax related effects		(1,818	)		(1,630	)

Net income, pro forma			$	17,205		$	1,719

Earnings per share:
	Basic as reported		$	0.22		$	0.03
	Basic pro forma		$	0.20		$	0.02
	Diluted as reported		$	0.22		$	0.03
	Diluted pro forma		$	0.20		$	0.02

Goodwill and Other Intangible Assets. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Effective January 1, 2002, Titan 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 least annually, utilizing a two step methodology. The initial step requires Titan 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.

Titan performs its annual testing for impairment of goodwill and other intangible assets in connection with the preparation of its annual financial statements.

On June 26, 2004, Lockheed Martin Corporation terminated the merger agreement pursuant to which Lockheed Martin was to have acquired Titan. The merger agreement was entered into in September 2003 and amended in March 2004 and April 2004 to provide additional time for Titan to resolve the Securities and Exchange Commission (SEC) and Department of Justice (DoJ) investigations under the Foreign Corrupt Practices Act (FCPA) (see Note 7).

On March 1, 2005, Titan settled the government investigations related to the FCPA. In the three months ended March 31, 2005, merger, investigation and settlement costs of $5.8 million, in the accompanying consolidated income statements, include $5.4 million in legal costs related to the resolution of the FCPA investigation and $0.4 million in legal costs stemming from FCPA-related litigation and investigations (see Note 7).

In the three months ended March 31, 2004, Titan incurred approximately $17.6 million in legal, investment banking, accounting, printing and other professional fees and costs related to the then-proposed merger, which are reflected in merger, investigation and settlement costs in the accompanying consolidated income statements. Approximately $11.9 million of these costs were associated with the comprehensive internal review being conducted by Titan to evaluate whether payments involving international consultants for Titan or its subsidiaries were made in violation of applicable law. The legal, accounting and other professional fees incurred also supported the related inquiry by the DoJ and the investigation by the SEC (see Note 7). Also included are costs of approximately $5.7 million related to the merger transaction itself, including the exchange offer and consent solicitation for Titan's senior subordinated notes and the redemption of Titan's preferred stock, both of which were conditions to close the then-proposed merger.

On March 15, 2004, Titan redeemed all outstanding shares of its cumulative convertible preferred stock. The redemption was a condition to the close of the proposed merger with Lockheed Martin. An aggregate of 625,846 shares were redeemed at $20 per share, plus cumulative dividends in arrears of $0.03 per share, which utilized cash of approximately $12.5 million, and the remaining 60,983 shares of

preferred stock were converted by shareholders into 47,580 shares of common stock. The redemption of the preferred stock is recorded in stockholders' equity.

In June 2004, Titan's board of directors decided to sell or otherwise divest its Datron World Communications business (Datron World) and its Titan Scan Technologies service business (Scan Services). These non-core operations did not perform to management's expectations, and their divestiture would allow Titan to better focus on its core National Security Solutions business. Subsequently, in November 2004, Titan sold its Datron World business for approximately $4.7 million, resulting in a loss of approximately $2.0 million. Additionally, in February 2005, Titan sold Scan Services for $4.9 million, resulting in a gain of $0.2 million. In connection with the sale, Titan assigned its lease on one facility to the buyer, but remained liable for facilities restoration costs on this facility. Prior to its sale, Scan Services generated revenues for the first quarter of 2005 of $0.6 million. These businesses have been reported as discontinued operations in accordance with SFAS No. 144, and all periods presented have been restated accordingly to reflect these operations as discontinued.

In July 2002, Titan's board of directors decided to exit all of its international telecommunications businesses by selling and winding down its operations within its previously reported Titan Wireless segment. Titan immediately began implementing these actions, which were substantially completed during 2003. Titan reported this exit of the Titan Wireless segment as a discontinued operation in accordance with SFAS No. 144.

On December 10, 1999, Titan's wholly-owned subsidiary, Titan Africa, Inc. (Titan Africa), in connection with its contract to build a satellite-based telephone system for its customer, the national telephone company of Benin, Africa (the OPT), entered into a Loan Facility agreement for up to 30.0 billion Francs CFA (the currency of the African Financial Community), equivalent to approximately $45.0 million U.S. dollars, with a syndicate of five banks, with Africa Merchant Bank as the arranger. This financing was subsequently increased by 6.0 billion francs CFA to approximately $54.0 million. This medium-term financing is a non-recourse loan to Titan Africa which is guaranteed by the OPT and secured by the OPT's equipment and revenues related to the project. The facility has a fixed interest rate of 9.5% per year and was originally to be repaid in seven equal semi-annual payments from the net receipts of this project, or by the OPT in the event that such receipts are not adequate to make these payments, which commenced on December 31, 2000 and were scheduled to end on December 31, 2003. The payment terms were subsequently amended calling for quarterly payments through mid-2006. The borrowings on this facility have been utilized to fund various equipment and subcontractor costs incurred most notably by Alcatel of France, a major subcontractor to this project.

Related to Titan's contract with the OPT, Titan has a $37.7 million gross receivable due from the OPT, less a reserve of $14.3 million, which is reflected as a net $23.4 million in non-current assets of discontinued operations as of March 31, 2005. The $23.4 million receivable is equal to the outstanding balance on the non-recourse loan, drawn to cover subcontract costs. The $23.4 million balance on the non-recourse loan is included in non-current liabilities of discontinued operations at March 31, 2005. The $14.3 million difference between the gross receivable of $37.7 million and the $23.4 million balance on the non-recourse loan represents amounts currently due from the OPT under the Titan settlement agreement entered into with the OPT in 2003. This agreement contemplated a $25 million payment by the OPT to Titan, which was due in full by November 30, 2003. On December 31, 2003, Titan received a partial payment of $11 million on the settlement. Based on the facts available in the second quarter of 2004, principally the OPT's cash flow deficiencies and inability to obtain adequate financing, Titan recorded a full reserve for the $14.3 million balance outstanding. Notwithstanding this reserve, Titan has commenced an international arbitration against the OPT seeking collection of this receivable. At December 31, 2004, Titan Wireless had an accrual for $10.3 million for estimated costs of resolving a

contingent liability with a subcontractor related to this project. In February 2005, Titan received a demand for full payment from the subcontractor, based on an international arbitration ruling which Titan was in the process of appealing. In light of this, Titan and the subcontractor later reached a final settlement whereby, in March 2005, Titan paid $9.0 million in full settlement of the matter, resulting in a gain of $1.3 million in the first quarter of 2005.

A summary of the utilization of exit and restructuring accruals related to the Titan Wireless discontinued operation during the three months ended March 31, 2005 is as follows:

On June 2, 2004, Titan sold Cayenta Canada, its remaining commercial information technology business for a net $5.6 million in cash, with no resulting gain or loss recorded on the sale. Titan recorded current liabilities related to this sale of approximately $1.8 million related to potential purchase price adjustments due to the buyer and transaction-related costs and indemnification obligations related to the sale. Additionally, Titan had previously guaranteed performance on several customer contracts and leased a facility that was subleased to Cayenta Canada. Although the buyer agreed to indemnify Titan for performance on certain of these contracts and subleased the facility, Titan was not released from its obligations under these guarantees or under the facility lease. The face value of the performance guarantees is approximately $14 million at March 31, 2005. Substantially all of the guarantees were issued prior to December 31, 2003 and are therefore not required to be recognized and measured under the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." Titan has not had to make any payments with respect to performance guarantees provided to customers of this business since Titan acquired the business in 1999 and has not provided any reserves for these contingencies at March 31, 2005, based on management's assessment that such payments are not probable of being made.

In October 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. At the time Titan adopted the plan to spin-off SureBeam, in accordance with APB No. 30, Titan accounted for SureBeam as a discontinued operation. On August 5, 2002, Titan's remaining ownership interest in SureBeam was spun-off to Titan stockholders as a tax-free dividend. Prior to the adoption of the spin-off plan, Titan reported the SureBeam business as a separate segment.

In January 2004, SureBeam began liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. During 2004, as a result of the bankruptcy proceedings, Titan assumed certain lease obligations and idle facilities which were previously guaranteed by Titan. Additionally, and since the time of the completion of the bankruptcy proceedings, Titan has incurred expenses and recorded charges related to these lease obligations and idle facilities that have been accounted for in discontinued operations, as such guarantees on the obligations of SureBeam existed at the time SureBeam was originally discontinued in October 2001. In the second and fourth quarters of 2004, the Company recorded charges aggregating $14.4 million to accrue the estimate of the shortfall between the amount of the SureBeam lease guarantees and the amount expected to be recovered by subleasing activities and for amounts to be incurred for facilities restoration costs.

As of March 31, 2005, the total amount of the accrual remaining to cover the aforementioned costs was $13.4 million, reflecting an approximate $0.5 million use of the accrual for lease payments made on idle facilities in the quarter. To date, Titan has not yet subleased or otherwise transferred any of the guaranteed leases or lease obligations to third parties. The gross obligations under leases and lease guarantees is approximately $21.0 million.

In relation to SureBeam's strategic alliance with Hawaii Pride, Titan has guaranteed repayment of Hawaii Pride's bank debt up to the greater of SureBeam's equity interest in Hawaii Pride (which is zero), or 19.9% of Hawaii Pride's $6.8 million, 15-year loan from its lender, WebBank. As of March 31, 2005, Titan has guaranteed approximately $1.1 million, or 19.9% of the current loan balance of $5.3 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 had stopped receiving financial support from SureBeam and did not have sufficient cash resources to make its monthly principal and interest payments to WebBank. Titan subsequently extended a credit facility to Hawaii Pride of up to a maximum of $0.8 million in principal to cover shortfalls in debt service payments. This facility is secured by a second lien on the assets of Hawaii Pride, including a second mortgage on its facility. As of March 31, 2005, Titan has loaned approximately $0.6 million to Hawaii Pride and, to Titan's knowledge, Hawaii Pride is current in its debt service to WebBank. All amounts outstanding under the Titan credit facility are required to be repaid in twenty equal quarterly installments commencing on October 1, 2005.

Following is a summary of the income (loss) from discontinued operations for 2005 and 2004:

	Three months ended March 31,
	2005			2004
Loss from discontinued operations	$	(636	)	$	(1,092	)
Gain on subcontractor liability settlement		1,331			—
Change in estimated exit costs		484			—
Gain on sale of businesses, net		185			—

		1,364			(1,092	)
Tax expense (benefit)		505			(520	)

Net income (loss)	$	859		$	(572	)

Following is a table of all related balance sheet categories for discontinued operations:

		As of March 31, 2005		As of December 31, 2004
Current assets of discontinued operations:
	Accounts receivable, inventory and other	$	—	$	1,665

		$	—	$	1,665

Non-current assets of discontinued operations:
	Accounts receivable	$	23,387	$	23,387
	Fixed assets and other		—		3,082

		$	23,387	$	26,469

Current liabilities of discontinued operations:
	Subcontractor contingency reserve	$	—	$	10,311
	Lease obligations and facilities restoration		4,691		5,095
	Exit costs		2,348		3,192
	Other		2,043		2,397

		$	9,082	$	20,995

Non-current liabilities of discontinued operations:
	Non-recourse loan	$	23,387	$	23,387
	Lease obligations and facilities restoration		9,677		9,931

		$	33,064	$	33,318

On May 23, 2002, Titan 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. The seven-year term loan matures on June 30, 2009, and the senior revolver matures on May 28, 2008.

At March 31, 2005, total borrowings outstanding under Titan's senior credit facility were $385.4 million at a weighted average interest rate of 5.34%. Commitments under letters of credit, which reduce availability under the senior credit facility, were approximately $4.2 million at March 31, 2005, resulting in approximately $85.8 million of borrowing availability on the senior revolver at March 31, 2005. Of the total outstanding borrowings, $3.5 million was short-term. At March 31, 2005, Titan was in compliance with all financial covenants under its various debt agreements; which are comprised of a maximum total debt to EBITDA ratio of 4.75 to 1.0, a maximum total senior debt to EBITDA ratio of 3.0 to 1.0, a minimum interest coverage ratio of 3.0 to 1.0; a minimum fixed charge coverage ratio of 1.35 to 1.0 and a minimum net worth of approximately $277.0 million at March 31, 2005. The remaining unamortized deferred costs and expenses of $6.6 million related to the senior credit facility,

which were incurred primarily in 2002, are included in "Intangible Assets" at March 31, 2005 and will be amortized over the remaining term of the senior credit facility, assuming no prepayment is made.

On May 15, 2003, Titan sold $200 million of 8% senior subordinated notes due May 15, 2011 in a private placement (the Notes). Titan used the net proceeds from the issuance of the Notes, plus borrowings of $50 million under its revolving 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.

Titan is required to make interest payments on the Notes semi-annually in arrears on May 15 and November 15 at the rate of 8% per annum. Titan 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:

Year	Percentage
2007	104.0	%
2008	102.0	%
2009 and thereafter	100.0	%

In addition, on or prior to May 15, 2006, Titan 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 Titan's current or future senior subordinated indebtedness. Each of Titan's domestic subsidiaries, other than Cayenta, guarantee the Notes. The guarantees are unsecured and rank equally with each guarantor's senior subordinated indebtedness. The Notes and the guarantees are junior to all of Titan's and each guarantor's senior indebtedness and senior to all of Titan's and each guarantor's subordinated indebtedness (see Note 9).

On July 19, 2004, Titan completed the exchange of the existing Notes for a new series of substantially identical 8% senior subordinated notes due May 15, 2011 registered under the Securities Act.

The remaining unamortized deferred costs and expenses of $4.8 million related to the Notes, which were incurred in May 2003, are included in "Intangible Assets" at March 31, 2005, and will be amortized over the term of the Notes, assuming no payment is made.

Basic and diluted earnings per share were computed based on net income, less the regular quarterly dividend requirement for preferred stock and the accrued dividend to the date of redemption.

The following data summarize information relating to the per share computations for income from continuing operations:

In the three months ended March 31, 2005, options and warrants to purchase approximately 893,000 shares of common stock at prices ranging from $17.18 to $29.74 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period. For the three month period ended March 31, 2004, options and warrants to purchase approximately 281,400 shares of common stock at prices ranging from $23.79 to $29.74 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period.

Approximately 460,100 shares of common stock in the three month period in 2004 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 change in potential dilution from 2004 to 2005 for the preferred stock is the result of its redemption on March 15, 2004 (see Note 3).

Included in revenues for the three months ended March 31, 2005, are revenues related to a single contract with the U.S. Army to provide linguist services of $85.0 million, or 15.2% of total revenues, in

the three month period. Revenues related to our enterprise information technology contract for U.S. Special Operations Command were $18.9 million, or 3.4%, of total revenues, during the first quarter of 2005. No other single contract accounted for more than 3% of total revenues in the first quarter of 2005.

The net gain on sale of assets reflected in the consolidated statement of operations for the three months ended March 31, 2004 represents a gain on the sale of certain contracts and related assets and liabilities of $0.9 million, which sale was completed in order to mitigate concerns raised by one customer related to organizational conflict of interest issues arising from the terminated merger with Lockheed Martin. The aforementioned gain was partially offset by a loss of $0.3 million on another sale of certain contracts and related assets and liabilities, which were sold as part of Titan's ongoing strategy to divest non-core assets and operations.

		March 31, 2005			December 31, 2004
Accounts Receivable:
	U.S. government—billed	$	379,274		$	415,889
	U.S. government—unbilled		122,222			88,257
	Trade		21,431			14,648
	Less: Allowance for doubtful accounts		(3,447	)		(3,408	)

		$	519,480		$	515,386

Inventories:
	Materials	$	7,371		$	6,988
	Work-in-process		10,164			10,107
	Finished goods		3,952			4,241

		$	21,487		$	21,336

A summary of the utilization of exit and restructuring accruals during the three months ended March 31, 2005 is as follows:

At March 31, 2005, $5.4 million of the exit and restructuring accruals are included in "Other Accrued Liabilities" on the consolidated balance sheet, and $9.0 million are included in "Other Non-current Liabilities." The remaining accrual balance is primarily comprised of amounts due under the excess facilities as a result of facilities consolidation actions, which requires lease payments and

other lease costs, net of assumed sublease income, to be paid over the remaining lease terms, which expire in 2009.

		Three months ended March 31,
		2005		2004
Non-cash investing and financing activities:
	Shares contributed to employee benefit plans	$	3,099	$	2,718
	Shares tendered for stock option exercises		—		128
Cash paid for interest		$	3,527	$	4,761
Cash paid for (refunds of) income tax			401		(509	)

During the first quarter of 2004, Titan learned of allegations that improper payments under the Foreign Corrupt Practices Act (FCPA) had been made, or items of value had been provided, involving international consultants for Titan or its subsidiaries to foreign officials. The allegations were identified as part of internal reviews conducted by Titan and Lockheed Martin, and jointly reported by them to the government. Titan's board of directors established a committee of the board to oversee Titan's internal review of these matters.

The internal review began with a focus on Titan's Datron World Communications unit, which was discontinued in June 2004 and sold in November 2004, but the internal review later was expanded to a number of Titan's international businesses, including Titan Wireless (which was discontinued in 2002 and was substantially wound down in 2003) and Titan's National ID Card contract in Saudi Arabia. Titan agreed to, and did, provide the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) with the results of the internal investigation on an ongoing basis. In connection with the internal review, the SEC commenced an investigation into whether payments involving Titan's international consultants were made in violation of applicable law, particularly the FCPA. In addition, the DoJ initiated a criminal inquiry into this matter, and also initiated an investigation into whether these same alleged practices violated provisions of the United States Tax Code.

Titan recorded a provision of $3.0 million as of December 31, 2003 for resolution of the government FCPA investigations. Titan recorded an additional provision of $25.5 million in the second quarter of 2004 to reflect the change in its estimate of the cost of resolving these investigations.

As a result of the investigation, Titan began to implement significant expanded FCPA and International Traffic in Arms Regulations (ITAR) policies. To lead and oversee those expanded policies, in September 2004, Titan created the position of Vice-President for Compliance and Ethics and hired an experienced executive to fill this position.

On March 1, 2005, Titan announced that it had entered into a consent to entry of a final judgment with the SEC without admitting or denying the SEC's allegations, and reached a plea agreement with the DoJ, under which Titan pled guilty to three felony FCPA counts related to its overseas operations, including in particular its operations in Benin. These counts consist of violations of the anti-bribery and the books and records provisions of the FCPA and aiding and assisting in the preparation of a false tax return. Matters resolved through the plea agreement with the DoJ involved commercial international

business that Titan had discontinued and is in the process of winding down. As a part of the settlement, Titan was given credit for self reporting and cooperating with the government, and for accepting responsibility.

On March 1, 2005, in connection with the FCPA settlement, Titan made total payments of $28.5 million, the same figure Titan reserved for this purpose during 2003 and 2004. The total includes a DoJ-recommended fine of $13 million, payments to the SEC consisting of disgorgement of $12.6 million and prejudgment interest of $2.9 million. The Hon. Roger T. Benitez, a judge of the Federal District Court in San Diego, imposed upon Titan a fine of $13 million and a three-year term of supervised probation, both of which are consistent with the DoJ's and Titan's agreed-upon recommendations to the Court. In addition, the sentence imposed by the Court incorporated Titan's agreement to implement a best-practices compliance program designed to detect and deter future violations of the FCPA.

Further, as a result of Titan's plea agreement, Titan is currently unable to obtain new export licenses for items regulated by the U.S. Department of State. Titan has been working with the U.S. Department of State to obtain relief from this automatic statutory provision, but there is no assurance that Titan will be able to obtain new export licenses in the foreseeable future.

The plea agreement requires Titan to file an amended corporate tax return for 2002 to correct deductions previously taken with respect to matters at issue in the investigations. The amended tax return will not result in additional taxes, but is estimated to reduce Titan's net operating loss carry forward benefit by approximately $1.3 million. The tax provision effect of the amended tax return was made in the fourth quarter of 2004. Under the Consent to Entry of Final Judgment with the SEC, Titan has retained a qualified independent consultant to review Titan's policies and procedures with respect to its compliance with the FCPA, and Titan has agreed to adopt the consultant's recommendations.

On March 2, 2005, Titan and the Navy executed an administrative settlement agreement that will allow Titan to continue to conduct business under U.S. government contracts and receive U.S. government contracts. The agreement also provides for Navy monitoring of Titan's compliance activities for three years.

Titan has an ongoing obligation under indemnity agreements with current and former employees to advance their costs of defense relating to the FCPA investigations and the related class action and derivative litigation described below, subject to the individuals undertaking to repay the costs of defense if it is ultimately determined that such individual is not entitled to be indemnified by Titan.

Titan is involved in legal actions in the normal course of its business, including audits and investigations by various governmental agencies that result from its work as a defense contractor. Titan and its subsidiaries are named as defendants in legal proceedings from time to time and third parties, including the government, may assert claims against Titan from time to time. In addition, Titan has acquired companies from time to time that have legal actions pending against them at the time of acquisition. Based upon current information, including consultation with its lawyers, Titan does not believe that the ultimate liability arising from any of these actions, including those discussed below, will materially affect its consolidated financial position. However, the March 1, 2005 FCPA settlement payment materially impacted cash flow and Titan's borrowings under its senior revolver in the first quarter of 2005. Titan's evaluation of the likely impact of these actions, including those discussed below, could change in the future and Titan could have unfavorable outcomes that it does not expect. Any of these matters could have a material adverse effect on Titan's results of operations or cash flows in a future period and could have other adverse effects on Titan's business.

Since April 2, 2004, two stockholder class action lawsuits have been filed against Titan and certain of its officers, asserting claims under the federal securities laws, which Titan refers to collectively as the "federal securities actions". On September 17, 2004, these class action lawsuits were consolidated as In re Titan Inc. Securities Litigation, No. 04-CV-0701-K(NLS), a consolidated purported class action filed before the U.S. District Court for the Southern District of California. The federal securities action purports to be brought on behalf of all purchasers of Titan common stock during the period from July 24, 2003 through and including March 22, 2004. The complaint seeks an unspecified amount of damages. The complaint alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, by issuing a series of press releases, public statements and filings disclosing significant historical and future revenue growth, but omitting to mention certain allegedly improper payments involving international consultants in connection with Titan's international operations, thereby artificially inflating the trading price of Titan's common stock. On January 14, 2005, Titan and certain individual defendants jointly filed a motion to dismiss the complaint. The plaintiff intends to seek leave to amend the complaint. If the court allows the plaintiff to amend the complaint, Titan expects to file a motion to dismiss the amended complaint. Titan intends to defend the claims vigorously.

Since April 7, 2004, two stockholder class action complaints have been filed against certain Titan officers, asserting that these officers breached their fiduciary duties to Titan's stockholders. The complaints, which Titan refers to as the "fiduciary duty actions", were filed in the Superior Court for the State of California in and for San Diego County. The cases include Paul Berger v. Gene W. Ray, et al., No. GIC 828346, and Robert Garfield v. Mark W. Sopp, et. al, No. GIC 828345. The fiduciary duty actions purport to be brought on behalf of all holders of Titan common stock as of April 7, 2004. The fiduciary duty actions allege, among other things, that the defendants breached their fiduciary duties by acquiescing in or condoning Titan's alleged violations of the FCPA by failing to establish adequate procedures to prevent the alleged FCPA violations, and by failing, in bad faith, to voluntarily report the alleged FCPA violations to government officials. The complaints seek compensatory damages in respect of the loss of value sustained by Titan stockholders as a result of the reduction in merger consideration payable to them under the terms of the amendment to the merger agreement with Lockheed Martin delivered on April 7, 2004. The Berger and Garfield matters have been consolidated and are now treated, for all purposes, as the Garfield matter. Additionally, plaintiffs and defendants have agreed that defendants are not required to answer or otherwise respond to the Garfield complaint until the motions to dismiss in the federal securities action have been denied or granted with prejudice. Titan intends to defend the claims vigorously.

Since June 28, 2004, four shareholder derivative lawsuits have been filed against Titan directors and certain Titan officers, naming Titan as a nominal defendant, which Titan refers to collectively as the "derivative actions". The derivative actions include Theodore Weisgerber v. Gene Ray, et al., No. 832018, which was filed in the Superior Court for the State of California, San Diego; Robert Ridgeway v. Gene Ray, et al., No. 542-N, which was filed in Delaware Court of Chancery, New Castle County; Bernd Bildstein v. Gene Ray, et al., No. 833701, which was filed in the Superior Court for the State of California, San Diego County and Madnick v. Gene Ray, et al, No. 1215-N, which was filed in the Delaware Court of Chancery, New Castle County. The derivative actions purport to be brought for the benefit of the nominal defendant, Titan, and allege that the defendants breached their fiduciary duties by failing to monitor and supervise management in a way that would have either prevented alleged FCPA violations or would have detected the FCPA violations. The Weisgerber complaint was subsequently amended to include allegations that the defendants breached their fiduciary duties by failing to monitor and supervise management in a way that would have prevented the alleged mistreatment of prisoners at the Abu Ghraib prison in Iraq, alleged billing errors relating to work

performed by foreign nationals, and the loss of contracts with the government. The plaintiffs seek to recover the costs incurred in the internal and external investigations, penalties or damages paid to settle private litigation or government proceedings, and lost goodwill. The Weisgerber and Bildstein matters have been consolidated and are now treated, for all purposes, as the Weisgerber matter. The Ridgeway plaintiff intends to file an amended complaint which will include both derivative and direct claims. Titan intends to defend all claims made in the derivative actions vigorously.

In August 2002, Titan completed the spin-off of its former subsidiary, SureBeam Corporation. On January 19, 2004, SureBeam voluntarily filed for bankruptcy relief to be liquidated under Chapter 7 of the United States Bankruptcy Court. Various lawsuits have been filed against Titan and/or certain directors and executive officers of Titan in connection with SureBeam.

Since August 2003, Titan, certain corporate officers of SureBeam Corporation, Dr. Gene Ray and Susan Golding, as SureBeam directors, and certain investment banks that served as lead underwriters for SureBeam's March 2001 initial public offering, have been named as defendants in several purported class action lawsuits filed by holders of common stock of SureBeam in the U.S. District Court. On October 6, 2003, these class action lawsuits were consolidated into In re SureBeam Corporation Securities Litigation, No. 03-CV-001721-JM (POR), a single class action for which an amended consolidated class action complaint was filed on March 24, 2004, with the U.S. District Court for the Southern District of California. The complaint seeks an unspecified amount of damages. The SureBeam class action complaint alleges that each of the defendants, including Titan, as a "control person" of SureBeam within the meaning of Section 15 of the Securities Act, should be held liable under Section 11 of the Securities Act because the prospectus for SureBeam's initial public offering was allegedly inaccurate and misleading, contained untrue statements of material facts, and omitted to state other facts necessary to make the statements made not misleading. The SureBeam class action complaint also alleges that the defendants, including Titan, as a control person of SureBeam within the meaning of Section 20(a) of the Exchange Act, should be held liable under Section 10(b) of the Exchange Act for false and misleading statements made during the period from March 16, 2001 to August 27, 2003. On January 3, 2005, the court granted in part and denied in part motions to dismiss the amended consolidated complaint. The court granted plaintiffs 45 days leave to amend their complaint, which amended complaint has been filed. Titan intends to defend the claims vigorously.

On September 17, 2004, the bankruptcy trustee in the SureBeam Corporation bankruptcy pending in the United States Bankruptcy Court for the Southern District of California brought an action in San Diego Superior Court, on behalf of the bankruptcy estate, against certain directors and current and former executive officers of Titan who served at one time as directors or officers of SureBeam. As of the date of this report, the bankruptcy trustee has not served the complaint. Titan is not named as defendant in this litigation and received a prior release of claims from the bankruptcy trustee. Because the defendants were named by reason of the fact that they were serving as directors or officers of SureBeam at the request of Titan, Titan is covering the costs of defense of these claims, subject to indemnification agreements and bylaw provisions.

Since June 9, 2004, two lawsuits have been filed alleging that Titan and other defendants either participated in, approved of, or condoned the mistreatment of prisoners by United States military officials in certain prison facilities in Iraq in violation of federal, state and international law. The first of these cases, Saleh v. Titan Corporation, No. 04-CV-1143 R, was filed in the United States District Court for the Southern District of California against The Titan Corporation, CACI International, Inc. (CACI), and its affiliates, and three individuals (one formally employed by Titan and one by a Titan subcontractor). Plaintiffs in Saleh seek class certification. The second case, Ibrahim v. Titan Corporation,

NO. 04-CV-1248, was filed on July 27, 2004, on behalf of five individual plaintiffs against Titan, CACI and CACI affiliates, and contains allegations similar to those in Saleh. Class certification has not been requested in Ibrahim. Titan intends to defend these lawsuits vigorously.

On August 16, 2002, Perimex International Corporation (Perimex) filed a complaint against Titan, Titan Wireless, Inc. (Titan Wireless) and a former Titan Wireless employee in San Diego Superior Court in San Diego, California. Perimex later dismissed its complaint voluntarily and filed a new complaint with substantially similar allegations in the United States District Court for the Southern District of California, NO. 03-CV-1037 IEG (WMC). 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 develop a telecommunications network in Argentina and other related alleged misconduct. On April 25, 2005, the court dismissed the complaint with prejudice, and the case was terminated.

On January 23, 2004, Titan, together with its wholly-owned subsidiary, Titan Wireless, Inc., and Titan Wireless's wholly-owned subsidiary, Titan Africa, Inc., were named as defendants in Gonzales Communications, Inc. v. Titan Wireless, Inc., Titan Africa, Inc., The Titan Corporation, Geolution International Inc., and Mundi development, Inc., a lawsuit filed in the U.S. District Court for the Southern District of California, NO. 04-CV-00147 WQH (JMA). The complaint relates to the purchase by Gonzales Communications of equipment and related services under an equipment purchase agreement entered into with Titan Wireless in June 2001. Gonzales Communications contends that the equipment and services delivered were unsatisfactory. In the complaint, Gonzales Communications seeks direct damages in the amount of $0.9 million plus interest, representing the amount Gonzales Communications alleges to have previously paid under the agreement, and consequential damages of approximately $16.3 million. To date, Titan and its subsidiaries have not received payment in full under the agreement for the equipment and services that were delivered to Gonzales Communications. Titan has filed a counterclaim against Gonzales Communications for in excess of $1.2 million. Titan intends to defend its position vigorously.

On March 14, 2005, Makram Majid Chams, a former consultant of Titan filed a claim with the Preliminary Committee on Labor Disputes Settlement in Saudi Arabia. Mr. Chams alleges that Titan wrongfully terminated his consulting agreement and that he was defamed by Titan's publication in a local newspaper of a mandatory notice that he is no longer representing Titan. The plaintiff is seeking approximately $21.9 million in damages. Titan intends to defend its position vigorously.

In October 2002, Titan received a grand jury subpoena from the Antitrust Division of the DoJ requesting the production of documents relating to information technology services performed for the Air Force at Hanscom Air Force Base in Massachusetts. Titan has been informed that other companies who have performed similar services have received subpoenas as well. Titan is not aware of any illegal or inappropriate conduct and has been cooperating and will continue to cooperate fully with the investigation.

In March 2003, Titan 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 its contracts with NASA. Titan 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. Titan is not aware of any illegal or inappropriate conduct and has been cooperating and will continue to cooperate fully with the investigation.

As discussed in Note 5, on May 15, 2003, Titan sold $200 million of 8% senior subordinated notes in a private placement. Titan used the net proceeds from the issuance of the 8% senior subordinated notes, plus borrowings of $50 million made under its 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 March 31, 2005 (unaudited) and December 31, 2004, and unaudited statements of operations for the three months ended March 2005 and 2004, and statements of cash flows for the three months ended March 31, 2005 and 2004 for the Guarantor Subsidiaries and the Non-guarantor Subsidiaries as defined below. The following consolidated condensed financial statements present financial information for:

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 March 31, 2005. Accordingly, certain legal entities that existed in prior years that have been merged into Titan as of March 31, 2005 have been reclassified in the prior year condensed financial statements to conform to the current year presentation.

Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended March 31, 2005
(Unaudited)
(In thousands)

Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended March 31, 2004
(Unaudited)
(In thousands)

Condensed Consolidating Parent Company, Guarantor and Non-guarantor

Balance Sheet

As of March 31, 2005

(Unaudited)

(In thousands)

Condensed Consolidating Parent Company, Guarantor and Non-guarantor

Balance Sheet

As of December 31, 2004

(In thousands)

Condensed Consolidating Parent Company, Guarantor and Non-guarantor

Statement of Cash Flows

For the Three Months Ended March 31, 2005

(Unaudited)
(In thousands)

Condensed Consolidating Parent Company, Guarantor and Non-guarantor

Statement of Cash Flows

For the Three Months Ended March 31, 2004

(Unaudited)
(In thousands)

On April 21, 2005, Titan completed the acquisition of 100% of the outstanding shares of Intelligence Data Systems, Inc. (IDS) for $42.5 million in cash, before considering the effect of cash acquired in the transaction. Of this amount, $6.3 million has been placed in escrow to satisfy any indemnification claims by Titan. IDS is a high-technology and professional services firm supporting the U.S. intelligence community through highly specialized expertise in data mining, high-performance computing, data analysis, information fusion, and information sharing. The acquisition was to further Titan's goal of acquiring government information technology companies that fit strategically with its government business, particularly within the intelligence community marketplace. The acquisition will be accounted for as a purchase in accordance with the provisions of SFAS No. 141, "Business Combinations", and accordingly, the results of operations of IDS will be included in Titan's results of operations beginning as of the date of acquisition.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands, except share and per share data, or as otherwise noted).

The Titan Corporation is a leading provider of comprehensive information and communications systems solutions and services to the Department of Defense, the Department of Homeland Security, and intelligence and other key government agencies. These systems, solutions, and services include research and development, design, assembly, installation, integration, test and evaluation, deployment, logistics and operations support, maintenance, and training. Systems and products we provide to military and government agencies include transformational weapons systems, sophisticated satellite communications systems, antennas/telemetry systems, tactical radios, signals intelligence systems, encryption devices, classified systems, and complex computer-based information systems for information processing, information fusion, dissemination, and data mining.

Our services include system procurement selection and acquisition management services, program management, systems engineering and integration for mission-critical defense platforms and communications systems, enterprise information technology network design, integration, deployment, and operations support, translation and interpreter services, military and first responder training and situational exercises and evaluation, and test, modeling, and continuity of operations analysis for blast, nuclear, electro-magnetic, and chemical/biological threats.

We apply our core capabilities to provide technology, products, and services with a focus in four often overlapping and synergetic market areas: C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), Transformational Military Programs, Government Enterprise Information Technology, and the War on Terrorism/Homeland Security.

Our revenues have grown by using our broader capabilities to win larger, more complex and long-term government contracts and, to a lesser extent, through acquisitions of other government information technology companies. We expect to continue our trend of bidding on larger government contracts with potential revenue values of $100 million or more as well as continuing to bid on smaller contracts within our targeted markets. We also expect to continue to participate in re-competes on our existing contracts. Our rate of revenue growth depends upon many factors, including, among others, our success in bidding on new contracts and re-competes of our existing contracts, the continuation of our existing programs, the rate of demand for services or products under our contracts, including demand created by the ongoing conflicts in Iraq and Afghanistan, the funding levels for our contracts, our ability to meet demand for our services or products and the timing of production under product contracts.

Our operating margins are affected by the mix of contract types (cost reimbursement, fixed-price or time and materials) as well as by the mix of prime contracts versus subcontracts. Significant portions of our contracts are time and materials and cost reimbursement contracts. We are reimbursed for labor hours at negotiated hourly billing rates and other direct expenses under time and materials contracts and reimbursed for all actual costs, plus a fee, or profit, under cost reimbursement contracts. The financial risks under these contracts generally are lower than those associated with fixed price contracts, and margins are also typically lower than those on fixed-price contracts. The U.S. government also has awarded us fixed-price contracts. Such contracts carry higher financial risks because we must deliver the products, systems or contracted services at a cost below the fixed price in order to earn a profit.

In June 2004, our board of directors decided to sell or otherwise divest our Datron World Communications business (Datron World) and Titan Scan Technologies service business (Scan Services). Datron World and Scan Services were non-core operations that had not performed to management's expectations, and their divestiture would allow us to better focus on our National Security Solutions

business. These businesses have been reported as discontinued operations in accordance with SFAS 144, and all periods presented have been restated accordingly to reflect these operations as discontinued. Subsequently, during the fourth quarter of 2004, Datron World was sold for approximately $4.7 million, resulting in a loss of approximately $2.0 million; and during the first quarter of 2005, Scan Services was sold for approximately $4.9 million, resulting in a gain of approximately $0.2 million.

Consolidated revenues for the first quarter increased from $454.0 million in 2004 to $559.0 million in 2005, a 23.1% increase. Revenues in 2005 increased due to the increased work on a number of existing contracts as well as work on new contracts. Revenues in 2005 increased approximately $41.6 million on our linguist contract with the U.S. Army's Intelligence and Security Command, under which we are providing translators and linguists worldwide, and in Iraq in particular, due to increased needs in the security, intelligence and reconstruction efforts. Three other intelligence-related contracts contributed to revenue growth of approximately $16.3 million in the aggregate. These contracts include the Joint Deployable Intelligence Support Systems contract, the Intelligence and Information Technology Management contract for the U.S. Navy and our contract with the U.S. Air Forces in Europe. Three contracts providing Enterprise IT services contributed approximately $10.1 million of the revenue growth in the first quarter of 2005. The Enterprise Architecture and Decision Support contract for the National Security Agency contributed increased revenues of approximately $3.1million; the Enterprise Information Technology contract contributed increased revenues of approximately $3.6 million; and services provided under our Integration and Operational Information Technology Support contract for the North American Aerospace Defense Command and the U.S. Northern Command contract contributed approximately $3.4 million to the quarter over quarter revenue growth. In addition, revenues increased approximately $10.7 million from two U.S. Navy contracts to provide engineering services and support, systems integration, installation and life cycle support. Total revenues from our linguist contract were $85.0 million during the first quarter of 2005, or 15.2%, of total revenues. Total revenues related to our enterprise information technology contract for U.S. Special Operations Command were $18.9 million, or 3.4%, during the first quarter of 2005. No other single contract accounted for more than 3% of total revenue in the first quarter of 2005.

Our selling, general and administrative (SG&A) expenses increased from $35.9 million in the first quarter of 2004 to $40.6 million in the first quarter of 2005, a 13.1% increase. As a percentage of revenues, SG&A decreased from 7.9% of revenues in the quarter ended March 31, 2004 to 7.3% in the quarter ended March 31, 2005. The increase in SG&A expenses is due to increased management costs to support the significant growth in revenues and to staff administrative positions that were lost in the first quarter of 2004, which were not initially replaced because of the then-pending merger with Lockheed Martin. SG&A expenses also increased with the addition of newly established corporate functions, including Contracts and Ethics and Compliance, which were established in late 2004. Additionally, legal costs of approximately $0.3 million related to the SureBeam class action litigation were incurred in the first quarter of 2005 (see Note 7). SG&A expenses in the first quarter of 2004 included $1.4 million in legal and other professional fees related to the SureBeam bankruptcy proceedings.

Our research and development (R&D) expenses for the first quarter increased from $3.4 million in 2004 to $3.6 million in 2005. As a percentage of revenues, R&D expenses remained at less than 1% in both years.

R&D expenses in the first quarter of 2005 were incurred primarily from our continued development of high-speed modems and related antennas, including applications related to the family of Wideband SATCOM Terminals, secure communications devices, high frequency (HF) and very high frequency (VHF) manpack multiband radios, devices for Homeland Security applications, and the development of an enterprise security system that enables secure storage, transmission and access of information in a mobile environment.

In the three months ended March 31, 2004, Titan incurred approximately $17.6 million in legal, investment banking, accounting, printing, and other professional fees and costs related to the then-proposed merger with Lockheed Martin. Approximately $11.9 million of these costs were associated with the comprehensive internal review being conducted by Titan to evaluate whether payments involving international consultants for Titan or its subsidiaries were made in violation of applicable law. The legal, accounting and other professional fees incurred also supported the related inquiry by the Department of Justice and the investigation by the Securities and Exchange Commission. Also included in merger, investigation and settlement costs are approximately $5.7 million of costs, related to the then-proposed merger transaction itself, including the exchange offer and consent solicitation for Titan's senior subordinated notes and the redemption of Titan's preferred stock, both of which were conditions to close the then-proposed merger.

On March 1, 2005, Titan entered into settlement agreements with the SEC and DoJ and paid $28.5 million to settle the matters related to the FCPA investigations. These payments were reserved for as of December 31, 2004 and did not impact Titan's results of operations for the three months ended March 31, 2005. These payments, however, impacted our cash flows from operations, our use of cash and our borrowings under our senior revolver during the quarter.

In the three months ended March 31, 2005, merger, investigation and settlement costs of $5.8 million, in the accompanying consolidated income statements, include $5.4 million in legal costs related to the resolution of the FCPA investigation and $0.4 million in legal costs stemming from FCPA-related litigation and investigations (see Note 7).

Our operating profit increased from $14.9 million for the three months ended March 31, 2004 to $38.5 million for the three months ended March 31, 2005, or from 3.3% of revenues in 2004 to 6.9% of revenues in 2005. Included in the operating results for the quarter ended March 31, 2005 are merger, investigation and settlement costs of approximately $5.8 million, discussed above. Included in the operating results for the quarter ended March 31, 2004 are approximately $17.6 million in investigation costs and legal, investment banking, accounting, and other professional fees and services related to the then-pending merger with Lockheed Martin. The increase in overall operating profit and operating margin was a result of the profits earned on the increased revenues, improved performance on fixed price work and improved award fees, prior year completion or improvement in certain under-performing contracts, and the lower merger, investigation and settlement costs incurred in the first quarter of 2005 as compared to the first quarter of 2004.

Our net interest expense increased from $9.0 million in the first quarter of 2004 to $9.7 million in the first quarter of 2005, due primarily to increased borrowings coupled with increases in LIBOR interest rates partially offset by reductions in the spread above LIBOR on the term loan in our senior credit facility based upon our credit rating from Moody's Investor Services and Standard & Poor's. As of September 2, 2004, the spread decreased by 50 basis points and as of March 10, 2005, the spread

was reduced by an additional 25 basis points. Borrowings from our senior credit facility, excluding working capital lines from acquired companies, averaged $354.0 million for the three months ended March 31, 2004, at a weighted average interest rate of 4.8%, as compared to $367.5 million in the three months ended March 31, 2005, at a weighted average interest rate of 5.6%.

The net gain on sale of assets in the first quarter of 2004 represents a gain on the sale of certain contracts and related assets and liabilities of our Communications & Software Solutions Division ("CSSD") of $0.9 million, and a loss of $0.3 million on the sale of certain assets of our Datacentric Automation business. The sale of certain assets of CSSD was completed in order to address concerns raised by CSSD's principal customer related to organizational conflict of interest issues arising from the then-pending merger with Lockheed Martin. The assets of our Datacentric Automation operations were sold as part of our ongoing strategy to divest non-core operations.

Consolidated income taxes reflect effective rates of 44% in the quarter ended March 31, 2004, and 37% in the quarter ended March 31, 2005. The rates in both years reflect the expected provision rates for each of the full fiscal years at the end of each of those periods. The expected tax provision rates are impacted by estimated changes in the annual book income and the estimated tax deductibility of certain operating expenses. The higher effective tax rate in 2004 primarily relates to non-deductible merger costs associated with the then-pending merger with Lockheed Martin.

Titan has net operating loss carryforwards of approximately $274 million as of December 31, 2004, which are reflected at their net-of-tax amounts in current and non-current deferred tax assets in the accompanying consolidated balance sheets. Titan believes these net operating loss carryforwards will be fully realized before they expire, with such expirations starting in 2010 and ending in 2024. Titan expects to report taxable income for the year ending December 31, 2005 and therefore any 2005 taxable income will reduce prior period net operating losses.

In the quarter ended March 31, 2004, loss from discontinued operations was $0.6 million, net of a tax benefit of $0.5 million. The net loss was related to net operating losses of $0.9 million from Titan Wireless and $0.4 million primarily from Lincom Wireless, Datron World and Scan Services, offset by income of $0.2 million from Cayenta Canada, our commercial information technology business.

In the quarter ended March 31, 2005, income from discontinued operations was $0.9 million, net of a tax provision of $0.5 million, primarily related to a gain of $1.3 million from the final settlement payment to a former Titan Wireless subcontractor, which was previously accrued at a higher estimated settlement amount. Also included in income from discontinued operations is a gain from the sale of Scan Services of $0.2 million, which was offset by net operating losses of $0.2 million related to the Company's shut down of the Titan Wireless business, $0.2 million in Scan Services, prior to the sale transaction, and $0.2 million in costs to maintain the SureBeam leased facilities.

In the quarter ended March 31, 2004, we reported net income of $3.1 million, as compared to net income of $19.0 million in the quarter ended March 31, 2005. Loss from discontinued operations was $0.6 million in the quarter ended March 31, 2004, as compared to income of $0.9 million in the quarter ended March 31, 2005. Included in the results for the quarters ended March 31, 2004 and 2005 are pre-tax merger, investigation and settlement costs of $17.6 million and $5.8 million, respectively.

Our continuing operations during the three months ended March 31, 2005 used net cash of approximately $22.3 million, primarily resulting from the payment of $28.5 million for the FCPA settlements, reductions in our accrued compensation of $20.5 million, primarily related to payments of our annual incentive compensation plan and the reduction of accounts payable from December 31, 2004 of $19.5 million. Additionally, cash flow from continuing operations reflects an increase in receivables balances of approximately $4.1 million. While our days sales outstanding related to our linguist contract with the U.S. Army improved in the first quarter of 2005, it was offset by slower payments in the quarter on other contracts. These uses were offset by cash generated by profits from our core government business in the first quarter of 2005.

Our investing activities used net cash of $2.0 million, which was primarily for capital expenditures.

Financing activities provided $30.4 million, primarily from $29.1 million of borrowings under our revolving line of credit and $1.7 million from the exercise of stock options, partially offset by retirements of debt held by subsidiaries of $0.5 million.

Discontinued operations used approximately $3.5 million, due primarily to the settlement payment to a former Titan Wireless subcontractor for $9.0 million in March 2005 (see Note 4 to the consolidated financial statements), and to a lesser extent to payments made on leases related to SureBeam and other exit costs. These amounts were substantially offset by proceeds of $4.9 million from the sale of Scan Services in February 2005 and an additional $2.6 million in the first quarter of 2005 from the sale of Datron World, which was sold in the fourth quarter of 2004.

We have a $485 million senior credit facility from a syndicate of commercial banks including Wachovia Securities, acting as sole lead arranger, 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. 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.

At March 31, 2005, total borrowings under our senior credit facility were $385.4 million at a weighted average interest rate of 5.34%. Commitments under letters of credit were $4.2 million at March 31, 2005, which reduces availability of our senior credit facility, resulting in $85.8 million of borrowing availability on the senior revolving credit facility at March 31, 2005. Of the total borrowings, $3.5 million was short-term.

On September 2, 2004, we entered into an amendment of our senior credit facility, which ties our effective borrowing rate on our term loan within the facility, within a limited range, to changes in ratings from the two major agencies. The amendment immediately reduced the interest rate on our term loan by 50 basis points from LIBOR plus 325 basis points (or prime plus 200 basis points) to LIBOR plus 275 basis points (or prime plus 150 basis points). The interest rate was based on our current senior debt credit rating and outlook from Moody's Investor Services and Standard & Poor's. The amendment includes a provision that automatically increases or decreases the rate on the term loan to either LIBOR plus 300 basis points (or prime plus 175 basis points) or LIBOR plus 250 basis points (or prime plus 125 basis points), if our senior debt credit rating from Standard & Poor's or Moody's Investor Services changes, per the terms of the amendment. In March 2005, both rating agencies completed their credit reviews of us reflecting the resolution of the government FCPA investigation. Both agencies confirmed our existing ratings, but improved our credit outlook to "stable". As a result, effective March 10, 2005, the rate on our Senior Secured Term B loan of $340 million was reduced by 25 basis points to LIBOR plus 250 basis points (or prime plus 125 basis points).

The amendment did not affect the interest rate on our senior revolver within our credit facility. The senior credit facility, as amended, provides for interest rates per annum applicable to amounts outstanding under the senior revolver that are, at our 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 1.50% per annum, based on our 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 2.75% per annum, based on our ratio of total debt to EBITDA. Currently, our interest rates for base rate and LIBOR revolving loans are 0.25% higher than our interest rates for base rate and LIBOR term loans. We are 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 senior revolver. We are 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 our 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.

Our 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 equal quarterly payments in year seven of the loan (through the quarter ending June 30, 2009). We may prepay amounts borrowed under the term loan and the revolving credit facility at our option without any fee, provided that any voluntary prepayment of the outstanding term loan made before September 3, 2005, resulting from a refinancing of the term loan (other than any refinancing resulting from a change of control) shall be at 101% of the par value. We are 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.

The terms of the senior credit facility require us to provide certain customary covenants for a senior credit facility, including certain financial covenants. As amended, these financial covenants, as set forth in the senior credit agreement, for the first quarter of 2005 are comprised of a maximum total debt to EBITDA ratio of 4.75 to 1.0, declining to 4.5 to 1.0 on June 30, 2005, 4.25 to 1.0 on December 31, 2005 and 4.0 to 1.0 on June 30, 2006; a maximum total senior debt to EBITDA ratio of 3.0 to 1.0, declining to 2.75 to 1.0 on June 30, 2005 and 2.5 to 1.0 on December 31, 2005; a minimum interest coverage ratio of 3.0 to 1.0; a minimum fixed charge coverage ratio of 1.35 to 1.0 and a minimum net worth of approximately $277.0 million at March 31, 2005. We were in compliance with all financial covenants as of March 31, 2005.

On May 15, 2003, we sold $200 million of 8% senior subordinated notes due May 15, 2011 in a private placement (the Notes). We used the net proceeds from the issuance of the Notes, plus borrowings of $50 million under our revolving credit facility and additional cash on hand, to redeem all $250 million of the then-outstanding 5³/4% HIGH TIDES convertible preferred securities. The redemption of HIGH TIDES occurred on June 4, 2003.

We are required to make interest payments on the Notes semi-annually in arrears on May 15 and November 15 at the rate of 8% per annum. Titan 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:

Year	Percentage
2007	104.0	%
2008	102.0	%
2009 and thereafter	100.0	%

In addition, on or prior to May 15, 2006, Titan 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 the 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 Titan's domestic subsidiaries, other than Cayenta, guarantee the Notes. The guarantees are unsecured and rank equally with each guarantor's senior subordinated indebtedness. The Notes and the guarantees are junior to all of Titan's and each guarantor's senior indebtedness and senior to all of Titan's and each guarantor's subordinated indebtedness. On July 19, 2004, Titan completed the exchange of the existing Notes for a new series of 8% senior subordinated notes due May 15, 2011 registered under the Securities Act with terms substantially similar to the Notes.

Except with respect to certain obligations related to divested and/or discontinued business, as discussed in Note 4 to the consolidated financial statements, there are no Titan guarantees of debt or performance for any third party, including any unconsolidated subsidiary. The standby letters of credit for Datron World disclosed as outstanding at December 31, 2004 were transferred to Datron World in the first quarter of 2005; as such, there are no outstanding Titan commitments or contingencies related to Datron World.

In relation to our acquisition of International Systems in 2002, additional consideration may be payable through 2011 based upon earnings levels achieved. Approximately $0.6 million additional consideration was accrued for earnings generated in 2004 and was paid in April 2005.

On April 21, 2005, we completed the acquisition of 100% of the outstanding shares of Intelligence Data Systems, Inc. for $42.5 million in cash, before considering the effect of cash acquired in the transaction. IDS is a high-technology and professional services firm supporting the U.S. intelligence community through highly specialized expertise in data mining, high-performance computing, data analysis, information fusion, and information sharing.

We plan to finance our operations and working capital from a combination of sources—principally cash generation from our core businesses and our credit facility. Management believes that the combination of our existing cash, amounts available under our credit facility and cash flow expected to be generated from our operations will be sufficient to fund planned investments, the payment of additional consideration on acquisitions, settlement or other resolution of pending class action litigation and working capital requirements for at least the next twelve months. Our strategy is to use cash flow from operations generated by the business to pay down debt. However, we may use some or all available cash to fund additional strategic acquisitions relating to our national security business. We may need to raise additional capital in the future. Additional capital may not be available at all, or may not be available on terms favorable to us. Any additional issuance of equity or equity-linked securities may result in substantial dilution to our stockholders. In addition, our senior credit facility, as amended, contains a provision whereby the interest rate for the term loan under our senior credit facility will be automatically increased if our senior debt credit rating from Standard & Poor's or Moody's Investor Services is downgraded. The applicable margin for our term loans, currently at LIBOR plus 250 basis points (or prime plus125 basis points), will increase by 25 basis points to LIBOR plus 275 basis points

(or prime plus 150 basis points) if Titan's debt rating from S&P, currently at BB-, is put on a rating watch of "Negative Outlook", or if Titan's debt rating from Moody's, currently at Ba3, is put on a rating watch of "Watch-Possible Downgrade", further more, the current applicable margin for Titan's term loans will increase to LIBOR plus 300 basis points (or prime plus 175 basis points) if our debt rating from S&P is B+ or lower or if our debt rating from Moody's is B1 or lower. If the credit rating on Titan is downgraded by rating agencies, Titan's ability to raise additional funds under new credit facilities may be more difficult or altogether not possible. Management is continually monitoring and re-evaluating its level of investment in all of our operations and the financing sources available to achieve our goals.

Many of our contracts with the U.S. government are funded by the procuring agency from time to time, primarily based on its fiscal requirements and vagaries of government procurement funding. This results in two different categories of U.S. government backlog: funded and unfunded backlog. "Funded backlog" consists of the aggregate contract revenues expected to be earned by us from existing contracts at a given time, but only to the extent such amounts have been appropriated by Congress and allocated to a specific contract by the procuring government agency. Although funded backlog is appropriated by Congress, we cannot guarantee that cancellations or scope adjustments will not occur. The majority of funded backlog represents contracts under the terms of which cancellation by the customer would entitle us to all or a portion of our costs incurred and potential cancellation fees. "Unfunded backlog" consists of the aggregate contract revenues expected to be earned as our customers incrementally allot funding to existing contracts, awarded to us whether we are acting as a prime contractor or subcontractor. Unfunded backlog includes priced options on existing contracts, which consist of the aggregate contract revenues expected to be earned as a result of a customer exercising an option period that has been specifically defined in the original contract award. Unfunded backlog also includes our estimate of aggregate contract revenues expected to be earned under existing unfunded Indefinite Delivery/Indefinite Quantity contracts and multiple-award contracts awarded to us. "Backlog" is the total of the government funded and unfunded backlog.

As of March 31, 2005, our total backlog was $6.6 billion as compared to $6.2 billion as of December 31, 2004. The actual timing of receipt of revenues on contracts included in backlog could change because many factors affect the scheduling of contract work and the amount of funding on contracts by the customer. In addition, cancellations or adjustments to contracts may occur. Backlog may be subject to large variations from period to period as existing contracts are renewed or new contracts are awarded. Additionally, all United States government contracts included in backlog, whether or not funded, may be terminated at the convenience of the United States government. No assurance can be given as to when and if revenue will be realized on projects included within our backlog.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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. Specifically, management must make estimates in the following areas:

Revenue adjustments and allowance for doubtful accounts. We provide a reserve against our receivables for estimated losses that may result from our customers' inability to pay. These reserves are recorded as an allowance for doubtful accounts and are included in bad debt expense. These reserves are based on potential uncollectible accounts, aged receivables, historical losses, and our customers' credit-worthiness. Should a customer's account become past due, we generally will place a hold on the account and discontinue further shipments and/or services provided to that customer, minimizing further risk of loss. We also record reserves against receivables for estimated adjustments to revenue that may result from changes in expected government funding on certain of our contracts and adjustments that may arise from audits by the Defense Contract Audit Agency (DCAA) of certain of our government contracts.

Our accounts receivable balances include unbilled receivables, which are comprised of work-in-process which will be billed in accordance with contract terms and delivery schedules, as well as amounts billable upon final execution of contracts, contract completion, milestones or completion of rate negotiations. Payments to us for performance on certain of our U.S. government contracts are subject to audit by the DCAA and are subject to government funding. We provide a reserve against our receivables for estimated losses that may result from rate negotiations, audit adjustments and/or government funding availability. To the extent that actual adjustments due to rate negotiations, audit adjustments, or government funding availability differ from our estimates, our revenue may be impacted. Due to the fact that substantially all of our receivables come from contracts funded by the U.S. government, the likelihood of a material loss to Titan on an uncollectible account from this activity is not probable.

Inventory. Inventories are stated at the lower of cost or market. We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. The likelihood of any material inventory write-downs is dependent on changes in competitive conditions, new product introductions by us or our competitors or rapid changes in customer demand.

Determining impairment losses on non-marketable securities. We evaluate our investment in non-marketable securities taking into consideration the financial condition of the investee, the near-term prospects of the investee, including the opportunities in the region and industry of the investee, changes in technology, the progress of the investee in achieving operational milestones according to its operating plan, and indications of implied fair value as a result of recent financing transactions. We also evaluate various alternatives relative to realizing the value of our investment. Factors that would influence the likelihood of a material change in our evaluation of whether there is a decline other than temporary include significant changes in the investee's ability to generate positive cash flow, a significant change in technology, loss of legal ownership or title to the asset or a significant decline in the economic and competitive environment on which the investee depends.

Impairment charge related to SureBeam. We estimated the impairment charges recorded in 2003 and 2004 related to the $25 million note receivable from SureBeam based upon assumptions we made regarding estimated proceeds we expect to recover from the liquidation of assets to be provided to us under the settlement agreement with the SureBeam bankruptcy trustee. We estimated these proceeds

based upon discounted sales values we believed the SureBeam equipment and inventory, primarily electron beam systems and other related components, could be sold for to third parties. We based these discounted sales values on recent sales prices as well as preliminary indications of interest from third parties. Subsequent to taking possession of the collateral, we have updated our estimates of potential proceeds from asset sales and have not recorded an additional impairment. If sales are made at prices greater than originally estimated, gains will be recognized as the sales occur. We evaluated the obligations due under the guarantee and lease agreements by taking into consideration the estimated sublease income and cash flows anticipated from all sources. We estimated the net amounts owed under the facilities lease agreements and lease guarantees issued on behalf of SureBeam by taking into consideration the estimated sublease income based on current market lease property values. Related to the bank guarantee we issued on behalf of Hawaii Pride, we evaluated the estimated cash flow to be generated from the operations of Hawaii Pride to determine the estimated amount that may be required to be loaned to Hawaii Pride to enable it to make its debt payments. We did not take into consideration the potential proceeds resulting from a sale of the intellectual property of SureBeam.

Valuation of goodwill, intangible and other long-lived assets. We use assumptions in establishing the carrying value, fair value and estimated lives of our long-lived assets and goodwill. The criteria used for these evaluations include management's estimate of the asset's continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Useful lives and related amortization or depreciation expense are based on our estimate of the period that the assets will generate revenues or otherwise be used by us. Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset's ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, utilization of the asset, and a significant change in the economic and/or political conditions, particularly in those areas in which we have investments.

Benefit plans. We provide for limited post-retirement medical benefits for former employees of operations discontinued in prior years and for our Chairman, President and Chief Executive Officer. Accounting and reporting for the pension plans requires the use of assumptions for discount rates, expected mortality rates and estimated growth rates in medical and healthcare costs, which are all assumptions our actuaries rely upon in preparing their estimates for us. Any materially different valuations for actuarial assumptions that are different from our current expectations could impact our accruals for these post-retirement benefit obligations. As the population that participates in these plans is limited, we do not believe changes in valuations would have a material impact on our provisions for these post-retirement obligations.

Valuation of deferred income taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The amount of the net deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Also, under federal tax law, certain potential changes in ownership of Titan may limit annual future utilization of these carryforwards. As such, the valuation allowance recorded is provided against certain carryforwards which may not be utilized. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, our ability to deduct tax loss carryforwards against future taxable income, the effectiveness of our tax planning and strategies among the various tax jurisdictions that we operate in, and any significant changes in the tax treatment received on our business combinations and/or divestitures.

Revenue recognition. We recognize a portion of our revenue using the percentage-of-completion method, which includes revenues recognized as costs are incurred or as output measures are identified, in accordance with Statement of Position (SOP) 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Total estimated costs are based on management's assessment of costs to complete the project based upon evaluation of the level of work achieved and costs expended to date. To the extent that our estimated costs materially change, our revenues recorded under such contracts could materially be affected and could have a material adverse effect on our operations in the future periods. In the year ended December 31, 2004, approximately 15% of our total revenues were generated by fixed-price contracts, which are generally recognized using the percentage-of-completion method. The remaining 85% of our revenues in the year ended December 31, 2004 were generated by cost reimbursable contracts and time and materials contracts, for which percentage-of-completion is not used, and revenues are generally recognized as work is performed and billed to the customer.

Titan contracts with its government customers using various cost-type contracts. They include cost-plus fixed fee, cost-plus award fee, cost-plus incentive fee with incentives based upon both cost and/or performance, and cost sharing contracts. Revenues and profits are recognized in accordance with Accounting Research Bulletin No. 45 and SOP 81-1. For award and incentive fee type contracts, we recognize the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the customer regarding our performance, including any interim performance evaluations rendered by the customer. Revenues are recognized under fixed-price contracts based on the percentage-of-completion basis, using the cost-to-cost or units-of-delivery methods. On occasion we receive unpriced and priced change orders from our customers, whereby we are requested to make modifications to the contract, which may include changes in specifications or design, method or manner of performance, equipment, materials and period for completion of work. Some change orders are unpriced; that is, the work to be performed is defined, but the adjustment to the contract price is to be negotiated later. We evaluate these change orders according to their characteristics and the circumstances in which they occur after taking all factors into consideration such as probability of recovery, our experience in negotiating change orders, and separate documentation for change order costs that are identifiable and reasonable. We record the costs and associated revenue as appropriate, in accordance with SOP 81-1.

Accounting for business combinations. In relation to our allocation of purchase price to the fair value of assets acquired and contingencies assumed in acquisitions accounted for as purchase transactions, management makes estimates of such amounts as the fair value of assets and contingencies assumed. To the extent that the actual values or contingencies may differ from the estimates used, our allocation of purchase price may differ, which may result in a change to the amount of goodwill and/or purchased intangibles. Generally, management also obtains an independent purchase valuation to assist in its purchase price allocation.

Principles of consolidation. Management evaluates its investment in each joint venture and investment on an individual basis for purposes of determining whether consolidation or the cost or equity method is appropriate, based upon management's evaluation of the level of our ability to retain and exercise control through decision-making ability and to exercise significant influence, as well as our equity ownership interest. Management also considers whether its investments are variable interest entities in accordance with Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46). In the event that our ability to obtain control and exercise significant influence changes materially from management's evaluation in determining whether consolidation should occur, or whether or not the cost or equity method is appropriate, then our operating results could be materially impacted, either positively or negatively.

Litigation reserves. Management evaluates its pending or threatened litigation, claims and assessments to determine whether to record a provision related to such items and the related disclosure in accordance with accounting principles generally accepted in the United States. For significant litigation matters, management obtains the opinion of counsel and to the extent that a loss is probable and estimable, the Company records a provision for such loss based on the best available estimate of possible outcomes, in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." For matters in which a loss is determined to be probable but not estimable, Titan provides disclosure of such matters in the notes to its consolidated financial statements. An example of a matter requiring a provision for loss and disclosure of the contingency was the Company's disclosed dispute with a subcontractor related to the project in Benin, Africa, for which the Company provided a loss reserve for $10.3 million, as disclosed in Note 4 to the consolidated financial statements. Examples of matters that do not currently require a provision for loss but do require disclosure of the contingency are the numerous class-action lawsuits filed against the Company, as disclosed in Note 7 to the consolidated financial statements.

Forward Looking Information: Certain Cautionary Statements: "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

Some of the statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and otherwise contained in this quarterly report that are not historical facts are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements relate to future events or our future financial and/or operating performance and can be generally identified as such because the context of the statement will include words such as "may," "will," "intends," "plans," "believes," "anticipates," "expects," "estimates," "predicts," "potential," "possible," "continue" or "opportunity," the negative of these words or words of similar import. Similarly, statements that describe our reserves or provisions, our estimates, and our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward looking statements. These forward looking statements are based largely on our expectations and projections about future events and future trends affecting our business and so are subject to risks and uncertainties, including those risks and uncertainties identified below, that could cause our actual results to differ materially from those anticipated as of the date of this quarterly report. The risks and uncertainties also include, without limitation, risks discussed in other reports filed by us with the SEC. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance. Except as required by law, we undertake no obligation to publicly revise these forward looking statements to reflect events or circumstances that arise after the date of this quarterly report.

Factors that may affect the accuracy of the forward looking information include the following:

We depend on government contracts for most of our revenues and the loss of government contracts or a decline in funding of existing or future government contracts could adversely affect our revenues and cash flows and our ability to fund our growth.

Virtually all of our revenue is from the sale of services and products to the U.S. government. Our U.S. government contracts are only funded on an annual basis, and the U.S. government may cancel these contracts at any time without penalty or may change its requirements, programs or contract budget or decline to exercise option periods, any of which could reduce our revenues and cash flows from U.S. government contracts. Our revenues and cash flow from U.S. government contracts could also be reduced by declines in U.S. defense, homeland security and other federal agency budgets. As noted, related to the FCPA settlement, Titan and the Navy entered into an administrative settlement

that will allow Titan to continue to receive U.S. government contracts. The agreement in relevant part provides for Navy monitoring of Titan compliance activities for three years.

During the three months ended March 31, 2005, $85.0 million of our revenue, or approximately 15.2% of our total revenues for this period, was from our linguist contract with the U.S. Army. During the third quarter of 2004, the U.S. Army extended our linguist contract for an initial period of six months through March 31, 2005, with two three-month options. In the first quarter of 2005, the U.S. Army exercised both options. Prior to the option exercises, and also in the first quarter of 2005, the U.S. Army also issued a cure letter to us. In response to this letter, we agreed upon a new schedule of services that requires us to accelerate the hiring of linguists. As of the date of this filing, we are meeting this requirement. During this period, we expect the U.S Army to issue a new competitive procurement strategy for future linguist services, on which we intend to bid. The U.S. Army may decide to procure linguist services from multiple sources instead of under a sole source contract, which would increase competition. We cannot be certain that we will be able to win the re-compete for this business.

Approximately 87% of our total revenues in the first quarter of 2005 was for products and services under contracts with various parts of the Department of Defense or with prime contractors to the Department of Defense, including the linguist contract with the U.S. Army and our contract with the U.S. Special Operations Command, which represented approximately 3.4% of our total revenue during this period. Although these various parts of the Department of Defense are subject to common budgetary pressures and other factors, our various customers exercise independent purchasing decisions. Because of such concentration of our contracts, we are vulnerable to adverse changes in our revenues and cash flows if a significant number of our Department of Defense contracts and subcontracts are simultaneously delayed or canceled for budgetary performance or other reasons.

In addition to contract cancellations and declines in agency budgets, our backlog and future financial results may be adversely affected by:

These or other factors could cause U.S. defense and other federal agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or not to exercise options to renew contracts or limit our ability to obtain new contract awards. Any of these actions or any of the other actions described above could reduce our revenues and cash flows.

We are subject to class action lawsuits that could result in material liabilities to us or cause us to incur material costs.

As a result of the government investigation against us for violations of the FCPA, shareholder class action lawsuits have been brought against us in federal and state court and shareholder derivative lawsuits have been filed against our board of directors and certain of our officers. These lawsuits allege, among other things, that we failed to account properly for allegedly improper payments involving international consultants in connection with our international operations in violation of the FCPA, which is alleged to have artificially inflated our revenue and earnings and that we failed properly to disclose the nature of these payments in certain of our periodic reports. The derivative lawsuits allege, among other things, that our directors and officers breached their fiduciary duties by failing to monitor

or supervise management in a way that would have either prevented or detected the alleged FCPA violations. In addition, one of the cases alleges that the defendants breached their fiduciary duties by failing to monitor and supervise management in a way that would have prevented the mistreatment of prisoners at the Abu Ghraib prison in Iraq, alleged billing errors relating to work performed by foreign nationals and the loss of contracts with the government. We are also named as a defendant in a class action lawsuit alleging that we either participated in, approved or condoned the mistreatment of prisoners in Abu Ghraib prison in Iraq and other named prison facilities in violation of California state and international law. Further, we or some of our directors and officers are also named in class action securities litigation, bankruptcy court and other litigation relating to our former subsidiary, SureBeam Corporation, which filed for bankruptcy and is being liquidated. The class action litigation pending against us or against some or all of our directors or officers may take years to resolve and cause us to incur substantial litigation expenses. The outcomes of these cases is uncertain and could have a material adverse effect on our financial position, results of operations or cash flows and prospects.

While we expect the cost of our defense of some of the pending litigation, including costs of defense for directors or officers, and our potential liability to be covered under insurance we maintain, our insurance coverage will not eliminate the risks associated with the pending litigation. We have a $5 million deductible for each claim, or series of related claims, and a co-insurance premium under our director and officer liability insurance and we are subject to deductibles under other insurance policies that may cover certain claims. Each of our insurance policies also is subject to limitations on maximum coverage. Our insurance carriers may deny coverage or provide the costs of defense, subject to a reservation of the right to contest ultimate liability. We also may face liabilities that are not subject to insurance coverage, including punitive damages.

We are obligated to comply with our plea agreement and consent to entry of judgment and our failure to comply could expose us to further liability.

We recently settled the DoJ and SEC FCPA investigations and a related Internal Revenue Service investigation against us by pleading guilty to three felony counts consisting of violations of the anti-bribery and books and records provisions of the FCPA, aiding and assisting in the preparation of a false tax return, and by entering into a consent to entry of a final judgment with the SEC. A federal judge imposed a $13 million fine and a three-year term of supervised probation. We agreed to make payments to the SEC of $15.5 million consisting of disgorgement of profits and prejudgment interest. As part of these agreements, we agreed to implement a best-practices compliance program designed to detect and deter future violations of the FCPA and we agreed to retain an independent consultant to review our policies and procedures with respect to FCPA compliance and to adopt the consultant's recommendations. If we fail to comply with our sentence or the final judgment in the SEC matter, we could be subject to additional criminal and civil fines or penalties and limitations on our ability to enter into or perform under U.S. government contracts.

Further, as a result of our plea agreement, we are currently unable to obtain new export licenses from the U.S. Department of State. We have been working with the U.S. Department of State to obtain relief from this automatic statutory provision, but we do not know when, or if, we will be able to obtain relief from the statutory prohibition on issuing new licenses under the Arms Export Control Act. In addition, our privilege to export products or services under existing export licenses may also be suspended. If we were to be prevented from obtaining new licenses and/or exporting products or services under existing licenses for a significant period of time, we could breach our obligations under certain contracts and could suffer adverse consequences, including termination of contracts and/or claims for damages. Certain of our revenues are generated by contracts with international customers which require export licenses. All revenues requiring export licenses are included in the total international revenues which were $27 million for the year ended December 31, 2004 and $8.1 million for the three months ended March 31, 2005.

Government audits of our government contracts could result in a material charge to our earnings and have a negative effect on our cash position following an audit adjustment.

Our government contracts are subject to cost audits by the government. These audits may occur several years after the period to which the audits relate. If a cost audit were to identify significant unallowable costs, otherwise deemed allowable by us, we could have a material charge to our earnings or reduction in our cash position as a result of an audit, including an audit of one of the companies we have acquired. Some of our acquired companies did not historically impose internal controls as rigorous as those we impose on the government contracts we perform, which may increase the likelihood that an audit of their government contracts could cause a charge to our earnings or reduction in our cash position.

Our operating margins may decline under our fixed-price contracts if we fail to estimate accurately the time and resources necessary to satisfy our obligations.

Some of our contracts are fixed-price contracts under which we bear the risk of any cost overruns. Our profits are adversely affected if our costs under these contracts exceed the assumptions we used in bidding for the contract. During the fiscal year ended December 31, 2004, approximately 17% of our revenues were derived from fixed-price contracts for both defense and non-defense related contracts. Often, we are required to fix the price for a contract before we finalize the project specifications, which increases the risk that we will mis-price these contracts. The complexity of many of our engagements makes accurately estimating our time and resources more difficult.

If we are not able to retain our contracts with the U.S. government and subcontracts under U.S. government prime contracts in the competitive rebidding process, our revenues may suffer.

Upon expiration of a U.S. government contract or subcontract under a U.S. government prime contract, if the government customer requires further services of the type provided in the contract, there is frequently a competitive rebidding process. We cannot guarantee that we, or if we are a subcontractor that the prime contractor, will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract. Further, all U.S. government contracts are subject to protest by competitors. The termination of several of our significant contracts or nonrenewal of several of our significant contracts could result in significant revenue reductions. For example, our linguist contract with the U.S. Army has been extended into September 2005. The U.S. Army's competitive procurement process was subject to a protest that resulted in the government canceling the bidding process and extending the short-term sole source contract to us. We do not know what procurement strategy the government will adopt. The U.S. Army may decide to procure linguist services from multiple sources instead of from a single source. We do not know whether we will be successful in our efforts to retain this contract or a portion of this contract.

Performance on some of our U.S. government contracts requires us to do business internationally and subjects us to varying rules and regulations as well as the business risks associated with international operations.

We must comply with certain international laws in connection with our performance on some of our U.S. government contracts that require us to provide services in international locations including, but not limited to, our linguist contract with the U.S. Army and our U.S. Air Forces in Europe contract. Our inability or other failure to comply with the applicable laws of the countries in which we do business could result in fines and penalties being imposed by foreign governments or the U.S. government. Additionally, non-compliance with laws could result in revenue and fee reductions, including fee reimbursements under contracts, contract terminations or non-renewals or the loss of contracts through the competitive rebidding process or suspension or debarment from contracting with the U.S. government, any or all of which could have a material adverse effect on our business, financial condition and results of operations. The laws and regulations, which vary from country to country,

include local work-permitting requirements for foreign nationals working in-country, laws obligating us to use local sponsor organizations as representatives, consultants or sponsors, local labor and benefits laws and tax laws. We also face risks from the necessity of using foreign representatives, consultants or sponsors, including the need to comply with the provisions of the FCPA and ITAR. Our need to comply with applicable local and U.S. laws may also increase our costs of doing business and the costs of our internal compliance programs. Any changes in applicable laws could adversely affect our future financial condition and results of operations. In addition, we may incur costs denominated in a currency other than the currency billed under the contract, subjecting us to foreign currency fluctuations and foreign currency exchange risk.

We may be liable for penalties under a variety of procurement rules and regulations, and changes in government regulations could adversely impact our revenues, operating expenses and profitability.

Our defense and commercial businesses must comply with and are affected by various government regulations that impact our operating costs, profit margins and our internal organization and operation of our businesses. These regulations affect how our customers and Titan do business and, in some instances, impose added costs on our businesses. Any changes in applicable laws could adversely affect the financial performance of the business affected by the changed regulations. With respect to U.S. government contracts, any failure to comply with applicable laws could result in contract termination, price or fee reductions or suspension or debarment from contracting with the U.S. government. Among the most significant regulations are the following:

Our failure to identify, attract and retain qualified technical and management personnel could adversely affect our existing businesses.

We cannot guarantee that we will be able to attract and retain the highly qualified technical personnel, including engineers, computer programmers and personnel with security clearances required for classified work, including the clearances required for work on intelligence-related contracts, or management personnel to supervise such activities that are necessary for maintaining and growing our existing businesses. We currently have a large number of open positions and are engaging in intensive recruiting activities. The competition for these resources may drive up the compensation we pay to attract and retain qualified personnel. Our failure to hire and retain adequate numbers of required personnel may adversely affect our ability to perform under our existing contracts or to win new contracts.

Under our linguist contract, we continue to face the challenge of recruiting qualified linguists to meet the demands of the U.S. Army for services on a worldwide basis, particularly in Iraq and Afghanistan. The ongoing insurgency in Iraq and the language requirements increases the risk that we will not fully meet ongoing demands. Our failure to meet U.S. Army demand may adversely affect our ability to retain our contract and to win any competitive rebid.

We compete primarily for government contracts against many companies that are larger, better financed and better known than ourselves. If we are unable to compete effectively, our business and prospects will be adversely affected.

Our businesses operate in highly competitive markets. Many of our competitors are larger, better financed and better known companies who may compete more effectively than we do. In order to remain competitive, Titan must invest to keep our products and services capabilities technically advanced and compete on price and on value added to our customers. Our ability to compete may be adversely affected by limits on our capital resources and our ability to invest in maintaining and expanding our market share.

We have taken an impairment charge in connection with the assets we acquired from the SureBeam Corporation bankruptcy, and we may not be able to recover the estimated amounts from SureBeam's bankruptcy and we may be required to make net payments on lease and bank debt guarantees in excess of estimated amounts.

As a result of SureBeam Corporation's voluntary filing on January 19, 2004 for liquidation under Chapter 7 of the United States Bankruptcy Code, we recorded estimated pre-tax impairment charges of $15.8 million in 2003, related to credit that we had extended to SureBeam and our assessment of our ability to recover a portion of the indebtedness from assets of SureBeam we received under a settlement agreement with the bankruptcy trustee. In 2004, we recorded $14.4 million to accrue the estimate of the shortfall between the amount of SureBeam lease guarantees and the amount expected to be recovered by subleasing activities and for amounts to be incurred for facilities restoration costs. The ultimate amount of impairment to be recognized is contingent upon the amount of actual proceeds recovered by us from the liquidation of these assets, and our ability to mitigate our obligations under the facilities lease guarantees, through subleases, and loan repayments from Hawaii Pride.

Realization of components of the net deferred tax assets is dependent upon our generating sufficient taxable income prior to expiration of tax loss and tax credit carryforwards.

The federal net operating losses at December 31, 2004 to be carried forward to future years are approximately $274 million, which carryforwards will expire in periods from 2010 through 2024. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be fully realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. In order to fully utilize the net operating loss carryforwards prior to the expiration dates, taxable income of $274 million needs to be generated. Also, under federal tax law, certain potential changes in ownership of Titan may limit annual future utilization of these carryforwards.

If a significant amount of the net operating loss carryforwards are not realized, or we determine a significant amount will not be realized before they expire, we will incur substantial losses. If the net operating loss carryforwards expire before they can be used, we will not realize the cash benefit of the prior operating losses.

Our senior credit facility and our 8% senior subordinated notes contain restrictive covenants that may limit our ability to expand or pursue our business strategy, including the pay down of certain indebtedness.

Our senior credit facility and our 8% senior subordinated notes limit, and in some circumstances prohibit, our ability to incur additional indebtedness, pay dividends, make investments or other restricted payments, sell or otherwise dispose of assets, effect a consolidation or merger and engage in other activities.

We are required under the senior credit facility to maintain compliance with certain financial ratios. We may not be able to maintain these ratios. Covenants in the senior credit facility and our 8% senior subordinated notes may impair our ability to expand or pursue our business strategies. Our ability to comply with these covenants and other provisions of the senior credit facility and our 8% senior subordinated notes may be affected by our operating and financial performance, changes in business conditions or results of operations, or other events beyond our control. In addition, if we do not comply with these covenants, the lenders under the senior credit facility and our 8% senior subordinated notes may accelerate our debt repayment under the senior credit facility and our 8% senior subordinated notes. We have pledged substantially all of our consolidated assets and the stock of our subsidiaries to secure the debt under our senior credit facility, excluding our foreign affiliates. If the indebtedness under the senior credit facility or our 8% senior subordinated notes is accelerated, we cannot assure that our assets will be sufficient to repay all outstanding indebtedness in full.

Our acquisitions may increase costs, liabilities, or create disruptions in our business.

Since 1998, we have pursued a strategy of acquiring other government contractors in the information technology sector. We may pursue acquisitions of other companies or businesses from time to time. Although we review the records of companies or businesses we plan to acquire, even an in-depth review of records may not reveal existing or potential problems or permit us to become familiar enough with a business to assess fully its capabilities and deficiencies. As a result, we may assume unanticipated liabilities or adverse operating conditions, or an acquisition may not perform as well as expected. We face the risk that the returns on acquisitions will not support the expenditures or indebtedness incurred to acquire such businesses, or the capital expenditures needed to develop such businesses. We also face the risk that we will not be able to integrate acquisitions into our existing operations effectively without substantial expense, delay or other operational or financial problems. Integration may be hindered by, among other things, differing procedures, including internal controls, business practices and technology systems. We may need to divert more management resources to integration than we planned, which may adversely affect our ability to pursue other profitable activities.

Our product revenues could be less than expected if we are not able to deliver components of systems or products as scheduled due to disruptions in our supply of products and components or services.

Because our internal manufacturing capacity is limited, we use contract manufacturers. While we use care in selecting our manufacturers, this arrangement gives us less control over the reliability of supply, quality and price of products or components than if we manufactured them ourself. In some cases, we obtain products from a sole supplier or a limited group of suppliers. Consequently, we risk disruptions in our supply of key products and components if our suppliers fail or are unable to perform because of strikes, natural disasters, financial condition or other factors. Any material supply disruptions could adversely affect our ability to perform our obligations under our product contracts and could result in cancellation of contracts or purchase orders, delays in realizing revenues, and payment delays as well as adversely affect our ongoing product cost structure.

Our business is subject to significant environmental regulation. Compliance costs, or any future violations or liability under environmental laws, could harm our business.

We are subject to environmental and safety laws and regulations governing the use, storage and disposal of hazardous substances or wastes and imposing liability for the cleanup of contamination from these substances. We cannot completely eliminate the risk of contamination or injury from these substances or wastes, and, in the event of such an incident, we could be held liable for any damages that result. From time to time, we have been notified of violations of government and environmental regulations. We attempt to correct these violations promptly without any material impact on our operations. In addition, we may be required to incur significant additional costs to comply with

environmental laws and regulations in the future. These costs, and any future violations or liability under environmental laws or regulations, could have a material adverse effect on our business.

We may incur significant costs in protecting our intellectual property which could adversely affect our profit margins. Our inability to protect our patents and proprietary rights in the U.S. and foreign countries could adversely affect our businesses' prospects and competitive positions.

As part of our strategy, we seek to protect our proprietary technology and inventions through patents and other proprietary-right protection in the U.S. and other countries. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. In addition, we may incur significant expense both in protecting our intellectual property and in defending or assessing claims with respect to intellectual property owned by others.

We assess the strength of our patent and intellectual property protection for our technologies and products. Despite our assessments and our belief in the strength of our patent protection for particular technologies or products, our patents may not provide effective barriers to entry against competitors in the markets targeted by particular technologies and products because our competitors may develop competing technologies and products that do not infringe upon our patents. Titan also could choose to modify or abandon one or more planned or current products because of these assessments or actual or threatened claims by other companies. We are not certain that our pending patent applications will be issued.

We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants and advisors. It is possible that these agreements may be breached and that any remedies for a breach will not be sufficient to compensate us for damages incurred. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information.

Third parties could independently develop competing technology or design around our technology. If we are unable to successfully detect infringement and enforce our rights in our technology, we may lose competitive position in the applicable market. We cannot be certain that our means of protecting our proprietary rights in the U.S. or abroad will be adequate or that competing companies will not independently develop similar technology.

To date we have not been notified that our technologies infringe the proprietary rights of any third parties, but third parties may, in the future, claim that our current or future technologies infringe upon their proprietary rights. In addition, third parties have challenged and may continue to challenge the validity or enforceability of our proprietary rights. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause delays in our development of technologies and products, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements may not be available on terms acceptable to us, or at all. As a result, any such claim could harm our business and prospects.

Our results of operations have historically fluctuated and may continue to fluctuate significantly in the future, which could adversely affect the market price of our common stock.

Our revenues are affected by factors such as the unpredictability of sales and contracts awards due to the long procurement process for most of our products and services, the potential fluctuation of defense, intelligence and civil agency budgets, the time it takes for the new markets we target to develop and for us to develop and provide products and services for those markets, competition and general economic conditions. Our contract type/product mix and unit volume, our ability to keep expenses within budgets, and our pricing affect our gross margins. These factors and other risk factors

described herein may adversely affect our results of operations within a period and cause our financial results to fluctuate significantly on a quarterly or annual basis. Consequently, we do not believe that comparison of our results of operations from period to period is necessarily meaningful or predictive of our likely future results of operations. It is possible that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors. If so, the market price of our common stock may decline significantly.

Anti-takeover provisions in our certificate of incorporation, bylaws and Delaware law, as well as our stockholder rights plan, could discourage, delay or prevent a change of control that our stockholders may favor.

Provisions in our certificate of incorporation, our bylaws and Delaware law could make it difficult and expensive for a third party to pursue a takeover attempt that Titan opposes even if a change in control of Titan would be beneficial to the interests of its stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions:

In addition to the provisions described above, in 1995 our board of directors adopted a poison pill stockholder rights plan, which may further discourage a third party from making a proposal to acquire Titan which Titan has not solicited or does not approve, even if the acquisition would be beneficial to our stockholders. As a result, our stockholders who wish to participate in such a transaction may not have an opportunity to do so. Under our rights plan, preferred share purchase rights, which are attached to our common stock, generally will be triggered upon the acquisition, or actions that would result in the acquisition, of 15% or more of our common stock by any person or group. If triggered, these rights would entitle our stockholders other than the acquiror to purchase, for the exercise price, shares of our common stock having a market value of two times the exercise price. In addition, if a company acquires Titan in a merger or other business combination not approved by the board of directors, these rights will entitle our stockholders other than the acquiror to purchase, for the exercise price, shares of the common stock of the acquiring company having a market value of two times the exercise price.

Our forecasts and other forward-looking statements are based upon various assumptions that are subject to significant uncertainties that may result in our failure to achieve our forecasted results.

From time to time in press releases, conference calls and otherwise, we may publish or make forecasts or other forward-looking statements regarding our future results, including estimated revenues, earnings per share and other operating and financial metrics. Our forecasts are based upon various assumptions that are subject to significant uncertainties and any number of them may prove incorrect. Further, our achievement of any forecasts depends upon numerous factors, many of which are beyond our control. Consequently, we cannot assure you that our performance will be consistent with management forecasts. Variations from forecasts and other forward-looking statements may be material and adverse.

There have been no material changes during the three months ended March 31, 2005, to the information as of December 31, 2004, contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

We maintain disclosure controls and procedures which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, or CEO, and chief financial officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2005.

An evaluation was also performed under the supervision and with the participation of our management, including our CEO and CFO, of any change in our internal controls over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. That evaluation did not identify any change in our internal controls over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

DELAWARE		95-2588754
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
3033 Science Park Road San Diego, California		92121-1199
(Address of Principal Executive Offices)		(Zip Code)
(858) 552-9500 (Registrant's Telephone Number, Including Area Code)

			Three months ended March 31,
			2005			2004
Revenues			$	558,993		$	454,022

Costs and expenses:
	Cost of revenues			470,495			382,272
	Selling, general and administrative			40,592			35,889
	Research and development			3,591			3,418
	Merger, investigation and settlement costs (Note 2)			5,818			17,579

		Total costs and expenses		520,496			439,158

Operating profit				38,497			14,864
Interest expense				(9,971	)		(9,116	)
Interest income				289			163
Net gain on sale of assets				—			563

Income from continuing operations before income taxes				28,815			6,474
Income tax provision				10,662			2,843

Income from continuing operations				18,153			3,631
Income (loss) from discontinued operations, net of tax (Note 4)				859			(572	)

Net income				19,012			3,059
Dividend requirements on preferred stock				—			(190	)

Net income applicable to common stock			$	19,012		$	2,869

Basic earnings (loss) per share:
	Income from continuing operations		$	0.21		$	0.04
	Income (loss) from discontinued operations, net of tax			0.01			(0.01	)

	Net income		$	0.22		$	0.03

	Weighted average shares			84,802			82,767

Diluted earnings (loss) per share:
	Income from continuing operations		$	0.21		$	0.04
	Income (loss) from discontinued operations, net of tax			0.01			(0.01	)

	Net income		$	0.22		$	0.03

	Weighted average shares			87,831			86,884

			March 31, 2005			December 31, 2004
			(Unaudited)
Assets
Current Assets:
	Cash and cash equivalents		$	19,322		$	16,672
	Accounts receivable—net			519,480			515,386
	Inventories			21,487			21,336
	Prepaid expenses and other			23,160			29,039
	Deferred income taxes			84,441			95,390
	Current assets of discontinued operations (Note 4)			—			1,665

		Total current assets		667,890			679,488
Property and equipment—net				55,976			57,542
Goodwill				464,469			464,469
Intangible assets				18,513			19,819
Other assets—net				38,028			41,599
Deferred income taxes				52,651			52,647
Non-current assets of discontinued operations (Note 4)				23,387			26,469

		Total assets	$	1,320,914		$	1,342,033

Liabilities and Stockholders' Equity
Current Liabilities:
	Current portion of amounts outstanding under line of credit		$	3,500		$	3,500
	Accounts payable			96,560			116,032
	Current portion of long-term debt			36			500
	Accrued compensation and benefits			77,911			98,368
	Other accrued liabilities			95,427			115,168
	Current liabilities of discontinued operations (Note 4)			9,082			20,995

		Total current liabilities		282,516			354,563

Long-term portion of amounts outstanding under line of credit				381,875			352,750

Senior subordinated notes				200,000			200,000

Other long-term debt				479			491

Other non-current liabilities				51,039			52,831

Non-current liabilities of discontinued operations (Note 4)				33,064			33,318

Commitments and contingencies (Note 7)
Stockholders' Equity:
	Preferred stock, $1 par value, authorized 5,000,000 shares:
		Series A junior participating, designated 1,000,000 authorized shares: None issued		—			—
	Common stock, $.01 par value, authorized 200,000,000 shares: 85,258,168 and 84,779,939 shares issued and outstanding as of March 31, 2005 and March 31, 2004, respectively			853			848
	Capital in excess of par value			689,760			684,934
	Deferred compensation			(35	)		(53	)
	Accumulated deficit			(317,606	)		(336,618	)
	Treasury stock at cost: 278,652 shares			(1,031	)		(1,031	)

		Total stockholders' equity		371,941			348,080

		Total liabilities and stockholders' equity	$	1,320,914		$	1,342,033

			Three months ended March 31,
			2005			2004
Cash Flows from Operating Activities:
Income from continuing operations			$	18,153		$	3,631
Adjustments to reconcile income from continuing operations to net cash provided by operating activities, net of effects of net assets sold:
	Depreciation and amortization			3,966			3,981
	Deferred income taxes and other			11,043			3,392
	Deferred compensation			18			517
	Changes in operating assets and liabilities, net of effects of net assets sold:
		Accounts receivable		(4,094	)		(44,609	)
		Inventories		(151	)		(3,911	)
		Prepaid expenses and other assets		6,894			(2,842	)
		Accounts payable		(19,472	)		(4,525	)
		Accrued compensation and benefits		(20,457	)		161
		Accrual for settlement charge		(28,500	)		—
		Other liabilities		10,338			18,529

Net cash used by continuing operations				(22,262	)		(25,676	)

Income (loss) from discontinued operations				859			(572	)
Proceeds from divestiture of businesses (Note 4)				7,491			—
Changes in net assets and liabilities of discontinued operations				(11,815	)		(493	)

Net cash used by discontinued operations				(3,465	)		(1,065	)

Net cash used by operating activities				(25,727	)		(26,741	)

Cash Flows from Investing Activities:
Capital expenditures				(2,027	)		(8,863	)
Proceeds from sale of investments and net assets				—			2,880
Earnout payment related to prior year acquisition				—			(1,781	)
Other investments				—			(17	)
Other				33			563

Net cash used in investing activities				(1,994	)		(7,218	)

Cash Flows from Financing Activities:
Additions to debt				29,125			30,000
Retirements of debt				(476	)		(26	)
Preferred stock redemption (Note 3)				—			(12,518	)
Proceeds from exercise of stock options and other				1,732			5,632
Dividends paid				—			(190	)
Other				(10	)		(30	)

Net cash provided by financing activities				30,371			22,868

Effect of exchange rate changes on cash				—			(131	)

Net increase (decrease) in cash and cash equivalents				2,650			(11,222	)
Cash and cash equivalents at beginning of period				16,672			26,974

Cash and cash equivalents at end of period			$	19,322		$	15,752

		Cumulative Convertible Preferred Stock			Common Stock		Capital In Excess of Par Value			Deferred Compensation			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Three Months Ended March 31, 2005
Balances at December 31, 2004		$	—		$	848	$	684,934		$	(53	)	$	(336,618	)	$	—		$	(1,031	)	$	348,080
	Exercise of stock options and other		—			2		1,730			—			—			—			—			1,732
	Amortization of deferred compensation		—			—		—			18			—			—			—			18
Shares issued under the employee stock purchase plan			—			3		3,096			—			—			—			—			3,099
	Net income		—			—		—			—			19,012			—			—			19,012

Balances at March 31, 2005		$	—		$	853	$	689,760		$	(35	)	$	(317,606	)	$	—		$	(1,031	)	$	371,941

Three Months Ended March 31, 2004
Balances at December 31, 2003		$	687		$	822	$	670,733		$	(1,584	)	$	(298,221	)	$	(215	)	$	(813	)	$	371,409
	Exercise of stock options and other		—			11		5,749			—			—			—			(128	)		5,632
	Redemption of preferred stock (Note 3)		(626	)		—		(11,892	)		—			—			—			—			(12,518	)
	Conversion of preferred stock		(61	)		—		61			—			—			—			—			—
	Amortization of deferred compensation		—			—		—			517			—			—			—			517
	Foreign currency translation adjustment		—			—		—			—			—			(131	)		—			(131	)
	Shares issued under the employee stock purchase plan		—			3		2,715			—			—			—			—			2,718
	Dividends on preferred stock—Cumulative convertible, $.28 per share		—			—		(190	)		—			—			—			—			(190	)
	Net income		—			—		—			—			3,059			—			—			3,059

Balances at March 31, 2004		$	—		$	836	$	667,176		$	(1,067	)	$	(295,162	)	$	(346	)	$	(941	)	$	370,496

		Balance December 31, 2004		Cash Paid			Change in Estimate			Balance March 31, 2005
Titan Wireless:
	Contingent liability with subcontractor	$	10,311	$	(8,980	)	$	(1,331	)	$	—
	Estimated exit costs		3,192		(360	)		(484	)		2,348

		$	13,503	$	(9,340	)	$	(1,815	)	$	2,348

		Three months ended March 31, 2005
		Income (Numerator)		Shares (000's) (Denominator)	Per Share Amounts
Income from continuing operations		$	18,153
Basic EPS:
	Income from continuing operations available to common stockholders	$	18,153	84,802	$	0.21
Effect of dilutive securities:
	Stock options and warrants		—	3,029		—

Diluted EPS:
	Income from continuing operations available to common stockholders	$	18,153	87,831	$	0.21

		Three months ended March 31, 2004
		Income (Numerator)			Shares (000's) (Denominator)	Per Share Amounts
Income from continuing operations		$	3,631
Less: preferred stock dividends			(190	)

Basic EPS:
	Income from continuing operations available to common stockholders	$	3,441		82,767	$	0.04
Effect of dilutive securities:
	Stock options and warrants		—		4,117		—

Diluted EPS:
	Income from continuing operations available to common stockholders	$	3,441		86,884	$	0.04

		Balance December 31, 2004		Cash Paid			Change in Estimate		Balance March 31, 2005
Titan Systems restructuring:
	Estimated facilities consolidation costs	$	14,856	$	(1,137	)	$	400	$	14,119

Cayenta headquarters exit costs:
	Lease commitment costs		383		(77	)		—		306
	Employee termination costs and other		45		(26	)		—		19

			428		(103	)		—		325

		$	15,284	$	(1,240	)	$	400	$	14,444

		Parent			Guarantor Subsidiaries		Non-guarantor Subsidiaries			Reclassifications and Eliminations			The Titan Corporation and Subsidiaries
Revenues		$	541,672		$	16,273	$	1,941		$	(893	)	$	558,993

Costs and expenses:
	Cost of revenues		455,464			14,160		1,692			(821	)		470,495
	Selling, general and administrative		38,725			1,362		505			—			40,592
	Research and development		3,359			232		—			—			3,591
	Merger, investigation and settlement costs		5,818			—		—			—			5,818

	Total costs and expenses		503,366			15,754		2,197			(821	)		520,496

Operating profit (loss)			38,306			519		(256	)		(72	)		38,497
Interest expense			(9,971	)		—		—			—			(9,971	)
Interest income			287			—		2			—			289

Income (loss) from continuing operations before income taxes			28,622			519		(254	)		(72	)		28,815
Income tax provision (benefit)			10,590			192		(94	)		(26	)		10,662

Income (loss) from continuing operations			18,032			327		(160	)		(46	)		18,153
Income (loss) from discontinued operations, net of taxes			(11	)		870		—			—			859

Earnings (loss) before equity in earnings of subsidiaries			18,021			1,197		(160	)		(46	)		19,012
Equity in losses of subsidiaries			1,037			—		—			(1,037	)		—

Net earnings (loss)		$	19,058		$	1,197	$	(160	)	$	(1,083	)	$	19,012

			Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Reclassifications and Eliminations			The Titan Corporation and Subsidiaries
Revenues			$	435,933		$	12,048		$	7,694		$	(1,653	)	$	454,022

Costs and expenses:
	Cost of revenues			364,898			10,744			8,233			(1,603	)		382,272
	Selling, general and administrative			33,308			1,227			1,354			—			35,889
	Research and development			3,177			241			—			—			3,418
	Merger, investigation and settlement costs			17,579			—			—			—			17,579

		Total costs and expenses		418,962			12,212			9,587			(1,603	)		439,158

Operating profit (loss)				16,971			(164	)		(1,893	)		(50	)		14,864
Interest expense				(9,116	)		—			—			—			(9,116	)
Interest income				163			—			—			—			163
Gain (loss) on sale of assets				863			(300	)		—			—			563

Income (loss) from continuing operations before income taxes				8,881			(464	)		(1,893	)		(50	)		6,474
Income tax provision (benefit)				3,805			(185	)		(757	)		(20	)		2,843

Income (loss) from continuing operations				5,076			(279	)		(1,136	)		(30	)		3,631
Income (loss) from discontinued operations, net of taxes				(167	)		(614	)		209			—			(572	)

Earnings (loss) before equity in earnings of subsidiaries				4,909			(893	)		(927	)		(30	)		3,059
Equity in losses of subsidiaries				(1,820	)		—			—			1,820			—

Net earnings (loss)			$	3,089		$	(893	)	$	(927	)	$	1,790		$	3,059

	Parent			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Reclassifications and Eliminations			The Titan Corporation and Subsidiaries
Cash Flows from Operating Activities:
Income (loss) from continuing operations	$	18,350		$	327		$	(160	)	$	(364	)	$	18,153
Adjustments to reconcile income (loss) from continuing operations to net cash used for continuing operations		(33,038	)		(4,714	)		(3,027	)		364			(40,415	)

Net cash used by continuing operations		(14,688	)		(4,387	)		(3,187	)		—			(22,262	)

Income (loss) from discontinued operations		(11	)		870			—			—			859
Adjustments to reconcile income (loss) from discontinued operations to cash used for discontinued operations		2,709			(7,033	)		—			—			(4,324	)

Net cash provided (used) by discontinued operations		2,698			(6,163	)		—			—			(3,465	)

Net cash used by operating activities		(11,990	)		(10,550	)		(3,187	)		—			(25,727	)

Cash Flows from Investing Activities:
Capital expenditures		(1,963	)		(55	)		(9	)		—			(2,027	)
Proceeds from sale of investments and net assets
Earnout payment related to prior year acquisition
Other investments
Proceeds (payments) on intercompany investments, advances and liabilities		(14,274	)		11,011			3,263			—			—
Other		33			—			—			—			33

Net cash provided (used) by investing activities		(16,204	)		10,956			3,254			—			(1,994	)

Cash Flows from Financing Activities:
Retirement of debt		(476	)		—			—			—			(476	)
Additions to debt		29,125			—			—			—			29,125
Proceeds from exercise of stock options and other		1,732			—			—			—			1,732
Other		164			(174	)		—			—			(10	)

Net cash provided (used) by financing activities		30,545			(174	)		—			—			30,371

Net decrease in cash and cash equivalents		2,351			232			67			—			2,650
Cash and cash equivalents at beginning of year		17,364			(611	)		(81	)		—			16,672

Cash and cash equivalents at end of period	$	19,715		$	(379	)	$	(14	)	$	—		$	19,322

	Parent			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Reclassifications and Eliminations			The Titan Corporation and Subsidiaries
Cash Flows from Operating Activities:
Income (loss) from continuing operations	$	4,943		$	(224	)	$	(1,060	)	$	(28	)	$	3,631
Adjustments to reconcile income (loss) from continuing operations to net cash used for continuing operations		(24,119	)		(5,080	)		(136	)		28			(29,307	)

Net cash used by continuing operations		(19,176	)		(5,304	)		(1,196	)		—			(25,676	)

Income (loss) from discontinued operations		(167	)		(614	)		209			—			(572	)
Adjustments to reconcile loss from discontinued operations to cash used for discontinued operations		2,362			(2,206	)		(649	)		—			(493	)

Net cash used by discontinued operations		2,195			(2,820	)		(440	)		—			(1,065	)

Net cash used by operating activities		(16,981	)		(8,124	)		(1,636	)		—			(26,741	)

Cash Flows from Investing Activities:
Capital expenditures		(3,260	)		(5,595	)		(8	)		—			(8,863	)
Proceeds from sale of investments and net assets		2,494			386			—			—			2,880
Earnout payment related to prior year acquisition		(1,781	)		—			—			—			(1,781	)
Other investments		(17	)		—			—			—			(17	)
Proceeds (payments) on intercompany investments, advances and liabilities		(12,831	)		13,031			(200	)		—			—
Other		563			—			—			—			563

Net cash provided (used) by investing activities		(14,832	)		7,822			(208	)		—			(7,218	)

Cash Flows from Financing Activities:
Additions to debt		30,000			—			—			—			30,000
Retirement of debt		(26	)		—			—			—			(26	)
Preferred stock redemption		(12,518	)		—			—			—			(12,518	)
Proceeds from exercise of stock options and other		5,632			—			—			—			5,632
Dividends paid		(190	)		—			—			—			(190	)
Other		(25	)		—			(5	)		—			(30	)

Net cash provided (used) by financing activities		22,873			—			(5	)		—			22,868

Effect of exchange rate changes on cash		—			—			(131	)		—			(131	)

Net decrease in cash and cash equivalents		(8,940	)		(302	)		(1,980	)		—			(11,222	)
Cash and cash equivalents at beginning of year		25,861			(852	)		1,965			—			26,974

Cash and cash equivalents at end of period	$	16,921		$	(1,154	)	$	(15	)	$	—		$	15,752

3.1		The Company's Certificate of Increase of Series A Junior Participating Preferred Stock dated as of May 13, 2003, which was Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, filed November 1, 2004, is incorporated herein by this reference. The Company's Certificate of Amendment of Restated Certificate of Incorporation dated as of June 2, 2000, which was Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, filed November 1, 2004, is incorporated herein by this reference. The Company's Certificate of Amendment of Restated Certificate of Incorporation dated as of October 21, 1998, which was Exhibit No. 3.1 to the Company's Quarterly Report on Form 10-Q, filed November 16, 1998, is incorporated herein by this reference. The Company's Certificate of Amendment of Restated Certificate of Incorporation dated as of June 30, 1987, which was Exhibit 3.2 to the Company's 1987 Annual Report on Form 10-K, filed March 29, 1988, is incorporated herein by this reference. The Company's Restated Certificate of Incorporation dated as of November 6, 1986, which was Exhibit No. 3.1 to the Company's 1987 Annual Report on Form 10-K, filed March 29, 1988, is incorporated herein by this reference.
3.2		Amendment to the Bylaws of the Company, dated February 4, 2005, which was filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K, is incorporated herein by this reference. Amendments to Bylaws of the Company, dated March 22, 2000 and August 16, 2000, which were Exhibit 3.4 to the Company's 2001 Annual Report on Form 10-K, filed on April 1, 2002, are incorporated herein by this reference. The Company's Bylaws, which were Exhibit 3.3 to the Company's 1999 Annual Report on Form 10-K/405 filed March 30, 2000, are incorporated herein by this reference.

10.1		Agreement and Plan of Merger, dated April 13, 2005 by and among The Titan Corporation, a Delaware corporation, IDS Acquisition, Inc., a Virginia corporation, Intelligence Data Systems, Inc., a Virginia corporation, and Mr. Mike Canney, which was filed as Exhibit 2.1 to the Company's Current Report of Form 8-K, filed on April 18, 2005, is incorporated herein by this reference.
10.2*		Summary of Titan's Annual Cash Incentive Program for Executive Officers.
31.1*		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2*		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b).

Dated: May 4, 2005	THE TITAN CORPORATION
	By:	/s/ GENE W. RAY Gene W. Ray Chief Executive Officer and Chairman of the Board
	By:	/s/ MARK W. SOPP Mark W. Sopp Senior Vice President and Chief Financial Officer