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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON,D.C. 20549**

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**FORM10-Q**

| x | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------------|

**For thequarterly period ended June 30, 2002**

**or**

| o | **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|----------------------------------------------------------------------------------------------------|

**For thetransition period from              to              **

**Commission file number 1-6035**

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**THETITAN CORPORATION**(Exact name of registrant as specified in its charter)

| **DELAWARE**(State or other jurisdiction of incorporation or organization) |   | **95-2588754**(I.R.S. Employer Identification No.) |
|----------------------------------------------------------------------------|--------|----------------------------------------------------|

**3033Science Park RoadSan Diego, California 92121-1199**(Address ofprincipal executive offices, zip code)

(Registrant's telephone number, including areacode) **(858) 552-9500**

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

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    Indicate by check markwhether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes x  No o.

    The number of shares ofregistrant's common stock outstanding at August 2, 2002, was77,936,690.

    OnApril 5, 2002, the Company decided to no longer engage ArthurAndersen LLP as its independent public accountants and appointedKPMG LLP as its successor independent public accountants.  Asa result of the dismissal of Arthur Andersen LLP, the review  of  the  financial  statements for thequarter ended March 31, 2002 included in the  Company’sForms 10-Q and 10-Q/A for that period had not yet been completed bythe Company’s successor independent public accountantspursuant to Rule 10-01(d)  at  the  time of  the  Company’s  filings.  As permitted  by  the  guidance issued by the SEC inRelease Nos. 33-8070/34-45590, the review of the quarter endedMarch 31, 2002 has now been completed in conjunction with theindependent accountants’ review of the financial statementsfor the quarter and cumulative interim period ending June 30,2002. 

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**Part I—FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**THE TITANCORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited) (in thousands, except per share data)******

| ** ** | **   ** | **Threemonths ended June 30,**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **   ** | **Sixmonths ended June 30,** | ** ** |
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|            |                        | **2002**

**2001**

**2002**

**2001**

Revenues

$

399,937

$

257,664

 

$

740,482

 

$

496,976

 

Costs andexpenses:

 

 

 

 

 

 

 

 

 

    Cost of revenues

 

322,047

 

197,013

 

 

593,821

 

 

376,696

 

    Selling, general and administrative expense

 

54,237

 

42,090

 

 

97,005

 

 

88,139

 

    Research and development expense

 

5,686

 

3,351

 

 

10,554

 

 

6,786

 

    Exit charges and other

 

1,833

 

—

 

 

3,319

 

 

—

 

    Acquisition and integration related charges andother

 

—

 

721

 

 

—

 

 

28,421

 

        Total costs and expenses

 

 

383,803

 

243,175

 

 

704,699

 

 

500,042

 

Operating profit(loss)

 

16,134

14,489

 

35,783

 

 

(3,066

)

Interestexpense

 

(7,937

)

(10,396

)

 

(16,410

)

(19,293

)

Interest income

 

124

266

 

264

 

 

539

Income (loss) fromcontinuing operations before income taxes, minorityinterests,     extraordinary loss and cumulative effectof change in accounting principle

8,321

4,359

19,637

(21,820

)

Income tax provision(benefit)

 

3,495

1,992

 

8,248

(5,076

)

Income (loss) fromcontinuing operations before minority interests,     extraordinary loss and cumulative effectof change in accounting principle

 

4,826

2,367

 

11,389

 

(16,744

)

Minorityinterests

 

(48

)

 

254

 

(48

)

 

4,659

Income (loss) fromcontinuing operations before extraordinary loss and     cumulative effect of change in accountingprinciple

 

4,778

2,621

 

11,341

 

(12,085

)

Loss from discontinuedoperations, net of tax benefit

 

(11,137

)

(10,426

)

 

(11,213

)

 

(55,590

)

Extraordinary loss fromearly extinguishment of debt, net of tax benefit

 

(5,408

)

—

 

(5,408

)

 

—

Cumulative effect ofchange in accounting principle, net of tax benefit (fromcontinuing     operations $6,144, from discontinuedoperations $33,967)

 

—

—

 

(40,111

)

 

—

Net loss

 

(11,767

)

(7,805

)

(45,391

)

(67,675

)

Dividend requirements onpreferred stock

 

(173

)

(173

)

 

(345

)

 

(345

)

Net loss applicable tocommon stock

$

(11,940

)

$

(7,978

)

$

(45,736

)

$

(68,020

)

Basic earnings (loss) pershare:

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income (loss) fromcontinuing operations before extraordinary loss         and cumulativeeffect of change in accounting principle

$

0.06

$

0.04

$

0.14

$

(0.30

)

    Loss from discontinuedoperations, net of tax benefit

 

(0.14

)

(0.20

)

 

(0.15

)

 

(1.11

)

    Extraordinary loss fromearly extinguishment of debt, net of tax benefit

 

(0.07

)

—

 

(0.07

)

 

—

    Cumulative effect ofchange in accounting principle, net of tax benefit(continuing         operations ($0.08)per share, discontinued operations ($0.46) per share)

 

—

—

 

(0.54

)

 

—

    Net loss

$

(0.15

)

$

(0.16

)

$

(0.62

)

$

(1.41

)

    Weighted averageshares

 

77,119

53,663

 

 

73,981

 

 

53,521

 

Diluted earnings (loss)per share:

 

 

 

 

 

 

 

 

 

    Income (loss) fromcontinuing operations before extraordinary loss         and cumulativeeffect of change in accounting principle

$

0.05

$

0.04

$

0.11

$

(0.30

)

    Loss from discontinuedoperations, net of tax benefit

 

(0.14

)

(0.20

)

(0.15

)

(1.11

)

    Extraordinary loss fromearly extinguishment of debt, net of tax benefit

 

(0.07

)

—

 

(0.07

)

 

—

    Cumulative effect ofchange in accounting principle, net of tax benefit(continuing         operations ($0.08)per share, discontinued operations ($0.45) per share)

 

—

—

 

(0.53

)

 

—

    Net loss

$

(0.16

)

$

(0.16

)

$

(0.64

)

$

(1.41

)

    Weighted averageshares

 

78,528

55,830

 

 

75,476

 

53,521

 

Theaccompanying notes are an integral part of these consolidatedfinancial statements.

**THE TITAN CORPORATIONCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)**

** **

** **

**June30, 2002**

** **

**December31, 2001**

** **

** **

** **

**(Unaudited)**

** **

** **

** **
**Assets**
 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

    Cash and cashequivalents

 

$

45,808

 

$

28,957

 

    Restricted cash

 

 

1,104

 

 

—

 

    Accounts receivable—net

 

 

359,258

 

 

374,728

 

    Inventories

 

 

33,010

 

 

29,112

 

    Prepaid expenses and other

 

 

44,973

 

 

19,168

 

    Deferred income taxes

 

 

60,948

 

 

53,941

 

    Current assets of discontinued operations

 

 

62,020

 

 

67,841

 

 

 

 

 

        Total current assets

 

 

607,121

 

 

573,747

 

Property and equipment— net

 

 

108,930

 

 

99,115

 

Long-term contractreceivables

87,747

93,143

Goodwill

 

 

547,115

 

 

441,647

 

Other assets —net

 

 

140,599

 

 

137,144

 

Non-current assets ofdiscontinued operations

 

 

78,480

 

 

115,606

 

 

 

 

 

         Total assets

 

$

1,569,992

 

$

1,460,402

 

 

 

 

 

**Liabilities and Stockholders'Equity**

 

 

 

 

 

 

 

CurrentLiabilities:

 

 

 

 

 

 

 

    Current portion of amounts outstanding under creditfacility

 

$

3,500

 

$

12,813

 

    Accounts payable

 

 

88,600

 

 

90,073

 

    Acquisition debt

 

 

2,000

 

 

2,000

 

    Current portion of long-term debt

 

 

938

 

 

1,413

 

    Accrued compensation and benefits

 

 

67,345

 

 

68,762

 

    Other accrued liabilities

 

 

87,347

 

 

76,478

 

    Income taxespayable

—

1,174

    Current liabilities of discontinued operations

 

 

23,473

 

 

42,422

 

 

 

 

 

        Total current liabilities

 

 

273,203

 

 

295,135

 

 

 

 

 

Long-term portion ofamounts outstanding under credit facility

 

 

346,500

 

 

317,187

 

 

 

 

 

Other long-termdebt

 

 

2,509

 

 

5,612

 

 

 

 

 

Non-recoursedebt

 

 

40,545

 

 

42,456

 

 

 

 

 

Other non-currentliabilities

 

 

50,152

 

 

44,861

 

 

 

 

 

Non-current liabilities ofdiscontinued operations

86

8,170

 

 

 

 

Company obligatedmandatory redeemable convertible preferred securities of asubsidiary trust     whose sole assets are senior subordinateddebentures of Titan

 

 

250,000

 

 

250,000

 

 

 

 

 

Minorityinterests

 

 

311

 

23

 

 

 

 

 

Stockholders'Equity:

 

 

 

 

 

 

 

    Preferred stock: $1 par value, authorized 5,000,000shares:

 

 

 

 

 

 

 

        Cumulative convertible, $13,800 liquidationpreference, designated 1,068,102 shares:              689,628and 689,678 shares issued and outstanding

 

 

690

 

 

690

 

        Series A junior participating: designated 1,000,000authorized shares:  None issued

 

 

—

 

 

—

 

    Common stock:  $.01 par value, authorized 200,000,000shares, issued and outstanding:          77,679,045 and70,128,582 shares

 

 

777

 

 

701

 

    Capital in excess of par value

 

 

732,844

 

588,184

 

    Deferred compensation

 

 

(23,832

)

 

(34,519

)

    Retained earnings (accumulated deficit)

 

 

(102,975

)

 

(57,239

)

    Accumulated other comprehensive income

 

 

124

 

128

 

    Treasury stock (345,750 and 372,050 shares), at cost

 

 

(942

)

 

(987

)

 

 

 

 

        Total stockholders' equity

 

606,686

 

 

496,958

 

 

 

 

        Total liabilities and stockholders'equity

 

$

1,569,992

 

$

1,460,402

 

 

 

 

 

Theaccompanying notes are an integral part of these consolidatedfinancial statements.

**THE TITAN CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)  (in thousands of dollars)**

**Sixmonths ended June 30,**

** **

** **

** **

** **

**2002**

**2001**

** **

** **

** **

** **

**Cash Flows fromOperating Activities:** 

 

 

 

 

 

 

Income (loss) fromcontinuing operations before extraordinary loss and cumulativeeffect of     change in accounting principle

$

11,341

$

(12,085

)

Adjustments to reconcileloss from continuing operations to net cash provided by (usedfor)     operating activities, net of effects ofbusinesses acquired and sold:

 

 

    Depreciation andamortization

 

13,824

 

15,674

    Write-offs due to assetimpairments

—

14,919

    Deferred income taxes andother

 

7,429

 

(3,219

)

    Minorityinterests

 

48

 

(4,659

)

    Equity in loss ofinvestee

562

—

    Deferredcompensation

 

2,411

 

2,126

    Changes in operatingassets and liabilities, net of the effects of businesses acquiredand sold:

 

 

        Accountsreceivable

 

50,560

 

(25,749

)

        Inventories

 

(3,637

)

 

(3,437

)

        Prepaidexpenses and other assets

 

(12,550

)

 

4,284

        Accountspayable

 

(9,431

)

 

(8,544

)

        Accruedcompensation and benefits

 

(6,627

)

 

6,862

        Incometaxes payable

 

(1,187

)

 

(793

)

        Otherliabilities

 

(14,662

)

 

10,469

 

 

 

Net cash provided by (usedfor) continuing operations

 

38,081

 

(4,152

)

 

 

 

Loss from discontinuedoperations

 

(11,213

)

 

(55,590

)

Minority interestattributable to discontinued operations

 

(130

)

 

(9,720

)

Issuance of stock insubsidiaries

 

132

 

60,856

Deferred compensationcharge attributable to discontinued operations

 

7,780

 

44,040

Changes in net assets andliabilities of discontinued operations

 

(28,466

)

 

(55,006

)

 

 

 

Net cash used fordiscontinued operations

 

(31,897

)

 

(15,420

)

 

 

 

Net cash provided by (usedfor) operating activities

 

6,184

 

(19,572

)

 

 

 

 

**Cash Flows fromInvesting Activities:**

 

 

 

 

 

 

Capitalexpenditures

 

(16,802

)

 

(17,099

)

Acquisition of businessesand other equity interests, net of cash acquired

 

29,978

 

(50,940

)

Capitalized softwaredevelopment costs

 

(1,952

)

 

(3,670

)

Proceeds from sale ofinvestments and business

 

1,500

 

3,217

Otherinvestments

 

(11,752

)

 

(370

)

Other

 

2,610

 

295

 

 

 

Net cash provided byinvesting activities

 

3,582

 

(68,567

)

 

 

 

**Cash Flows fromFinancing Activities:**

 

 

Additions todebt

 

20,000

 

76,875

Retirements ofdebt

 

(6,143

)

 

(678

)

Issuance of stock bysubsidiaries

 

286

 

22

Deferred financingcosts

 

(8,706

)

 

(1,199

)

Increase in restrictedcash

 

(1,104

)

 

—

Dividends paid

 

(345

)

 

(345

)

Exercise of stock optionsand other

 

7,061

 

1,506

Other

 

(3,960

)

 

(637

)

 

 

 

Net cash provided byfinancing activities

 

7,089

 

75,544

 

 

 

Effect of exchange ratechanges on cash

 

(4

)

 

50

 

 

 

Net increase (decrease) incash and cash equivalents

 

16,851

 

(12,545

)

Cash and cash equivalentsat beginning of period

 

28,957

 

 

27,291

 

 

 

 

Cash and cash equivalentsat end of period

$

45,808

 

$

14,746

 

 

 

 

 

Theaccompanying notes are an integral part of these consolidatedfinancial statements.

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

****

** **

** **

**Cumulative Convertible Preferred Stock******

** **

**Common Stock******

** **

**Capital In Excess of Par Value******

** **

**Deferred Compen-sation******

** **

**Retained Earnings (Accumulated Deficit)******

** **

**Accumulated Other Comprehensive Income******

** **

**Treasury Stock******

** **

**Total******

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Six Months Ended June 30, 2002**

 

Balances at December 31, 2001

 

$

690

 

$

701

 

$

588,184

 

$

(34,519

)

$

(57,239

)

$

128

 

$

(987

)

$

496,958

 

   Issuanceof stock for       acquisitions

 

 

 

 

66

 

134,506

 

 

 

 

 

 

 

 

 

39

 

 

134,611

 

   Exercise of stock options       and other

 

 

 

 

8

 

7,053

 

 

 

 

 

 

 

 

 

 

 

 

7,061

 

   Deferredcompensation       related to the issuanceof       stock options

 

 

 

 

 

133

 

 

(133

)

 

 

 

 

 

 

 

 

 

—

 

   Write-off of deferred       compensation related to       discontinuedoperations

 

 

 

 

 

(629

)

 

629

 

 

 

 

 

 

 

 

 

 

—

 

   Amortization of deferred      compensation

 

 

 

 

 

 

 

 

 

10,191

 

 

 

 

 

 

 

 

 

 

10,191

 

   Foreign currency translation      adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

(4

)

   Shares contributed to       employee benefitplans

 

 

 

 

 

2

 

3,597

 

 

 

 

 

 

 

 

 

 

 

6

 

 

3,605

 

   Dividends on preferred       stock - Cumulative      convertible, $.50 per share

 

 

 

 

 

 

 

 

 

 

 

 

(345

)

 

 

 

 

 

 

 

(345

)

   Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(45,391

)

 

 

 

 

 

 

 

(45,391

)

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Balances at June 30, 2002

 

$

690

 

$

777

 

$

732,844

 

$

(23,832

)

$

(102,975

)

$

124

$

(942

)

$

606,686

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Six Months Ended June 30, 2001**

 

Balances at December 31, 2000

 

$

690

 

$

541

 

$

191,358

 

$

(13,882

)

$

(9,960

)

$

108

$

(1,439

)

$

167,416

 

   Exercise of stock options        and other

 

 

 

3

 

 

1,603

 

 

 

 

 

 

 

 

 

 

 

(100

)

1,506

 

   Deferred compensation,      related to the issuance of      stock options

 

 

 

 

 

 

78,604

 

 

(78,604

)

 

 

 

 

 

 

 

 

 

 

—

 

   Amortization of deferred      compensation

 

 

 

 

 

 

 

 

 

46,166

 

 

 

 

 

 

 

 

 

 

 

46,166

 

   Foreign currency translation      adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

50

 

   Unrealized loss on       investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(555

)

 

 

 

 

(555

)

   Gain related to issuance of      stock in subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

 

52,025

 

 

 

 

 

 

 

 

52,025

 

   Sharescontributed to        employee benefitplan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

324

 

 

324

   Dividends on preferred       stock - Cumulative      convertible, $.50 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(345

)

 

 

 

 

 

 

 

(345

)

      Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(67,675

)

 

 

 

 

 

 

 

(67,675

)

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Balances at June 30, 2001

 

$

690

 

$

544

 

$

271,565

 

$

(46,320

)

$

(25,955

)

$

(397

)

$

(1,215

)

$

198,912

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Theaccompanying notes are an integral part of these consolidatedfinancial statements.

**THE TITAN CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002(in thousands, except share and per share data, or as otherwisenoted)**

**Note (1) Basis ofFinancial Statement Preparation**

    The accompanyingconsolidated financial information of The Titan Corporation and itssubsidiaries ("Titan" or the "Company") should be read inconjunction with the Notes to Consolidated Financial Statementscontained in the Company's Annual Report on Form 10-K/A AmendmentsNo. 1 and No. 2**to the Securities and ExchangeCommission for the year ended December 31, 2001.  Theaccompanying financial information includes substantially allsubsidiaries on a consolidated basis and all normal recurringadjustments which are considered necessary by the Company'smanagement for a fair presentation of the financial position,results of operations and cash flows for the periodspresented.  However, these results are not necessarilyindicative of results for a full fiscal year.  Additionally,certain prior period amounts have been reclassified to conform tothe current period presentation.

    The preparation offinancial statements in conformity with accounting principlesgenerally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses duringthe reporting period.  Actual results could differ from thoseestimates.

    InAugust 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 143, "Accounting for AssetRetirement Obligations".  This statement addresses financialaccounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated assetretirement costs.  It applies to (a) all entities and(b) legal obligations associated with the retirement oflong-lived assets that result from the acquisition, construction,development and/or normal operation of long-lived assets, exceptfor certain obligations of lessees.  This statement amendsSFAS No. 19, "Financial Accounting and Reporting by Oil andGas Producing Companies," and is effective for financial statementsissued for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of this statementwill have a material impact on its consolidated financial positionor results of operations.

    Also in August 2001, theFASB issued SFAS No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets." SFAS No. 144 addressesfinancial accounting and reporting for the impairment or disposalof long-lived assets and supersedes SFAS No. 121, "Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of," and the accounting and reporting provisions ofAPB Opinion No. 30, "Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment ofa Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions," for the disposal of a segment of abusiness (as previously defined in that Opinion).  Theprovisions of SFAS No. 144 are effective for financialstatements issued for fiscal years beginning afterDecember 15, 2001.  The Company adopted SFAS No. 144 inthe first quarter of 2002.  The Company has reported thediscontinuance of its SureBeam segment under the provisions of APBNo. 30 and the discontinuance of certain components discussedbelow in accordance with SFAS No. 144.

    During the first quarterof 2002, the Company made the decision (see Note 6) to sell certainof its commercial information technology operations within itsCayenta segment and the AverCom business within the TitanTechnologies segment in order to allow management to focus onoperations with the most near term growth opportunities.  As aresult, Cayenta’s federal government operations are beingreported in Titan Systems, and Cayenta’s remaining continuingoperations are being reported in Titan Technologies, formerlyTitan’s Emerging Technologies and Businesses segment. In accordance with SFAS No. 144, all commercial operationsthat are held for sale have been reflected as discontinuedoperations for all periods presented in Titan’s consolidatedfinancial statements.  All prior period financial informationhas been restated to reflect the new segments.

    OnJuly 11, 2002, Titan announced that it would exit its internationaltelecommunications business through a combination of selling andwinding down its operation within its Titan Wireless segment. Titan began implementing these actions immediately and expects tocomplete the majority of these actions by the end of 2002. Titan is in the process of determining the impact these actionswill have to the carrying value of the assets of these businesses,as well as exit costs associated with infrastructure reductionsincluding costs for employee terminations and excessfacilities.  Such amounts will be recorded as a non-recurringcharge in the third quarter of 2002.  Titan estimates thatthis after tax charge will not exceed $200 million.

    The FASB issued SFAS No.145, Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFASB Statement No. 13, and Technical Corrections as of April 2002,which is effective for fiscal years beginning after May 15, 2002.SFAS 145 rescinds SFAS 4 and SFAS 64, which required that all gainsand losses from extinguishment of debt be aggregated, and ifmaterial, classified as an extraordinary item. As a result, gainsand losses from debt extinguishment are to be classified asextraordinary only if they meet the criteria set forth inAccounting Principles Board Opinion No. 30, Reporting the Resultsof Operations—Reporting the Effects of Disposal of a Segmentof a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions. SFAS 145 also requires thatsale-leaseback accounting be used for capital lease modificationswith economic effects similar to sale-leaseback transactions. TheCompany does not expect implementation to have a significant effecton its results of operations, except for the reclassification ofthe losses from the current extinguishment of the Company’scredit facility.

    In July2002, the FASB issued SFAS No. 146, Accounting for RestructuringCosts.  SFAS 146 applies to costs associated with an exitactivity (including restructuring) or with a disposal of long-livedassets. Those activities can include eliminating or reducingproduct lines, terminating employees and contracts, and relocatingplant facilities or personnel. Under SFAS 146, a company willrecord a liability for a cost associated with an exit or disposalactivity when that liability is incurred and can be measured atfair value. SFAS 146 will require a company to disclose informationabout its exit and disposal activities, the related costs, andchanges in those costs in the notes to the interim and annualfinancial statements that include the period in which an exitactivity is initiated and in any subsequent period until theactivity is completed. SFAS 146 is effective prospectively for exitor disposal activities initiated after December 31, 2002, withearlier adoption encouraged. Under SFAS 146, a company may notrestate its previously issued financial statements and the newStatement grandfathers the accounting for liabilities that acompany had previously recorded under Emerging Issues Task ForceIssue 94-3.

**Note (2)Acquisitions and Investment**

    OnMarch 21, 2002, Titan completed the acquisition of GlobalNet, Inc.("GlobalNet"), a provider of international voice, data, andInternet services to further Titan’s goal of building aglobal telecommunications network.  Titan issued approximately1,452,800 shares of common stock for all the common stock ofGlobalNet at an aggregate value of $28.6 million, based on$19.67 per Titan share, the average trading price endingMarch 15, 2002, the date on which the formula forconsideration became fixed, and assumed stock options and warrantsrepresenting approximately 77,900 shares of Titan common stockat an aggregate value of $0.8 million, based on an exchange ratioof 0.3853 shares of Titan common stock for each share ofGlobalNet common stock.  GlobalNet's operations are reportedin our Titan Wireless segment from March 22, 2002.  Thetransaction was accounted for as a purchase.  The excess ofthe purchase price of $29.4 million over the estimated fairmarket value of the net liabilities acquired of approximately$21.4 million was approximately $50.8 million.  InApril 2002, the Company had an independent valuation completed byindependent valuation specialists KPMG Consulting(“KCI”) to assist management in its purchase priceallocation of the GlobalNet acquisition.  The independentvaluation supported the Company’s allocation in which thedetermination was made to allocate $50.8 million to goodwilland $0 to intangible assets.

    OnMarch 21, 2002, Titan completed the acquisition of Jaycor, Inc.("Jaycor"), a San Diego, California, based provider of informationtechnology services and specialized communications and sensorproducts to further Titan’s goal of acquiring governmentinformation technology companies which fit strategically with TitanSystems.  Titan issued approximately 4,919,500 shares of Titancommon stock for all the outstanding shares of common stock ofJaycor, based on an exchange ratio of 0.50160 shares of Titancommon stock for each share of Jaycor common stock at an aggregatevalue of $99.6 million, based on $20.24 per Titan share, theaverage trading price ending March 20, 2002, the date on which theformula for the purchase consideration became fixed.  Jaycor'soperations are reported in our Titan Systems segment from March 22,2002.  The excess of the purchase price of $99.6 million overthe estimated fair market value of the net assets acquired ofapproximately $56.8 million was approximately $42.8 million. The transaction was accounted for as a purchase.  InApril 2002, the Company had an independent valuation completedby KCI to assist management in its purchase price allocation forthe Jaycor acquisition.  The independent valuation supportedthe Company’s allocation of $38.9 million to goodwill and$3.9 million to intangible assets.  The intangible assetsconsist of backlog, customer relationships and trade name of $0.7million, $1.3 million, and $1.9 million, respectively, whichwill be amortized over the estimated useful lives of 1 year, 1 to 3years and 5 years, respectively.  The transaction valuewas increased by approximately $3.9 million to an aggregatetotal of $103.5 million to reflect an additional 173,099shares issued in July to cover certain costs of the shareholders ofJaycor, and an additional 20,948 shares issued in July and August2002 related to certain working capital adjustments.  Theadditional purchase price of $3.9 million was accounted for asan increase to goodwill resulting in a final allocation to goodwillof $46.7 million.

    OnFebruary 23, 2002, and as amended on July 3, 2002, Titan enteredinto a definitive agreement to acquire Science and EngineeringAssociates, Inc. ("SEA"), a New Mexico based privately-heldprovider of engineering and information technology services andspecialized laser, sensor, and imaging products for approximately$78.1 million in Titan common stock less a $3.9 millionholdback, which is subject to the satisfaction of certainindemnification obligations for approximately a one year periodfollowing the closing date.  In addition, a potential$3.9 million earn-out may be paid to the SEA shareholders uponthe attainment of certain operating performance targets during theperiod from July 1, 2002 through June 30, 2003.  Theexchange ratio and the number of shares of Titan stock will bedetermined based upon the average closing sale prices of Titancommon stock over the 20 consecutive trading days ending on the dayprior to the closing date.  Following regulatory approval forthe registration of the shares anticipated to be issued in themerger, a proxy will be mailed to the SEA shareholders and aspecial meeting of the SEA shareholders will take placeapproximately twenty (20) business days following the proxy mailingto vote on the merger transaction.  The special meeting hasnot yet been scheduled, but is expected to be held in the thirdquarter of 2002, and the transaction is expected to close shortlythereafter.

    OnFebruary 22, 2002, Titan completed the acquisition of InternationalSystems, LLC, which designs and builds low-cost combat systems forthe Department of Defense (DoD) and agencies of the DoD, to furtherTitan’s goal of acquiring government information technologycompanies which fit strategically with Titan Systems.  Thepurchase price, which aggregated approximately $1.8 million,was comprised of approximately 100,000 shares of Titan commonstock, subject to post-closing adjustments and indemnificationobligations.  Also, additional consideration may be paid basedon the receipt of certain potential future contract awards and theachievement of defined earnings levels on all contracts generatedby International Systems, which consideration may be satisfied withcash or Titan common stock.  In July 2002, 100,000 shares wereissued based on the receipt of certain of these contractawards.  The value of the shares will be recorded as anincrease to goodwill.  Up to an aggregate maximum of 350,000additional shares of common stock may be issued as additionalconsideration based on the receipt of future contract awards. The operations of International Systems are reported in our TitanSystems segment from February 23, 2002.  The transaction wasaccounted for as a purchase, and goodwill of $2.4 million wasrecorded.

    OnNovember 27, 2001, Titan completed the acquisition of BTG, Inc.("BTG"), a provider of information technology solutions andservices primarily to the U.S. military and other governmentagencies, for $13.35 per BTG share.  The acquisition was tofurther Titan’s goal of acquiring government informationtechnology companies which fit strategically with TitanSystems.  Titan issued approximately 4,024,100 shares of itscommon stock at an aggregate value of $99.9 million based on$24.814 per Titan share, the average trading price endingNovember 19, 2001, the date on which the formula for considerationbecame fixed, and cash of $23.4 million for all the outstandingshares of BTG common stock and assumed BTG stock optionsrepresenting approximately 734,200 shares of Titan common stock atan aggregate value of $12.2 million, based on an exchangeratio of approximately 0.5380 shares of Titan stock for each shareof BTG common stock.  Titan also paid off $37.1 million ofBTG's outstanding debt as of the closing date.  Thetransaction was accounted for as a purchase.  The excess ofthe purchase price of approximately $135.5 million over theestimated fair market value of the net liabilities acquired ofapproximately $13.6 million was approximately$149.1 million.   In connection with the determination ofthe fair value of assets acquired and pursuant to the provisions ofSFAS No. 141, the Company has valued contracts in process atcontract price, minus the estimated costs to complete and anallowance for the normal industry profit on its effort to completesuch contracts which amounted to $9.2 million.  Thisadjustment has been reflected in the consolidated balance sheet asadditional purchase price allocated to the fair value of the assetsand liabilities acquired by the Company.  The Companyrecognized approximately $0.3 million and $0.6 million inthe three and six months ended June 30, 2002, respectively, as areduction of costs, with the remaining $8.1 million to berecorded as a reduction of costs in future periods as work oncertain contracts is performed, which is estimated to continuethrough fiscal 2016.

    InFebruary 2002, an independent valuation performed by KCI wascompleted to assist management in its purchase price allocation forthe BTG acquisition.   This independent valuation supportedthe Company’s allocation of $140.4 million to goodwill,$8.2 million to intangible assets and $0.5 million deferredcompensation related to unvested options assumed.  Theintangible assets consist of backlog, customer relationships and astrategic relationship of $1.7 million, $5.5 million and$1.0 million, respectively, which will be amortized over theestimated useful lives of 1 year, 2 to 5 years and 2 years,respectively.  The consolidated balance sheet reflects thisallocation between goodwill and intangible assets.  Theamortization expense related to the intangible assets commenced inthe first quarter of 2002.

    OnSeptember 28, 2001, Titan completed the acquisition of theremaining shares of Datron Systems Incorporated ("Datron"), aprovider of radio and satellite-based communication systems andbroadband communication products for government and commercialmarkets, that were acquired through a stock for stock exchangetender offer that closed in August 2001.  The acquisition wasto further Titan’s goal of acquiring government informationtechnology companies which fit strategically with TitanSystems.  Titan issued approximately 2.3 million shares of itscommon stock for all the outstanding shares of Datron common stockat an aggregate value of $44.9 million, based on $19.544 per Titanshare, the average trading price ending July 27, 2001, the date onwhich the formula for consideration became fixed, and assumedDatron stock options representing approximately 437,000 shares ofTitan common stock at an aggregate value of $4.0 million, based onan exchange ratio of approximately .81919 shares of Titan commonstock for each share of Datron common stock.  The transactionwas accounted for as a purchase.  The excess of the purchaseprice of approximately $48.9 million over the estimated fair marketvalue of the net assets acquired of approximately $15.9 million wasapproximately $33 million.  In connection with thedetermination of fair value of assets acquired and pursuant to theprovisions of SFAS No. 141, the Company has valued contractsin process at contract price, minus the estimated costs to completeand an allowance for the normal industry profit on its effort tocomplete such contracts, which amounted to $1.4 million. This adjustment has been reflected in the accompanying consolidatedbalance sheet as additional purchase price allocated to the fairvalue of the assets and liabilities acquired by the Company. The Company recognized approximately $0.1 million and$0.4 million in the three and six months ended June 30, 2002,respectively, as a reduction of costs, with the remaining$0.2 million to be recorded as a reduction of costs in futureperiods as work on certain contracts is performed, which isestimated to continue through fiscal 2002.

    InFebruary 2002, an independent valuation performed by KCI wascompleted to assist management in its purchase price allocation forthe Datron acquisition.  This independent valuation supportedthe Company’s allocation of $27.4 million to goodwill and$5.6 million to intangible assets.  The intangible assetsconsist of backlog, customer relationships and trademarks andpatents of $1.0 million, $3.2 million and $1.4 million,respectively, which will be amortized over the estimated usefullives of 1 to 2 years, 10 years and 5 years,respectively.  The consolidated balance sheet reflects thisallocation between goodwill and intangible assets.  Theamortization expense related to the intangible assets commenced inthe first quarter of 2002.

    Following is unauditedcondensed balance sheet information for GlobalNet, Jaycor, Datronand BTG at the date of their respective acquisition (amounts inmillions):

** **

**GlobalNet**

**Jaycor**

**Datron**

**BTG**

** **
****************
Cash

$

0.1

$

35.6

$

3.7

$

1.2

Accountsreceivable

4.8

16.6

12.0

63.8

Other currentassets

0.6

12.5

12.5

1.9

Property, plant andequipment

9.5

3.9

8.3

4.0

Non-currentassets

1.2

1.1

3.0

3.4
********
Total assets

16.2

69.7

39.5

74.3

 Accounts payable

4.8

8.9

2.0

11.5

Currentliabilities

23.0

3.7

18.1

74.1

Non-currentliabilities

9.8

0.3

3.5

2.3
********
Totalliabilities

37.6

12.9

23.6

87.9

  Net assets (liabilities)

$

(21.4

)

$

56.8

$

15.9

$

(13.6

)

    OnJune 28, 2000, Titan Wireless Africa, a wholly ownedsubsidiary of Titan Wireless, made an investment in Ivoire TelecomS.A. Holding (Ivoire Telecom), acquiring an 80% interest in IvoireTelecom and through such interest acquired a majority equityinterest in each of the principal subsidiaries owned by IvoireTelecom.  The initial investment consisted of$5.0 million in cash subject to certain indemnificationobligations, and an initial $5.5 million working capital note,which was funded shortly after the initial investment, which wererecorded as Other Assets in the Company's consolidated balancesheet.  In addition, Titan committed to provide up to amaximum of $35.0 million for capital expenditures and otherexpenditures necessary to build out the Ivoire Telecom network, andTitan has provided equipment with an approximate aggregate value of$4.5 million.  This commitment had been substantially fundedfor such expenditures as of the end of 2001.  Our aggregateinvestment in Ivoire Telecom of approximately $50 million isreflected in Other Assets in the Company's consolidated balancesheet at December 31, 2001 and June 30, 2002, and has beenreported on the cost method as a result of the Company’sinability to exercise control and significant influence over IvoireTelecom or to receive any reliable or timely financial informationfrom Ivoire Telecom.  Titan has not consolidated theoperations of Ivoire Telecom for a number of reasons, including theCompany’s inability to obtain accurate and reliable financialinformation, the Company’s inability to exercise anyinfluence on the operations of the company due to strong oppositionfrom the CEO located in Africa, and the Company’s inabilityto obtain representation on the board of directors of each ofIvoire Telecom’s 14 principal subsidiaries.  Titanengaged a global independent public accounting firm to audit thefinancial statements of Ivoire Telecom for the year ended December31, 2001.  The independent public accounting firm has beenunable to complete its audit procedures due to significant openmatters.  Further, the independent public accounting firm hasreported that there are weaknesses in internal controls, accountingpolicies and procedures, and limited management informationsystems, posing difficulties in the financial reporting andconsolidation of Ivoire Telecom.  Based upon the informationavailable to management, the Company believes Ivoire Telecomcontinues to incur losses and negative cash flows consistent withits original expectations at the time of investment in thisstart-up enterprise.  To the extent Ivoire Telecom requiresadditional cash in the future to fund operations, Titan has noobligation nor commitment to fund such cash flow needs.  Titanregularly reviews its investment in Ivoire Telecom for impairmentand believes that as of June 30, 2002 the fair value of thisinvestment exceeds it costs.

    InJune 2000, e-tenna Corporation was formed to facilitate thetransfer of an antenna technology originally designed forgovernment and military customers to the commercial wirelessmarket.  Titan's initial investment of approximately $0.6million in e-tenna in 2000 consisted of its contribution of certainintellectual property and patents.  As of December 31, 2001,Archery Capital and other investors invested a total of $9.9million for common and voting preferred stock, and Titan invested$5.8 million in non-voting preferred stock and $0.4 million incommon stock.  During the first quarter of 2002, Titan paid$1.9 million in satisfaction of its commitment to acquireadditional non-voting preferred stock.  As of June 30, 2002,Titan's investment of approximately $7.6 million is included in theaccompanying consolidated balance sheet in Other Assets, and isreflected under the cost method.  During the first quarter andmost of the second quarter of 2002, Titan's investment in e-tennaapproximated 58.7% of the total equity of e-tenna and approximately29.1% of the voting power of e-tenna.  For a temporary periodof time, the Company’s voting power of e-tenna rose above20%.  For that period, the relevant amounts of gains or losseswere included in the determination of net income and reflectedagainst the carrying value of Titan’s investment ine-tenna.  As of June 30, 2002, the Company’s votinginterest of e-tenna is 12%.

    Unaudited pro forma datagiving effect to the purchase of Jaycor, GlobalNet, BTG and Datronas if they had been acquired at the beginning of 2001 are shownbelow.  Pro forma information related to the Maxwell orInternational Systems acquisitions are not included, because theeffects are not significant.

 

 

**Three months ended June 30,****2001**

 

**Six months ended June 30,**

 

 

 

 

**2002**

 

**2001**

 

Revenues

 

$

374,814

$

799,410

$

729,258

            

Income (loss) fromcontinuing operations before extraordinary     loss and cumulative effect of change inaccounting principle

 

 

(4,364

)

 

(679

)

(16,491

)

Net income(loss)

 

(14,790

)

(58,273

)

(78,795

)

            

Basic earnings (loss) pershare:

 

 

  

 

 

 

 

 

    Income (loss) fromcontinuing operations before         extraordinary lossand cumulative effect of change in         accountingprinciple

 

$

(0.09

)

$

(0.01

)

$

(0.38

)

    Net income (loss)

 

(0.29

)

(0.63

)

(1.66

)

            

Diluted earnings (loss)per share:

 

 

 

 

 

 

 

    Income (loss) fromcontinuing operations before         extraordinary lossand cumulative effect of change in         accountingprinciple

 

$

(0.09

)

$

(0.01

)

$

(0.38

)

    Net income (loss)

 

(0.29

)

(0.65

)

(1.66

)

    During the six monthsended June 30, 2002, approximately $2.0 million was paid insatisfaction of purchase price holdbacks for the SenCom Corporationacquisition made in 2000, and $3.75 million was paid for theSakon investment.  In July 2002, approximately$3.75 million was paid in satisfaction of the remainingamounts due for Titan’s Sakon investment.  Each of theseamounts had been recorded as liabilities in periods prior toJanuary 1, 2002.

**Note (3)Acquisition and Integration Related Charges andOther**

    There have been noacquisition and integration related charges and other in2002.

    The $28.4 millionacquisition and integration charges in the first six months of 2001include costs of $12.4 million primarily related to theintegration of ACS and AverStar, and a realignment of the businessto better align the major categories of customers of TitanSystems.  These actions together resulted in a reduction inemployee workforce of approximately 50 employees and the closing ofseveral facilities.  Included in these costs is approximately$3.3 million of employee termination and retention costs,$3.5 million of costs to eliminate duplicate and excessfacilities and assets, $1.1 million of duplicate personnelcosts to transition processes and functions, and $1.5 millionof asset impairment costs of certain asset balances.  Therecoverability of such balances was impaired due to our exit from asatellite services business within the Titan Systems segment. Approximately $3.0 million of the charge was related to anothersubsidiary acquired in a prior year for contingencies arising frommatters pre-existing to Titan's acquisition of the business. That acquisition was accounted for as a purchase, and those matterswere resolved in 2001.

    Also included in theacquisition and integration related charges for the six months of2001 is a charge of $15.5 million related to the restructuringof Cayenta’s headquarters office.  As a result ofreduced corporate spending on commercial information technologyservices and e-business software applications, the Companydeveloped and approved a plan to restructure the Cayentaheadquarters and network operations center, which included areduction in workforce of approximately 40 personnel,resulting in a charge of $1.7 million, and the elimination ofduplicate and excess facilities, resulting in a charge ofapproximately $0.8 million.  As a result of management'sevaluation of the recoverability of all the assets of Cayenta, inaccordance with Statement of Financial Accounting Standards No.121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of", management concluded fromthis evaluation that the estimated fair value of intangible as wellas long-lived assets was less than the carrying value of theassets.  The resulting impairment charge of $13.0 millionwas comprised of the following: $5.5 million for fixed assetsassociated with Cayenta's network operations center, $2.0 millionfor prepaid advertising costs, $5.3 million for Cayenta'sinvestment in Soliance, LLC, a joint venture that markets anddelivers information technology systems and solutions to theutility industry, and $0.2 million for certain otherassets.

    Also included in theacquisition and integration related charges and other in the sixmonths ended June 30, 2001 is a charge of $0.5 million inthe Titan Wireless segment for employee termination costs relatedto certain organizational changes within that businessunit.

    Asof June 30, 2002, approximately $1.2 million wasremaining to be paid primarily related to excess facilities whichare expected to be paid during 2002.

**Note (4) ExitCharges and Other**

    Included in the quarterand six months ended June 30, 2002 are $1.8 million and$3.3 million, respectively, of exit charges related to theshutdown of Cayenta’s headquarters office and networkoperations center, which included employee termination costs andlease commitment costs.

**Note (5) Adoptionof SFAS No. 142, “Goodwill and Other IntangibleAssets”**

    Effective January 1,2002, the Company adopted SFAS No. 142, "Goodwill and OtherIntangible Assets," which establishes financial accounting andreporting for acquired goodwill and other intangible assetsandsupersedesAccounting Principles Board Opinion No. 17, "IntangibleAssets".  Under SFAS No. 142, goodwill andindefinite-lived intangible assets are no longer amortized but arereviewed at least annually for impairment.  Separableintangible assets that have finite useful lives will continue to beamortized over their useful lives.

    SFAS No. 142 requiresthat goodwill be tested for impairment at the reporting unit levelat adoption and at least annually thereafter, utilizing a two stepmethodology.  The initial step requires the Company to assesswhether indications of impairment exist.  If indications ofimpairment are determined to exist, the second step of measuringimpairment is performed, wherein the fair value of the relevantreporting unit is compared to the carrying value, includinggoodwill, of such unit.  If the fair value exceeds thecarrying value, no impairment loss is recognized. However,if thecarrying value of thereporting unit exceeds its fair value, thegoodwill of the reporting unit isimpaired. 

    Inconnection with adopting this standard as ofJanuary 1, 2002, during the first quarter the Company’sindependent valuation consultant, KCI, completed step one of thetest for impairment, which indicated that the carrying values ofcertain reporting units exceeded their estimated fair values, asdetermined utilizing various evaluation techniques includingdiscounted cash flow and comparative market analysis. Thereafter, given the indication of a potential impairment, KCI hassubstantially completed step two of the test.  Based on thatanalysis, a transitional impairment loss of $40.1 million, whichwas net of a $10.0 million tax benefit, or $0.57 basicearnings per share and $0.55 diluted earnings per share, wasrecognized in the first quarter of 2002 as the cumulative effect ofan accounting change.  The impairment charge resulted from achange in the criteria for themeasurement of the impairment loss fromanundiscounted cash flow method, as required bySFAS No. 121, "Accounting for theImpairment of Long-Lived Assets andfor Long-Lived Assets to be Disposed Of," toa discounted cashflow method and comparative market analysis as required by SFAS No.142.  The gross$50.1 million impairment charge recorded in the first quarter of2002 was comprised of approximately $27.5 million in certaincomponents of our Cayenta business, approximately $14.9 million inour AverCom business, which was reported in our Titan Technologiessegment (previously our Emerging Technologies and Businessessegment), both attributable to lower valuations and weakenedoutlook in commercial IT services, and approximately $7.7 millionin our Titan Wireless business.  Approximately $34.0 millionof this charge, net of tax, pertained to businesses that werediscontinued by the Company on March 1, 2002.

    The adjustment ofpreviously reported net income (loss) and earnings (loss) per sharebelow represents the recorded amortization of goodwill and otherpurchased intangibles.  The impact on net income (loss), andbasic and diluted net earnings (loss) per share for the three andsix months ended June 30, 2002 and 2001 is set forthbelow:

Reconciliation of NetIncome (Loss) and Earnings (Loss) Per Share:

 

 

**Threemonths ended June 30,**

 

**Sixmonths ended June 30,**

 

 

 

**2002**

 

**2001**

 

**2002**

 

**2001**

 

Income (loss) fromcontinuing operations before extraordinary loss andcumulative     effect of change in accountingprinciple

$

4,778

$

2,621

$

11,341

$

(12,085

)

Add back amortization ofgoodwill, net of tax

—

2,113

—

5,867

Adjusted income (loss)from continuing operations before extraordinary lossand     cumulative effect of change in accountingprinciple

4,778

4,734

11,341

(6,218

)

Loss from discontinuedoperations, net of tax benefit

(11,137

)

(10,426

)

(11,213

)

(55,590

)

    Add back amortization ofgoodwill, net of tax

—

2,857

—

6,738

Adjusted loss fromdiscontinued operations

(11,137

)

(7,569

)

(11,213

)

(48,852

)

Extraordinary loss fromearly extinguishment of debt, net of taxes

(5,408

)

—

(5,408

)

—

Cumulative effect ofchange in accounting principle

—

—

(40,111

)

—

Net loss

(11,767

)

(2,834

)

(45,391

)

(55,070

)

Dividend requirements onpreferred stock

(173

)

(173

)

(345

)

(345

)

Net loss applicable tocommon stock

$

(11,940

)

$

(3,007

)

$

(45,736

)

$

(55,415

)

Basic earnings (loss) pershare:

Income (loss) fromcontinuing operations beforeextraordinary lossandcumulative     effect of change in accountingprinciple

$

0.06

$

0.04

$

0.14

$

(0.30

)

    Add back amortization ofgoodwill, net of tax

—

0.04

—

0.11

Adjusted income (loss)from continuing operations before extraordinary lossand     cumulative effect of change in accountingprinciple

$

0.06

$

0.08

$

0.14

$

(0.19

)

Loss from discontinuedoperations, net of tax benefit

$

(0.14

)

$

(0.20

)

$

(0.15

)

$

(1.11

)

    Add back amortization ofgoodwill, net of tax

—

0.05

—

0.13

Adjusted loss fromdiscontinued operations

$

(0.14

)

$

(0.15

)

$

(0.15

)

$

(0.98

)

Extraordinary loss fromearly extinguishment of debt, net of taxes

(0.07

)

—

(0.07

)

—

Cumulative effect ofchange in accounting principle, net of taxes

$

—

$

—

$

(0.54

)

$

—

    Net loss

$

(0.15

)

$

(0.07

)

$

(0.62

)

$

(1.17

)

    Weighted average shares

77,119

53,663

73,981

53,521

Diluted earnings (loss)per share:

Income (loss) fromcontinuing operations before extraordinary loss andcumulative     effect of change in accountingprinciple

$

0.05

$

0.04

$

0.11

$

(0.30

)

    Add back amortization of goodwill, net of tax

—

0.04

—

0.11

Adjusted income (loss)from continuing operations before extraordinary loss and     cumulative effect of change in accountingprinciple

$

0.05

$

0.08

$

0.11

$

(0.19

)

Loss from discontinuedoperations, net of tax benefit

$

(0.14

)

$

(0.20

)

$

(0.15

)

$

(1.11

)

    Add back amortization of goodwill, net of tax

—

0.05

—

0.13

    Adjusted loss from discontinued operations

$

(0.14

)

$

(0.15

$

(0.15

)

$

(0.98

)

Extraordinary loss fromearly extinguishment of debt, net of taxes

(0.07

)

—

(0.07

)

—

Cumulative effect ofchange in accounting principle, net of taxes

$

—

$

—

$

(0.53

)

$

—

    Net loss

$

(0.16

)

$

(0.07

)

$

(0.64

)

$

(1.17

)

    Weighted average shares

78,528

53,663

75,476

53,521
****
****

**Note (6)Discontinued Operations**

*2002 DiscontinuedOperations*

    OnMarch 1, 2002, the Company made the decision to sell certain of itscommercial information technology operations within its Cayentasegment and the AverCom business within the Titan Technologiessegment in order to allow management to focus on operations withthe most near term growth opportunities.  As a result,Cayenta’s federal government operations have become a part ofTitan Systems, and Cayenta’s remaining continuing operationsare being reported in Titan Technologies, formerly Titan’sEmerging Technologies and Businesses segment.  In accordancewith Statement of Financial Accounting Standard No. 144,“Accounting for the Impairment or Disposal of Long-livedAssets and for Long-Lived Assets to be Disposed of,” allcommercial operations that are held for sale have been reflected asdiscontinued operations for all periods presented in Titan’sconsolidated financial statements.  All prior period financialinformation has been restated to reflect the discontinuedoperations and the new segments.

    Revenues and net lossgenerated by Cayenta’s discontinued operations and AverCom in2002 and 2001 were as follows:

 

 

**Threemonths ended June 30,**

 

**Sixmonths ended June 30,**

 

 

 

**2002**

 

**2001**

 

**2002**

 

**2001**

 

Revenues

 

$

5,930

 

$

13,687

$

13,282

$

29,012

Net loss

 

 

(1,224

)

 

(2,765

)

 

(1,300

)

(13,453

)

    Included inCayenta’s net loss for the three and six months endedJune 30, 2001 are charges of $5.0 million related to therestructuring of Cayenta (which was included in our SoftwareSystems segment), consisting primarily of a write-off of$1.3 million of capitalized software designed for B2Bexchanges, a write-off of $2.0 million of accounts receivableand employee termination and lease termination costs ofapproximately $1.7 million.

    Employee terminationcosts of $0.8 million were recorded in the six months endedJune 30, 2001 related to a reduction in workforce in AverComresulting from the same economic conditions which impacted demandfor corporate information technology services atCayenta.

    InJuly 2002, the two information technology businesses of Cayentawere sold for approximately $3.5 million consideration, in theform of a promissory note, with $1.0 million due a year fromthe date of sale and the remaining balance due in eight equalquarterly installments with the final payments due within 3 yearsfrom the sale date.  The sales price closely approximates theremaining book value of these businesses.  In addition, amaximum potential earn-out is available for approximately$7.5 million based on certain future EBITDAtargets.

    The Company is currentlyin the process of selling its AverCom business.  Based uponthe outcome of this process, once the Company has obtained areasonable determination of fair value, it will determine if thereis an impairment in value.  Management anticipates that itwill have a reasonable determination of fair value during the thirdquarter of 2002, based upon this process.

*2001 DiscontinuedOperations*

    OnMarch 16, 2001, SureBeam Corporation, Titan's subsidiary thatprovides electronic food irradiation systems and services,completed its initial public offering ("IPO").  OnOctober 16, 2001, Titan adopted a definitive plan to spin offSureBeam in the form of a tax-free dividend to Titan stockholderswithin 12 months from that date.  The plan involvesfiling a letter ruling request with the Internal Revenue Serviceseeking approval of the tax-free distribution.  Titan receiveda favorable ruling in May 2002 and the SureBeam stock wasdistributed to Titan stockholders on August 5, 2002. Titan has historically reported the SureBeam business as a separatesegment.  In accordance with Accounting Principles BoardOpinion No. 30, "Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment ofa Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions," the consolidated financial statements ofTitan for all periods presented have been restated to reflectSureBeam as a discontinued business.

    Revenues and net lossgenerated by SureBeam in 2002 and 2001 were asfollows: 

 

 

**Threemonths ended June 30,**

 

**Sixmonths ended June 30,**

 

 

 

**2002**

 

**2001**

 

**2002**

 

**2001**

 

Revenues

 

$

2,841

 

$

8,616

$

5,355

$

14,092

Net loss

 

(19,846

)

 

(7,661

)

 

(30,375

)

(42,137

)

    Atthe time the Company adopted the plan to spin-off SureBeam, inaccordance with APB No. 30, the Company recorded a charge of $35.4million for estimated costs of disposal and for estimated operatinglosses up to the date of disposal.  This charge was recordedin the quarter ended September 30, 2001.  All lossesincurred by SureBeam since that time have been charged against thisaccrual.  Losses charged against the accrual in 2002 were$9.9 million and $20.5 million in the three and sixmonths ended June 30, 2002, respectively.  The remainingbalance of the accrual was utilized in full during the quarterended June 30, 2002 and an additional charge of $11.0 millionwas taken during the second quarter of 2002 to record the netlosses (in excess of the accrual) incurred by SureBeam during thesecond quarter of 2002 as well as estimated operating losses andspin-off expenses expected to be incurred through the spin-off dateof August 5, 2002.  Subsequent to that date, SureBeam will nolonger be included in Titan’s results of operations. Management will continue to assess the estimated disposal costs andlosses, and may from time to time adjust the allowance for suchcosts accordingly.

*2000 DiscontinuedOperations*

    InNovember 2000, the Company's Board of Directors adopted a planto dispose of the Company's commercial information assurance andnetwork monitoring businesses.  Accordingly, the results ofthese businesses have been accounted for as discontinued operationsin 2001.  In addition, the accompanying consolidated financialstatements reflect operations discontinued by Titan in 2000. All periods presented reflect the commercial information assuranceand network monitoring businesses as discontinued operations. Management continues to assess the estimated wind-down and/ordisposal costs associated with the businesses, and may from time totime adjust the allowance for such costs accordingly.

    Following is a table ofall related balance sheet categories for each discontinuedoperation:

 

 

**Asof June 30, 2002**

 

**Asof December 31, 2001**

 

Current assets ofdiscontinued operations:

 

 

 

    SureBeam

 

$

44,421

$

44,940

    Commercial informationtechnologies

 

17,599

 

21,209

 

    Other

 

 

—

1,692

$

62,020

$

67,841

 

 

 

Non-current assets ofdiscontinued operations:

 

 

 

    SureBeam

 

$

70,821

$

65,704

    Commercial informationtechnologies

 

7,659

 

49,902

 

    Other

 

—

 

—

 

$

78,480

$

115,606

 

 

 

Current liabilities ofdiscontinued operations:

 

 

 

    SureBeam

 

$ 

17,383

$

33,470

    Commercial informationtechnologies

 

5,651

 

8,952

 

    Other

439

—

$

23,473

$

42,422

 

 

 

Non-current liabilities ofdiscontinued operations:

 

 

 

    SureBeam

 

$

—

$

7,608

    Commercial informationtechnologies

 

86

 

562

 

    Other

 

—

 

—

 

$

86

$

8,170

 

 

 

**Note (7)Debt**

    OnMay 23, 2002, the Company entered into an agreement with WachoviaBank, National Association and Wachovia Securities for a $485million credit facility from a syndicate of commercial banksincluding Wachovia Securities acting as Sole Lead Arranger andWachovia Bank, National Association, as Administrative Agent, TheBank of Nova Scotia and Comerica Bank as Co-Syndication Agents andBranch Banking Trust Company and Toronto Dominion Bank asCo-Documentation Agents and other financial institutions.  Theproceeds of the loan were used to repay outstanding indebtedness onthe Company’s $425 million credit facility arranged byCredit Suisse First Boston in February 2000.  The seniorsecured credit facility is secured by substantially all of our andour subsidiaries’ assets (other than the assets of SureBeam,LinCom Wireless, Sakon and our foreign operations) and guaranteedby substantially all of our subsidiaries (except for SureBeam,LinCom Wireless, Sakon and our foreign subsidiaries).  The$485 million facility is comprised of a seven-year term loanin an aggregate principal amount of $350 million and asix-year $135 million revolving credit facility.  Loansmade under the term loan amortize at 1.0% per year for years onethrough six, with the remaining 94% due in four equal quarterlypayments in year seven of the agreement.  Under the term loanand the revolving facility, the Company has the option to borrow atthe bank’s rate or at adjusted LIBOR plus, in each case, anapplicable margin based on our total debt to EBITDA ratio (earningsbefore interest and taxes and depreciation and amortization). The agreement contains financial covenants, which were comprised ofthe following at June 30, 2002:  a maximum debt to EBITDA (asdefined) limit of 3.50 to 1, a minimum interest coverage ratio of2.75 to 1, a minimum fixed charge ratio of 1.20 to 1 and aminimum net worth (as defined) of $445 million.  AtJune 30, 2002, the Company was in compliance with allfinancial covenants.  No funds were drawn initially on therevolver, which will be available to the Company for generalcorporate needs, including strategic acquisitions. Additionally, the new facility excludes Titan’s ownership ofSureBeam stock as collateral, which enabled Titan to spin-offSureBeam in accordance with Titan’s plans to doso.

    Related to Titan'sextinguishment of its prior credit facility of $425 million withCredit Suisse First Boston, all deferred financing costs related tothat agreement were written off during the quarter ended June 30,2002, resulting in an extraordinary loss in the amount of $5.4million including the effects of a tax benefit of$3.9 million, which has been reflected as an extraordinaryitem in the accompanying consolidated statements ofoperations.

    AtJune 30, 2002, total borrowings outstanding under the Company'sprimary credit facility were $350 million at a weightedaverage interest rate of 4.84%.  Commitments under letters ofcredit were $9.7 million at June 30, 2002, $8.7 millionof which reduce availability of the working capital line.  Ofthe total borrowings, $3.5 million was short-term.  AtJune 30, 2002, the Company was in compliance with allfinancial covenants under its various debt agreements.

**Note (8) OtherFinancial Information**

     The Company hashistorically reported SureBeam as a separate operatingsegment.  On October 16, 2001, the Company adopted adefinitive plan to spin off SureBeam in the form of a tax-freedividend to Titan stockholders.  In accordance with AccountingPrinciples Board Opinion No. 30, "Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment ofa Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions," all current and prior year data have beenrestated to reflect SureBeam as a discontinued business, and it isno longer reported as a separate segment.

    OnMarch 1, 2002, the Company adopted a plan to eliminate and hold forsale certain of its commercial information technology operationswithin Cayenta and Titan Technologies in order to allow managementto focus on operations with the most near term growthopportunities.  As a result, Cayenta’s federalgovernment operations are now reported as a part of Titan Systems,and Cayenta’s remaining operations are being reported inTitan Technologies, which was formerly named Emerging Technologiesand Businesses.  In accordance with Statement of FinancialAccounting Standards No. 144, all current and prior year data havebeen restated to reflect the operations of Cayenta which have beeneliminated and held for sale as discontinued operations, and thesegment of Cayenta (Software Systems) is no longer reported as aseparate segment.  Further, all prior period data have beenrestated to reflect the change in Titan’s segment reportingfor the components previously reported as Cayenta that will becontinued in Titan Systems and Titan Technologies.

    The following tablessummarize revenues and operating profit (loss) by operating segmentfor the three and six month periods ended June 30, 2002 and2001.  All segment operating profit and loss data reported onan historical basis and for the current year have been reportedbefore Corporate overhead costs.

 

 

**Threemonths ended June 30,**

 

**Sixmonths ended June 30,**

 

 

 

**2002**

 

**2001**

 

**2002**

 

**2001**

 

Revenues

 

    Titan Systems

$

334,952

 

$

224,388

$

639,804

$

435,931

    Titan Wireless

48,730

23,002

69,552

44,016

    TitanTechnologies

16,255

10,274

31,126

17,029

$

399,937

 

$

257,664

$

740,482

$

496,976

Operating Profit(Loss):

    Titan Systems

$

27,396

 

$

18,748

$

51,464

$

23,438

    Titan Wireless

(4,186

)

1,402

(5,083

)

1,328

    TitanTechnologies

129

1,757

2,758

1,198

    Cayenta headquarterscosts

—

(2,915

)

—

(20,022

)

    Exit charges andother

(1,833

)

—

(3,319

)

—

Segment operating profitbefore Corporate

21,506

18,992

45,820

5,942

Corporate

(5,372

)

(4,503

)

(10,037

)

(9,008

)

$

16,134

 

$

14,489

$

35,783

$

(3,066

)

    The operating income ofthe Titan Systems segment for the three and six month periods endedJune 30, 2001 includes a planned $0.2 million and$12.2 million, respectively, restructuring charge relatedprimarily to the integration of ACS and AverStar, acquired in 2000,and a realignment of business around its major categories ofcustomers, which together resulted in personnel reductions and theclosing of certain facilities (see Note 3).  Also in theTitan Systems segment, deferred profit of $2.0 million and$1.1 million related to acquisitions in 2001, 2000 and 1999was recognized in the three months ended June 30, 2002 and 2001,respectively, and $1.0 million and $1.8 million wasrecognized related to the same acquisitions in the six months endedJune 30, 2002 and 2001, respectively.

    Operating income in theTitan Wireless segment in the three and six month periods endedJune 30, 2001, includes restructuring charges of $0.5 million,as discussed in Note 3.

    Included in theacquisition and integration related charges is a charge of$15.5 million related to the restructuring of Cayenta’sheadquarters office.  As a result of reduced corporatespending on commercial information technology services ande-business software applications, the Company developed andapproved a plan to restructure the Cayenta headquarters and networkoperations center, which included a reduction in workforce ofapproximately 40 personnel, resulting in a charge of$1.7 million, and the elimination of duplicate and excessfacilities, resulting in a charge of approximately$0.8 million.  As a result of management's evaluation ofthe recoverability of all the assets of Cayenta, in accordance withStatement of Financial Accounting Standards No. 121, "Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of", management concluded from this evaluation thata significant impairment of intangible as well as long-lived assetshad occurred.  An impairment charge was required because theestimated fair value was less than the carrying value of theassets.  The impairment charge of $13.0 million wascomprised of the following: $5.5 million for fixed assetsassociated with Cayenta's network operations center, $2.0 millionfor prepaid advertising costs, $5.3 million for Cayenta'sinvestment in Soliance, LLC, a joint venture that markets anddelivers information technology systems and solutions to theutility industry, and $0.2 million for certain otherassets.

    The Company's onlyelement of other comprehensive income resulted from foreigncurrency translation adjustments in all periods reported, which isreflected in the Consolidated Statements of Stockholders'Equity.

    The following datasummarize information relating to the per share computations forincome (loss) before extraordinary item:

 

 

**Threemonths ended June 30, 2002**

 

**Threemonths ended June 30, 2001**

 

 

 

**Loss (Numerator)**

 

**Shares (000's) (Denominator)**

 

**Per Share Amounts**

 

**Income (Loss) (Numerator)**

 

**Shares (000's) (Denominator)**

 

**Per Share Amounts**

 

Income (loss) fromcontinuing     operations before extraordinary     loss and cumulative effect of     change in accounting principle

 

$

4,778

 

 

 

 

 

$

2,367

 

 

 

 

 

Less preferred stockdividends

 

 

(173

)

 

 

 

 

 

 

(173

)

 

 

 

 

 

Effect of minorityinterests

 

 

93

 

 

 

 

 

 

51

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income fromcontinuing         operations beforeextraordinary         loss andcumulative effect of         change inaccounting principle         available tocommon stockholders

 

 

4,698

77,119

 

$

0.06

$

2,245

53,663

 

$

0.04

Effect of minorityinterests

 

 

(628

)

—

 

 

(0.01

)

 

—

 

—

 

 

—

 

Effect of dilutivesecurities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Stock options andwarrants

 

 

—

1,409

 

 

—

 

—

 

2,167

 

 

—

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income from continuingoperations         beforeextraordinary loss and         cumulative effectof change in         accountingprinciple available to         commonstockholders

 

$

4,070

78,528

 

$

0.05

$

2,245

55,830

 

$

0.04

 

 

 

 

 

  

 

 

 

 

 

 

 

 

**Sixmonths ended June 30, 2002**

 

**Sixmonths ended June 30, 2001**

 

 

 

**Loss (Numerator)**

 

**Shares (000's) (Denominator)**

 

**Per Share Amounts**

 

**Loss (Numerator)**

 

**Shares (000's) (Denominator)**

 

**Per Share Amounts**

 

Income (loss) fromcontinuing     operations before extraordinary loss     and cumulative effect of change in     accounting principle

 

$

11,341

 

 

 

 

 

$

(16,744

)

 

 

 

 

 

Less preferred stockdividends

 

 

(345

)

 

 

 

 

 

 

(345

)

 

 

 

 

 

Effect of minorityinterests

 

 

(24

)

 

 

 

 

 

 

1,124

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income (loss) fromcontinuing         operationsextraordinary loss and         cumulative effectof change in         accountingprinciple available to         commonstockholders

 

 

10,972

73,981

 

$

0.14

$ 

(15,965

)

53,521

 

$

(0.30

)

Effect of minorityinterests

 

 

(2,366

)

—

 

 

(0.03

)

 

—

 

—

 

 

—

 

Effect of dilutivesecurities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Stock options andwarrants

 

 

—

1,495

 

 

 

—

 

—

 

 

—

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Income (loss) fromcontinuing         operations beforeextraordinary loss         and cumulativeeffect of change in         accountingprinciple available to         commonstockholders

 

$

8,606

75,476

 

$

0.11

$

(15,965

)

53,521

 

$

(0.30

)

 

 

 

 

 

  

 

 

 

 

 

 

    The effect of theminority interests primarily represents the dilutive effect ofoutstanding stock options of Titan’s subsidiaries, notablyTitan Systems.

    Inthe three months ended June 30, 2002, options and warrants topurchase approximately 1,214,800 shares of common stock atprices ranging from $21.35 to $40.00 per share were not included inthe computation of diluted EPS, as the effect would have beenanti-dilutive due to the exercise price.  Similarly, optionsto purchase approximately 1,361,400 shares of common stock atprices ranging from $20.04 to $47.50 per share, were notincluded in the computation of diluted EPS for the three monthperiod ended June 30, 2001.

    Inthe six months ended June 30, 2002, options and warrants topurchase approximately 1,224,300 shares of common stock atprices ranging from $20.94 to $40.00 per share were notincluded in the computation of diluted EPS, as the effect wouldhave been anti-dilutive due to the exercise price.  Options topurchase approximately 3,595,000 shares of common stock atprices ranging from $1.12 to $47.50 per share were notincluded in the computation of diluted EPS for the six month periodended June 30, 2001, due to the loss from continuingoperations and/or the exercise price.

    Approximately 5,038,000shares in 2002 and 2001 from the potential conversion ofremarketable term income deferrable equity securities were notincluded in the computations as their effect wasanti-dilutive.  Approximately 460,000 shares of common stockin 2002 and 2001 that could result from the conversion ofcumulative convertible preferred stock were not included in thecomputations of diluted EPS, as the effect would have beenanti-dilutive.

    Following are detailsconcerning certain balance sheet data:

 

 

**June30, 2002**

 

**December 31, 2001**

Inventories:

 

 

 

 

 

 

    Materials

 

$

17,528

 

$

15,720

    Work-in-process

 

 

12,101

 

 

9,466

    Finished goods

 

 

3,381

 

 

3,926

 

 

$

33,010

 

$

29,112

    Supplemental disclosureof cash flow information:

** **

** **

**Sixmonths ended June 30,******

** **

** **

**2002**

** **

**2001**

Noncash investing andfinancing activities:

 

 

 

 

 

 

    Issuance of stock foracquisitions

 

$

134,611

 

$

—

    Extraordinary loss onearly extinguishment of debt

 

5,408

 

—

    Gain related to issuanceof stock in subsidiary

 

—

 

52,025

    Notes receivable inconnection with sale of buildings

 

 

5,417

 

 

—

    Shares contributed toemployee benefit plans

 

 

3,605

 

 

324

    Write-off of deferredcompensation related to discontinued         operations

 

 

629

 

 

—

    Deferred compensationrelated to the issuance of stock         options

 

 

133

 

 

—

Cash paid forinterest

 

$

19,242

 

$

19,150

Cash paid for (providedby) income tax

 

 

1,128

 

1,335

**Note (9)Commitments and Contingencies**

    OnJanuary 6, 2000, Ion Beam Applications s.a., a Belgian corporation,and some of its U.S. subsidiaries ("IBA") filed an action fordeclaratory judgment in a federal court in Virginia against Titanand the SureBeam Corporation ("SureBeam") relating to SureBeam'spatents for SureBeam systems.  The action attacked thevalidity of SureBeam's core patent, sought a declaration that IBAand its customers had not infringed any of the 62 claims inSureBeam's patent, and alleged that Titan and SureBeam engaged inunfair competition and that Titan and SureBeam's conductconstituted patent misuse.  The case was moved to the federalcourt in San Diego.  On November 22, 2000, IBA filed anamended complaint alleging, in addition to the original claims,that Titan and SureBeam engaged in false advertising,monopolization, restraint on trade and unfair businesspractices.

    OnJanuary 25, 2002, Titan and SureBeam announced that they settledthe litigation with IBA.  Under the settlement, IBA droppedall the claims it made against Titan and SureBeam in thelitigation, including IBA's challenge to the validity andenforceability of SureBeam's core patent.  Titan and SureBeamagreed that IBA and its customers may continue to operate or useIBA's electronic irradiation facility in Bridgeport, NewJersey.  The settlement terms include, among other things,that IBA will purchase its requirements in the United States fore-beam and x-ray systems for use for processing food and sanitizingmail from Titan and SureBeam during the next four years, providedTitan and SureBeam offer competitive terms.  Titan andSureBeam also agreed to purchase their requirements of acceleratorswith above 150 kilowatts of power from IBA during the samefour-year period, provided IBA offers competitive terms. Other terms of the settlement agreement are immaterial and were notdiscloseable.

    Weare involved in legal actions in the normal course of our business,including audits and investigations by various governmentalagencies that result from our work as a defense contractor. We and our subsidiaries are named as defendants in legalproceedings from time to time and we or our subsidiaries may assertclaims from time to time.  In addition, we acquire companiesfrom time to time that have legal actions pending against them atthe time of acquisition.  Based upon current information andreview, we believe the ultimate liability or recovery with respectto pending actions would not materially affect our consolidatedfinancial position or results of operations.  However, ourevaluation of the likely impact of these actions could change inthe future and an unfavorable outcome, depending upon the amountand timing, could have a material adverse effect on theCompany’s results of operations or cash flows in a futureperiod.

**Note (10) Related PartyTransactions**

    Inconnection with our SureBeam business, we have entered into anumber of agreements with SureBeam, including a corporate servicesagreement pursuant to which we provided general corporateadministrative support, facility space and related maintenance andoccupancy services through a facilities allocation and a taxallocation agreement whereby in the event Titan offsets its taxablegains with SureBeam losses, Titan will compensate SureBeam in cashfor the benefit it receives for use of SureBeam losses, whenSureBeam demonstrates that it is able to utilize those losses orthe losses would have otherwise expired.  The corporateservices agreement terminated effective as of the spin-offdistribution of SureBeam on August 5, 2002, and we will no longerprovide these services to SureBeam.

    InSeptember 2001, Titan purchased a world-wide perpetual andexclusive, non-royalty bearing license to use SureBeam'sintellectual property for all applications and fields other thanthe food, animal hide and flower markets, for the followingconsideration: 1) a $50 million senior secured line of credit, withcustomary financial, affirmative and negative covenants, 2) theexchange of the $75 million debt owed by SureBeam to Titan foradditional shares of Class B and Class A common stock of SureBeam,and 3) a cash payment of $8 million, with $4 million paid atSeptember 30, 2001 and four installments of $1 million eachpayable on March 31, 2002, June 30, 2002, September 30, 2002 andDecember 31, 2002. 

    OnAugust 5, 2002, as part of our commitment to extend a $50.0 millionline of credit to SureBeam, Titan extended a $50 million seniorsecured revolving loan commitment to SureBeam that allows SureBeamto borrow up to $12.5 million in the second quarter of 2002, up to$17 million in the third quarter of 2002 and up to $12.5 millionper quarter beginning in the fourth quarter of 2002 (of which$10 million was borrowed during the second quarter) throughthe fourth quarter of 2003, subject to the $50 million limitationon borrowing.  The amount available for borrowing in thesecond, third and fourth quarters of 2003 is based upon certainminimum ratios of SureBeam’s earnings before interest, taxes,depreciation and amortization (EBITDA) as a percentage compared totarget EBITDA amounts in SureBeam’s financial plan submittedto Titan, but subject to a maximum of $12.5 million per quarter in2003.  As of August 11, 2002, SureBeam has borrowed $15million under the credit facility.

    Inaddition, we have guaranteed certain lease obligations of SureBeam,and SureBeam is obligated to reimburse us for any payments we makeunder these guarantees.  Any guarantee payments we makereduces amounts available for future borrowing under the creditagreement.  SureBeam will pay us a monthly fee of 10% of theguaranteed monthly payments.  Some of the guaranteed leaseshave longer terms than the credit facility.  If Titan remainsa guarantor at the maturity date for the credit facility, thenSureBeam will enter into a reimbursement agreement with Titancovering the outstanding guarantees.

    SureBeam is obligated tomake quarterly principal payments on the credit facility asfollows:  13.75% of the outstanding principal balance as ofDecember 31, 2003 during each quarter in 2004; 25% of theoutstanding principal balance as of December 31, 2004 during eachquarter in 2005; and all remaining principal by December 31,2005.  In addition, with some exceptions, SureBeam isobligated to use net proceeds from the sale of assets and itssecurities to repay amounts advanced under this facility. Interest is payable monthly beginning in January 2003.  Thecredit agreement contains affirmative and negative covenants,including covenants limiting SureBeam’s incurrence of debt,capital expenditures, operating expenses, investments, declarationof dividends and other restricted payments, sale of stock ofsubsidiaries and consolidations and mergers.  The creditagreement, however, does not contain any financial covenantsrequiring SureBeam to maintain specific financial ratios.  Thecredit agreement is secured by a first priority lien on all ofSureBeam’s assets.  We are required to collaterallyassign our rights under this credit agreement and our security aswell as the License Agreement to our senior lenders under oursenior credit facility. 

    Related to the exchangeof the $75 million debt owed by SureBeam to us, we exchanged$2 million of the balance on December 31, 2001 for190,385 Class B common shares of SureBeam, and exchanged theremaining $73 million of the balance on February 13, 2002for 4,441,496 Class A and 3,225,765 Class Bcommon shares of SureBeam.

    Wehave entered into subcontract agreements with SureBeam for them tobuild, design and integrate linear accelerators we are providingfor our customers in our Scan Technologies business to providemedical sterilization electron beam accelerators as well as mailsanitization systems for the United States Postal Service("USPS").  All appropriate intercompany eliminations have beenmade in our consolidated financial statements.

    Titan has also committedto utilize SureBeam as its exclusive supplier, provided SureBeamoffers competitive terms, for all e-beam and x-ray acceleratorsystems owned and operated by Titan or sold to a third partythrough at least December 31, 2003.  In addition, Titan hasalso committed to utilize SureBeam exclusively for all integrationservices related to accelerator systems until at leastDecember 31, 2002.

    Inrelation to SureBeam's strategic alliance with Hawaii Pride, Titanhas guaranteed up to the greater of SureBeam's equity interest inHawaii Pride or 19.9% of Hawaii Pride's $6.8 million, 15-yearloan from its lender, Web Bank.  As of June 30, 2002,Titan has guaranteed approximately $1.3 million, or 19.9% ofthe loan balance.

    Wehavesubleasedto SureBeam approximately 70,522square feet used for its service center in Los Angeles and severalother operating facilitiesundersubleases that expire beyond the maturity date of theCredit Facility.  Generally, SureBeam is paying us subleasepayments equal to our monthly expense under these leases plus a 10%markup.  SureBeam will continue to seek to have itselfsubstituted as the direct lessee under each master lease so thatthe sublease can be terminated.

    InMarch 2002, our Board of Directors adopted a stock optionrelinquishment program, the primary purpose of which is to alignthe interests of our directors and senior executives more closelywith our stockholders' interests by allowing directors and seniorexecutives to participate in the appreciation in our equityvalue:

        

•    

without requiring ourdirectors and executive officers to trade shares of our commonstock obtained through the exercise of options on the open market;and

 

   

  

        

•    

without the dilutive andpotentially stock-price depressive effects associated with theexercise and subsequent sale of stock option shares.

    The program also assistsour directors and executive officers with their individualfinancial planning.  Under the program, a participant canrelinquish eligible, in-the-money stock options in exchange for aloan, the principal amount of which is 150% of the differencebetween the aggregate exercise price of the options and the productof (i) the number of shares issuable upon exercise of theoptions and (ii) a 20 day trailing average of the dailyhigh and low sales price of our common stock prior torelinquishment.  The loans will bear interest at a rate equalto the applicable federal rate as published by the Internal RevenueService for the month in which the loan is made.  The loansare contingent upon the participant's, within 90 days,utilizing a portion of the loan proceeds to purchase a lifeinsurance policy with a death benefit sufficient to repay the loanand accrued interest thereon upon maturity.  The deadline fornotice from directors and executive officers of their intent toparticipate in the current program was March 29,2002.

    If, subsequent to theindividual's notice to participate and within 90 days (or suchlonger period agreed to by the Company in compliance with theSarbanes-Oxley Act) after receiving the loan proceeds, theindividual elects not to participate in the program or no lifeinsurance policy is obtained, the loans are repaid with accruedinterest thereon and the options are returned to theindividual.  The loans mature on the death of the second todie of the participant and his/her spouse.  Under the program,to date the following conditional transactions have occurred, eachstill within the noted period for the individual to withdraw fromthe program and repay the loans:

        

•    

Dr. Ray, Chairman ofthe Board and Chief Executive Officer: 222,380 optionsconditionally relinquished, $3,985,725 principal amount of loan,5.48% interest per annum;

 

 

  

        

•    

Mr. Fink, director:15,000 options conditionally relinquished, $336,337.50 principalamount of loan, 5.48% interest per annum;

 

 

  

        

•    

Mr. Alexander,director: 19,972 options conditionally relinquished, $499,999principal amount of loan, 5.48% interest per annum.

    Inconnection with the same program, loans were conditionally made toMr. Costanza, Senior Vice President, General Counsel and Secretaryin the amount of $614,400, and Mr. Hanisee, director, in the amountof $220,184.  In June 2002, Mr. Costanza and Mr. Haniseerepaid the outstanding balance of their loans in full.  AtJune 30, 2002, the Company had other loans receivable fromthree officers of two of the Company's subsidiaries totaling$0.2 million.

**Note (11)Subsequent Events**

    OnJuly 11, 2002, Titan announced that it would exit its internationaltelecommunications business through a combination of selling andwinding down its operation within its Titan Wireless segment. Titan began implementing these actions immediately and expects tocomplete the majority of these actions by the end of 2002. Titan is in the process of determining the impact these actionswill have to the carrying value of the assets of these businesses,as well as exit costs associated with infrastructure reductionsincluding costs for employee terminations and excessfacilities.  Such amounts will be recorded as a non-recurringcharge in the third quarter of 2002.  Titan estimates thatthis after tax charge will not exceed $200 million.

**THE TITAN CORPORATION**

**Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**(Dollaramounts in thousands, except share and per share data, or asotherwise noted)**
**Results ofOperations**
    During the first quarterof 2002, the Company made the decision to sell certain of itscommercial information technology operations in order to allowmanagement to focus on those operations with the most near termgrowth opportunities.  As a result, Cayenta’s federalgovernment operations have become a part of Titan Systems andCayenta’s remaining operations are being reported in TitanTechnologies, formerly Titan’s Emerging Technologies andBusinesses segment.  All commercial operations that are heldfor sale have been reflected as discontinued operations for allperiods presented in Titan’s consolidated financialstatements.  All prior period financial information has beenrestated to reflect the new segments.

*    Consolidated.*  Our consolidated revenues increased from$257.7 million and $497.0 million in the second quarter andfirst six months of 2001, respectively, to $400.0 million and$740.5 million in the second quarter and first six months of2002, respectively.  Increased revenues were reported in ourTitan Systems segment, primarily attributable to the acquisitionsof BTG, Inc. in the fourth quarter of 2001, Datron in the thirdquarter of 2001 and Jaycor in the first quarter of 2002. Increased revenues were also reported in our Titan Wirelesssegment, primarily attributable to the acquisition of GlobalNet,Inc. in March 2002 and in our Titan Technologies segment, primarilyas a result of revenues generated on Titan’s contract withthe United States Postal Service (USPS) to provide mailsanitization systems.
***Revenues:******Three Months EndedJune 30, 2002 and 2001:***
*    TitanSystems.  *Titan Systems’revenues increased from $224.4 million in the second quarter of2001 to $334.9 million in the second quarter of 2002.  Theacquisitions of BTG, Datron and Jaycor contributed approximately$97.0 million of the revenues in the second quarter of 2002,with the remaining increase in revenues driven by internal revenuegrowth generated in part from the start up of Titan’senterprise information technology contract with the SpecialOperations Command, as well as several new contracts with the AirForce’s Electronic Systems Center, increased demand by theNaval Air Warfare Center, and increased demand for cryptologyproducts, mini-DAMA terminals and continued work on the ProphetProgram (the Army’s next generation signals intelligencesystem).  Comparable revenues for the second quarter of 2001for BTG, Datron and Jaycor (which were not acquired until thefourth quarter of 2001, the third quarter of 2001 and the firstquarter of 2002, respectively), were approximately$93.3 million.

*    TitanWireless.  *TitanWireless’ revenues increased from $23.0 million in the secondquarter of 2001 to $48.7 million in the second quarter of2002.  The acquisition of GlobalNet contributed approximately$28.2 million of the revenues in the second quarter of2002.  Increased service revenues of approximately$3.3 million from Titan’s wholesale long distancebusiness generated by Titan’s consolidated joint venture,Sakon LLC, were offset by a $5.7 million decrease in revenuesgenerated by the systems integration business, primarily a resultof decreased revenues recorded on Titan Wireless’ project inBenin to build a telecommunications system for its customer, theOffice of Post and Telecommunication of Benin(“OPT”). 

*  TitanTechnologies.*  TitanTechnologies revenues increased from $10.3 million in the secondquarter of 2001 to $16.3 million in the second quarter of2002.  The increase in 2002 is related primarily to revenuesof approximately $6.6 million generated on Titan’s contractwith the U.S. Postal Service to provide mail sanitizationsystems.

***SixMonths Ended June 30, 2002 and 2001:***

*    TitanSystems.  *Titan Systems’revenues increased from $435.9 million in the first six months of2001 to $639.8 million in the first six months of 2002.  Theacquisitions of BTG, Datron and Jaycor contributed approximately$177.3 million of the revenues in the first six months of2002, with the remaining increase in revenues driven by internalrevenue growth generated by strong demand from the Naval AirWarfare Center and the Air Force’s Electronic Systems Centerand increased demand for cryptology products and mini-DAMAterminals and continued work on the Prophet Program. Comparable revenues for the first six months of 2001 for BTG,Datron and Jaycor, were approximately$189.7 million.

*    TitanWireless.*  TitanWireless’ revenues increased from $44.0 million in thefirst six months of 2001 to $69.6 million in the first sixmonths of 2002.  The acquisition of GlobalNet contributedapproximately $28.2 million of the revenues in the first sixmonths of 2002.  Increased service revenues of approximately$7.7 million from Titan’s wholesale long distancebusiness generated by Titan’s consolidated joint venture,Sakon LLC, were offset by a $10.3 million decrease in revenuesgenerated by the systems integration business, primarily a resultof decreased revenues recorded on Titan Wireless’ project inBenin to build a telecommunications system for its customer, theOPT. 

*    TitanTechnologies.*  TitanTechnologies revenues increased from $17.0 million in the first sixmonths of 2001 to $31.1 million in the first six months of2002.  The increase in 2002 is related primarily to revenuesof approximately $11.6 million generated on Titan’scontract with the U.S. Postal Service to provide mail sanitizationsystems.

*Selling,General and Administrative*

    Our SG&A expensesincreased from $42.1 million in the second quarter of 2001 to$54.2 million in the second quarter of 2002.  SG&A,as a percentage of revenues, decreased from 16.3% in the secondquarter of 2001 to 13.6% in the second quarter of 2002. SG&A increased from $88.1 million in the first six monthsof 2001 to $97.0 million for the same period in 2002,reflecting a decrease as a percentage of revenues from 17.7% in thefirst six months of 2001 to 13.1% in the first six months of2002.  Included in SG&A was amortization of goodwill of$3.9 million and $7.6 million for the three months andsix months ended June 30, 2001, and amortization of purchasedintangibles of $1.3 million and $2.7 million for thethree months and six months ended June 30, 2002, and deferredcompensation of $1.1 million and $2.1 million in thequarter and six months ended June 30, 2001 and$1.4 million and $2.4 million in the quarter and sixmonths ended June 30, 2002.  Excluding the amortizationof goodwill and purchased intangibles and deferred compensation,SG&A decreased from 14.4% in the quarter ended June 30, 2001 to12.9% in the quarter ended June 30, 2002, and from 15.8% inthe six months of 2001 to 12.4% in the six months of 2002. The decreases in 2002 are in part attributable to certain costreductions that were made during 2001, as well as due to adifference in the methodology of the classification of operatingcosts reported as costs of sales versus sales, general &administrative costs, as defined by the acquired companyBTG’s stated disclosure statement with its appropriategovernment customers.  We expect to conform BTG’sdisclosure statement and classification of operating costs to thoseclassifications used by Titan by the end of 2002.

*Research andDevelopment*

    Our R&D expensesincreased from $3.4 million and $6.8 million in the secondquarter and first six months of 2001, respectively, to $5.7 millionand $10.6 million in the second quarter and first six months of2002, respectively.  The increase in 2002 is primarilyattributable to increased development expenses of approximately$4.3 million for the six months ended June 30, 2002, incurredin LinCom Wireless.* * As a percentage of revenues,R&D expenses remained fairly flat at approximately 1.4% for allperiods in 2001 versus the comparable periods in 2002.

*Acquisition andIntegration Related Charges and Other*
***Fiscal 2001Charges***
    Acquisition andintegration related charges and other of $0.7 million and$28.4 million in the second quarter and first six months of2001, respectively, were comprised of costs of $12.4 millionincurred in the six months of 2001 primarily related to theintegration of ACS and AverStar, and a realignment of businessaround its major categories of customers, which together resultedin personnel reductions and the closing of severalfacilities.  Included in these costs is approximately$3.3 million of employee termination and retention costs,$3.5 million of costs to eliminate duplicate and excessfacilities and assets, $1.1 million of duplicate personnelcosts to transition processes and functions, and $1.5 million ofasset impairment costs of certain asset balances for which therecoverability of such balances was impaired due to the exit of asatellite services business within the Titan Systems segment. Approximately $3.0 million of the charge was related toanother subsidiary acquired in a prior year for contingenciesarising from matters pre-existing to Titan’s acquisition ofthe business.  That acquisition was accounted for as apurchase, and those matters were resolved in 2001. 

    Also included in theacquisition and integration related charges and other for the sixmonths ended June 30, 2001 is a charge of $0.5 million of employeetermination costs in the Titan Wireless segment related to certainorganizational changes within that business unit and theelimination of the internal product developmentgroup. 

    Also included in theacquisition and integration related charges is a charge of$0.5 million and $15.5 million for the three and sixmonths ended June 30, 2001, respectively, related to therestructuring of Cayenta’s headquarters office.  As aresult of reduced corporate spending on commercial informationtechnology services and e-business software applications, theCompany developed and approved a plan to restructure the Cayentaheadquarters and network operations center, which included areduction in workforce of approximately 40 personnel, resulting ina charge of $1.7 million, and the elimination of duplicate andexcess facilities, resulting in a charge of $0.8 million.  Asa result of management’s evaluation of the recoverability ofall of the assets of Cayenta, in accordance with Statement ofFinancial Accounting Standards No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of”, management concluded from this evaluation thata significant impairment of intangible as well as long-lived assetshad occurred.  An impairment charge was required because theestimated fair value was less than the carrying value of theassets.  The impairment charge of $13.0 million wascomprised of the following: $5.5 million for fixed assetsassociated with Cayenta’s network operations center, $2.0million for prepaid advertising costs, $5.3 million forCayenta’s investment in Soliance, LLC, a joint venture thatmarkets and delivers information technology systems and solutionsto the utility industry, and $0.2 million for certain otherassets.
***Exit Charges andOther***
    Included in the exitcharges and other is a charge of $1.8 million and$3.3 million for the three and six months ended June 30,2002, related to the shut-down of Cayenta’s headquartersoffice.  These charges primarily include employee terminationcosts and lease commitment costs.

*Operating Profit(Loss)*

*    Consolidated.*  Our operating profit improved from operatingprofit of $14.5 million in the three months ended June 30, 2001 to$16.1 million in the three months ended June 30, 2002, and improvedfrom an operating loss of $3.1 million in the first six months of2001 to operating income of $35.8 million in the first sixmonths of 2002.  Included in the 2001 operating results is acharge of $0.7 million and $28.4 million in the three andsix months ended June 30, 2001, respectively, for acquisition andintegration related charges and other, and a charge of $1.8 millionand $3.3 million in the three and six months endedJune 30, 2002, respectively, for certain exit charges relatedto the Cayenta headquarters office.  In addition, amortizationof goodwill of $3.9 million and $7.6 million for the three and sixmonths ended June 30, 2001, and amortization of purchasedintangibles of $1.3 million and $2.7 million for the three andsix months ended June 30, 2002, respectively, and deferredcompensation of $1.1 million and $2.1 million in thethree and six months ended June 30, 2001, respectively, and$1.4 million and $2.4 million for the three and sixmonths ended June 30, 2002, respectively, are included inoperating profit.  Excluding these charges and costs,operating profit increased from $20.2 million and$35.1 million in the quarter and first six months ended June30, 2001, respectively, to $20.7 million and $44.2 million in thequarter and first six months ended June 30, 2002,respectively.  Increased operating profit was primarilyattributed to the increase in revenues discussedpreviously. 

*    Segment OperatingProfit.  *Operating profitreported by business segment includes substantially all of thesegment’s costs of operations and administration.  Thesegment performance is based upon profit or loss before interestexpense, income taxes, and before allocated costs of corporateoverhead.  Corporate overhead may include, among other things,costs for financial accounting, marketing, administrative and legalactivities incurred by Titan.  Also included in segmentoperating profit for the quarter and six months ended June 30,2001, are overhead and administrative costs associated with theprevious corporate headquarters and network operations center ofCayenta, which were eliminated in the first quarter of 2002, whencertain components of Cayenta were discontinued.  Included inthese costs for the Cayenta headquarters are certain charges of$0.5 million and $15.5 million for the three and six months endedJune 30, 2001, respectively, related to the impairment of assets ofCayenta’s network operations center and the restructuring ofthe Cayenta headquarters which are included in the acquisition andintegration related charges for the year ended December 31,2001.  Consequently, the results of operations of the segmentsmay not be indicative of the actual results that would be shown inthe financial statements of those segments if prepared on astand-alone basis.  The discussion of segment operating profitbelow includes only the operating profits for each of our businesssegments and does not include separate discussion of our corporateoverhead. 

***Segment OperatingProfit:***

***Three Months EndedJune 30, 2002 and 2001:***

*    TitanSystems.*  Titan Systems'operating profit increased from $18.7 million in the second quarterof 2001 to $27.4 million in the second quarter of 2002. Included in the 2001 operating results is an integration andacquisition related charge of $0.2 million and amortization ofgoodwill of $2.5 million.  Included in the 2002 operatingresults is amortization of purchased intangibles of$1.3 million and deferred compensation of $0.4 million,relating to the acquisition of BTG.  Excluding the charges andthe amortization of goodwill and purchased intangibles and deferredcompensation, operating profit increased from $21.4 million inthe second quarter of 2001 to $29.2 million in the secondquarter of 2002.  The increase in operating profit wasprimarily a result of the increased revenues discussedpreviously.

*    TitanWireless.*  TitanWireless’ operating performance decreased from operatingincome of $1.4 million in the second quarter of 2001 to anoperating loss of $4.2 million in the second quarter of 2002. Included in the 2001 operating income was $0.4 million amortizationof goodwill. Excluding the amortization of goodwill, operatingprofit decreased from operating income of $1.8 million in thesecond quarter of 2001 to an operating loss of $4.2 million in thesecond quarter of 2002.  Although revenues were up over theprior year, reduced operating margins were caused in large part bycertain competitors of our long distance business that are now inbankruptcy or undergoing significant reorganizations, that havesought to generate revenue by reducing pricing, thereby creatingsignificant margin pressure. 

*    TitanTechnologies.*  TitanTechnologies operating profit decreased from $1.8 million inthe second quarter of 2001 to $0.1 million in the second quarter of2002.  The operating profits in 2002 were impacted byincreased development expenses in LinCom Wireless.  The secondquarter of 2001 operating results include approximately$1.0 million of amortization of goodwill.  Excluding theimpact of the amortization of goodwill in 2001, operating profitdecreased from $2.8 million in the second quarter of 2001 to $0.1million in the second quarter of 2002. 

***Six Months EndedJune 30, 2002:***

*    TitanSystems.*  Titan Systems'operating profit increased from $23.4 million in the first sixmonths of 2001 to $51.5 million in the first six months of2002.  Included in the 2001 operating results is anintegration and acquisition related charge of $12.4 million andamortization of goodwill of $4.8 million.  Included inthe 2002 operating results is amortization of purchased intangiblesof $2.7 million and deferred compensation of$0.4 million.  Excluding the charges and the amortizationof goodwill and purchased intangibles and deferred compensation,operating profit increased from $40.7 million in the first sixmonths of 2001 to $54.6 million in the first six months of2002.   The increase in operating profit was primarily aresult of the increased revenues discussed previously.

*    TitanWireless.*  TitanWireless’ operating performance decreased from operatingincome of $1.3 million in the first six months of 2001 to anoperating loss of $5.1 million in the first six months of2002.  Included in the 2001 operating income was$0.8 million amortization of goodwill and an integration andacquisition related charge of $0.5 million.  Excludingthe charge and amortization of goodwill, operating profit decreasedfrom operating income of $2.7 million in the first six monthsof 2001 to an operating loss of $5.1 million in the secondquarter of 2002.  Although revenues were up over the prioryear, reduced operating margins were caused in large part bycertain competitors of our long distance business that are now inbankruptcy or undergoing significant reorganizations, that havesought to generate revenue by reducing pricing, thereby creatingsignificant margin pressure. 

    *TitanTechnologies.*  Titan Technologies operating profitincreased from $1.2 million in the first six months of 2001 to$2.8 million in the first six months of 2002.  Theoperating profits in 2002 were impacted by the increase in revenuesdiscussed previously, offset by increased development expenses inLinCom Wireless.  The first six months of 2001 operatingresults include approximately $2.0 million of amortization ofgoodwill.  Excluding the impact of the amortization ofgoodwill in 2001, operating profit decreased from $3.2 millionin the first six months of 2001 to $2.8 million in the firstsix months of 2002. 

*Interest Expense,Net*

    Our net interest expensedecreased from $10.1 million and $18.8 million in thesecond quarter and first six months of 2001, respectively, to$7.8 million and $16.1 million in the second quarter andfirst six months of 2002, respectively.  Net interest expensedecreased primarily as a result of reduced effective interestrates.  Borrowings from our primary bank lines of credit,excluding working capital lines from acquired companies, averaged$341.6 million and $349.7 million for the three and sixmonths ended June 30, 2002, respectively, at weighted averagerates of 5.3% and 5.2%, respectively, compared to$348.7 million and $334.9 million in the three and sixmonths ended June 30, 2001, respectively, at weighted averageinterest rates of 8.3% and 8.6%, respectively.

*IncomeTaxes*

    Consolidated income taxesreflect effective rates of a provision rate of 46% and a benefitrate of 23% in the quarter and six months ended June 30, 2001,respectively, compared to a provision rate of 42% in the quarterand six months ended June 30, 2002.  The reduced rate for thetax benefit in 2001 is primarily due to significant non-deductibleexpenses which were recorded for financial reporting purposes,which resulted in a reduced benefit rate for the net lossreported.

*Net Income(Loss)*

    Inthe quarter and six months ended June 30, 2001, we reported anet loss of $7.8 million and $67.7 million, respectively,compared to a net loss of $11.8 million and $45.4 millionin the quarter and six months ended June 30, 2002.  Lossfrom discontinued operations was $10.4 million and$55.6 million in the quarter and six months endedJune 30, 2001, respectively, compared to a loss of$11.1 million and $11.2 million in the quarter and sixmonths ended June 30, 2002, respectively.   Includedin the loss from discontinued operations in 2001 was approximately$42.1 million of a net loss from the Company’s SureBeamoperations, which included approximately $38.9 million ofdeferred compensation related to the initial public offering ofSureBeam in March 2001.  Included in the loss fromdiscontinued operations for the three and six months ended June 30,2002, is approximately $11.0 million related to SureBeam,which includes current net losses of approximately$4.6 million, net of the application of the remaining accruedlosses and an accrual for estimated net losses and spin-offexpenses expected to be incurred by SureBeam through the spin-offdate of August 5, 2002.

    The Company is currentlyin the process of selling its AverCom business.  Based uponthe outcome of this process, once the Company has obtained areasonable determination of fair value, it will determine if thereis an impairment in value.  Management anticipates that itwill have a reasonable determination of fair value during the thirdquarter of 2002.
**Liquidity and CapitalResources**
    We generatedapproximately $38.1 million cash from our continuingoperations during the six months ended June 30, 2002, resultingfrom income from continuing operations coupled with a reduction ofreceivable balances of $50.6 million, partially offset bydecreases in other working capital components.  Our investingactivities generated net cash of approximately $3.6 million,resulting from net cash acquired of approximately$30.0 million, primarily from the Jaycor acquisition whichclosed in late March 2002, offset by investments and capitalexpenditures.  Financing activities provided$7.1 million, primarily from an increase in our line of creditborrowings.

    AtJune 30, 2002, total borrowings under our credit facility were$350 million at a weighted average interest rate of4.84%.  Commitments under letters of credit were$9.7 million at June 30, 2002, $8.7 million of whichreduce availability of our working capital line, resulting in$126.3 million of availability on our working capital line atJune 30, 2002.  Of the total borrowings, $3.5 million wasshort-term.

   Wegenerated approximately $38.1 million cash from our continuingoperations during the six months ended June 30, 2002, resultingfrom income from continuing operations coupled with net sourceresulting from changes in working capital, with the most notablesource of $50.6 million from a reduction in accountsreceivables.  Our investing activities generated net cash ofapproximately $3.6 million, resulting from net cash acquired ofapproximately $30.0 million, primarily from the Jaycor acquisitionwhich closed in late March 2002, offset by investments and capitalexpenditures.

    Our financing activitiesgenerated cash of $7.1 million, primarily reflecting additionsto debt of $20.0 million, resulting from the Company’snew credit facility, as well as the payment of deferred financingcosts of $8.7 million for the Company’s new creditfacility.  Proceeds of $7.1 million were received fromthe exercise of stock options.

    OnMay 23, 2002, the Company entered into an agreement with WachoviaBank, National Association and Wachovia Securities for a $485million credit facility from a syndicate of commercial banksincluding Wachovia Securities acting as Sole Lead Arranger andWachovia Bank, National Association, as Administrative Agent, TheBank of Nova Scotia and Comerica Bank as Co-Syndication Agents andBranch Banking Trust Company and Toronto Dominion Bank asCo-Documentation Agents and other financial institutions.  Theproceeds of the loan were used to repay outstanding indebtedness onthe Company’s $425 million credit facility arranged byCredit Suisse First Boston in February 2000.  The seniorsecured credit facility is secured by substantially all of our andour subsidiaries’ assets (other than the assets of SureBeam,LinCom Wireless, Sakon and our foreign operations) and guaranteedby substantially all of our subsidiaries.  The$485 million facility is comprised of a seven-year term loanin an aggregate principal amount of $350 million and asix-year $135 million revolving credit facility.  Loansmade under the term loan amortize at 1.0% per year for years onethrough six, with the remaining 94% due in four equal quarterlypayments in year seven of the agreement.  Under the term loanand the revolving facility, the Company has the option to borrow atthe bank’s rate or at adjusted LIBOR plus, in each case, anapplicable margin based on our total debt to EBITDA ratio (earningsbefore interest and taxes and depreciation and amortization). The agreement contains financial covenants, which were comprised ofthe following at June 30, 2002:  a maximum debt to EBITDAlimit of 3.50 to 1, a minimum interest coverage ratio of 2.75to 1, a minimum fixed charge ratio of 1.20 to 1 and a minimumnet worth (as defined) of $445 million.  At June 30,2002, the Company was in compliance with all financialcovenants.  No funds were drawn initially on the revolver,which will be available to the Company for general corporate needs,including strategic acquisitions.  Additionally, the newfacility excludes Titan’s ownership of SureBeam stock ascollateral, which enabled Titan to spin-off SureBeam in accordancewith Titan’s plans to do so.

    OnDecember 10, 1999, our wholly owned subsidiary, Titan Africa, Inc.("Titan Africa"), in connection with its contract to build asatellite-based telephone system for its customer, the nationaltelephone company of Benin, Africa, entered into a Loan Facilityagreement for up to 30.0 billion Francs CFA (the currency of theAfrican Financial Community), equivalent to approximately $45.0million U.S. dollars, with a syndicate of five banks, with AfricaMerchant Bank as the arranger.  This medium term financing isa non-recourse loan to Titan Africa which is guaranteed by thenational telephone company of Benin, Africa and secured by thenational telephone company's equipment and revenues related to theproject.  The facility has a fixed interest rate of 9.5% andwill be repaid in seven equal semi-annual payments from the netreceipts of this project, or by the OPT in the event that suchreceipts are not adequate to make these payments, which commencedon December 31, 2000.  The borrowings on this facility havebeen utilized to fund the subcontractor costs incurred by Alcatelof France, a major subcontractor to this project.  Thenon-Alcatel equipment provided by Titan Africa was financed througharrangement with the OPT whereby Titan Africa would be paid inseven equal semi-annual installments, which commenced onDecember 31, 2000.  Due to the approximate six to ninemonth delay in the delivery of the system, which was impacted bythe expansion of the original project to include increased GSMlines, increased capacity and capability of the VSAT sites and anoverall increase in lines in Benin, the Africa Merchant Bank andTitan Africa have collectively agreed to extend the due date of thesemi-annual principal payments until such time as the servicerevenues have achieved certain levels, which occurred in mid2002.  The terms of Titan Africa's agreement with the customerinclude, among other things, a revenue sharing of total netreceipts earned on this project for up to a period of 9 yearsdepending upon when the equipment has been paid for.  As ofJune 30, 2002, approximately $40.5 million was drawn onthis facility, which has been reflected as Non-recourse debt in theaccompanying consolidated balance sheet and approximately$87.7 million has been reflected as Long-term contractreceivables, related to the gross amount due from the OPT on thecontract.  The $40.5 million drawn on the facilityreflects the amount that has been funded by the Africa MerchantBank to cover subcontract costs.  In October 2000, wecollected an $18 million progress payment from an African grouprelated to the construction financing of this project.  As ofJune 30, 2002, the outstanding receivable balance, net of thenon-recourse debt, due on this contract was approximately$47.2 million.  Management believes that the appropriateinsurance policies are in place to cover risk related to loss inBenin and certain other foreign countries.

    Inrelation to our investment in Ivoire Telecom, we provided equipmentwith an approximate aggregate value of $4.5 million and wecommitted to provide up to a maximum of $35 million for capitalexpenditures and other expenditures necessary to build out theIvoire Telecom network. At March 31, 2002, this maximumcommitment has been substantially funded, resulting in aninvestment balance of approximately $50.0 million, which includesour initial equity investment of approximately $10.5 million andequipment we provided. Our investment is reflected in Other Assetsin the accompanying consolidated balance sheet. In addition, inconnection with our agreement to acquire an additional 30.0% equityinterest in Sakon, an additional $12.5 million of consideration wasdue and payable upon certain revenue targets being attained. Thesetargets were met in January 2001, and a $5.0 million installmentwas made in the second quarter of 2001, a $3.75 million installmentwas made in the first quarter of 2002, and the remaining $3.75million was paid in July 2002.

    There are no Titanguarantees of debt, either directly or indirectly, associated withIvoire Telecom or Sakon or any other unconsolidated subsidiariesother than approximately $2.0 million of equipmentfinancing.

    Aspart of our strategy of seeking external financing to grow ourcommercial businesses, our discontinued SureBeam subsidiarycompleted its initial public offering of its common stock onMarch 16, 2001 and raised gross proceeds of $67 million. Weextended a credit facility for up to a maximum of$75.0 million under which SureBeam owed us approximately $73.0million as of December 31, 2001.  On December 31, 2001, $2.0million of the note was exchanged for common stock of SureBeam, at$10.505, the fifteen day trading average of SureBeam stock as ofDecember 30, 2001, which resulted in the exchange for 190,385 ClassB common shares of SureBeam.  As of December 31, 2001,SureBeam had approximately $73.0 million in principal outstandingunder the note.  On February 13, 2002, the remainingoutstanding balance on the note of $73.0 million was exchanged forequity of SureBeam, at $9.521 per share, the twenty day tradingaverage of SureBeam stock as of February 12, 2002, which resultedin the exchange for 4,441,496 Class A and 3,225,765 Class B commonshares of SureBeam.

    OnOctober 16, 2001, Titan adopted a definitive plan to spin offSureBeam in the form of a tax-free dividend to Titan stockholderswithin 12 months from that date.  The plan involved filing aletter ruling request with the Internal Revenue Service seekingapproval of the tax-free distribution.  Titan filed the letterruling request, and received a favorable determination in May2002.  Titan announced a completed spin-off on August 5,2002.  Titan has purchased a world-wide perpetual andexclusive, non-royalty bearing license to use SureBeam'sintellectual property for all applications and fields other thanthe food, animal hide and flower markets for the followingconsideration: 1) Titan provides to SureBeam a $50 millionsenior secured line of credit, 2) the exchange of the $75 milliondebt owed by SureBeam to Titan for additional shares of Class B andClass A common stock of SureBeam, and 3) a cash payment of $8million, with $4 million paid at September 30, 2001 and fourinstallments of $1.0 million payable on each of March 31, 2002,June 30, 2002, September 30, 2002 and December 31,2002. 

    OnAugust 5, 2002, as part of our commitment to extend a $50.0 millionline of credit to SureBeam, Titan extended a $50 million seniorsecured revolving loan commitment to SureBeam that allows SureBeamto borrow up to $12.5 million in the second quarter of 2002 (which$10 million was borrowed in the second quarter), up to $17million in the third quarter of 2002 and up to $12.5 million perquarter beginning in the fourth quarter of 2002 through the fourthquarter of 2003, subject to the $50 million limitation onborrowing.  The amount available for borrowing in the second,third and fourth quarters of 2003 is based upon certain minimumratios of SureBeam’s earnings before interest, taxes,depreciation and amortization (EBITDA) as a percentage compared totarget EBITDA amounts in SureBeam’s financial plan submittedto Titan, but subject to a maximum of $12.5 million per quarter in2003.  As of August 11, 2002, SureBeam has borrowed $15million under the credit facility.

    Inaddition, we have guaranteed certain lease obligations of SureBeam,and SureBeam is obligated to reimburse us for any payments we makeunder these guarantees.  Any guarantee payments we makereduces amounts available for future borrowing under the creditagreement.  SureBeam will pay us a monthly fee of 10% of theguaranteed monthly payments.  Some of the guaranteed leaseshave longer terms than the credit facility.  If Titan remainsa guarantor at the maturity date for the credit facility, thenSureBeam will enter into a reimbursement agreement with Titancovering the outstanding guarantees.

    SureBeam is obligated tomake quarterly principal payments on the credit facility asfollows:  13.75% of the outstanding principal balance as ofDecember 31, 2003 during each quarter in 2004; 25% of theoutstanding principal balance as of December 31, 2004 during eachquarter in 2005; and all remaining principal by December 31,2005.  In addition, with some exceptions, SureBeam isobligated to use net proceeds from the sale of assets and itssecurities to repay amounts advanced under this facility. Interest is payable monthly beginning in January 2003.  Thecredit agreement contains affirmative and negative covenants,including covenants limiting SureBeam’s incurrence of debt,capital expenditures, operating expenses, investments, declarationof dividends and other restricted payments, sale of stock ofsubsidiaries and consolidations and mergers.  The creditagreement, however, does not contain any financial covenantsrequiring SureBeam to maintain specific financial ratios.  Thecredit agreement is secured by a first priority lien on all ofSureBeam’s assets.  We are required to collaterallyassign our rights under this credit agreement and our security aswell as the License Agreement to our senior lenders under oursenior credit facility. 

    Funding for theadvancement of our strategic goals, including acquisitions andcontinued investment in targeted commercial businesses and start-upventures and capital expenditures, is expected to continue. We planto finance these requirements from a combination of sources, whichinclude cash generation from our core businesses, our creditfacility and other available cash sources. Management believes thatthe combination of our existing cash, amounts available under ourcredit facility and cash flow expected to be generated from ouroperations will be sufficient to fund planned investments andworking capital requirements for at least the next twelve months.However, we could elect, or we could be required, to raiseadditional funds during that period and we may need to raiseadditional capital in the future. Additional capital may not beavailable at all, or may not be available on terms favorable to us.Any additional issuance of equity or equity-linked securities mayresult in substantial dilution to our stockholders. Management iscontinually monitoring and reevaluating its level of investment inall of its operations, specifically the investment required infiscal 2002 to further grow its commercial businesses, and thefinancing sources available to achieve our goals in each businessarea.

**Forward LookingInformation: Certain Cautionary Statements: "Safe Harbor" Statementunder the Private Securities Litigation Reform Act of1995:**

    Statements contained inthis Management's Discussion and Analysis of Financial Conditionand Results of Operations and otherwise which are not historicalfacts are forward looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934.  Examples of suchforward looking statements include our expectations regarding ourcontinuing funding for the advancement of our strategic goals,including acquisitions, the Company’s expectation that itwill be able to determine what, if any, impairment charges arerequired on AverCom in the third quarter, expectations regardingthe operations of Titan Wireless, that it believes that it will beable to complete planned exit actions in Titan Wireless, that itwill eliminate future operating losses in Titan Wireless, that theCompany will be able to sell or dispose of any assets which are notmaterial to its core business, and management’s belief as tothe outcome of pending litigation or claims and any otherexpressions of belief, expectation, anticipation, plan, strategies,intention, possibilities or elections, including statements ofevents or contingencies that may or could occur or similarstatements.  Actual results may differ materially from thosestated or implied in the forward looking statements.  Further,certain forward looking statements are based upon assumptions offuture events which may not prove to be accurate and are subject torisks and uncertainties that could cause actual results to differmaterially from those set forth or implied by forward lookingstatements.  These risks and uncertainties include but are notlimited to those referred to in the Company's Annual Report onForm 10-K/A for the year ended December 31, 2001, and inthe Company’s Registration Statement on Form S-4, as amended,filed with the Securities and Exchange Commission on August 8,2002, including its ability to access the capital markets,dependence on continued funding of U.S. Department of Defense andfederal civilian agency programs, that the Government will fund,continue to make awards or exercise options, and issue task ordersagainst the potential funding ceiling of contracts, contracttermination risks, risks associated with acquiring other companies,including integration risks, the risks of doing business indeveloping countries and international markets, including foreigncurrency risks, and other risks described in the Company'sSecurities and Exchange Commission filings.
****
**PART II—OTHER INFORMATIONTHE TITAN CORPORATION**

**Item 1. Legal Proceedings.**

    OnJanuary 6, 2000, Ion Beam Applications s.a., a Belgian corporation,and some of its U.S. subsidiaries ("IBA") filed an action fordeclaratory judgment in a federal court in Virginia against Titanand the SureBeam Corporation ("SureBeam") relating to SureBeam'spatents for SureBeam systems.  The action attacked thevalidity of SureBeam's core patent, sought a declaration that IBAand its customers had not infringed any of the 62 claims inSureBeam's patent, and alleged that Titan and SureBeam engaged inunfair competition and that Titan and SureBeam's conductconstituted patent misuse.  The case was moved to the federalcourt in San Diego.  On November 22, 2000, IBA filed anamended complaint alleging, in addition to the original claims,that Titan and SureBeam engaged in false advertising,monopolization, restraint on trade and unfair businesspractices.

    OnJanuary 25, 2002, Titan and SureBeam announced that they settledthe litigation with IBA.  Under the settlement, IBA droppedall the claims it made against Titan and SureBeam in thelitigation, including IBA's challenge to the validity andenforceability of SureBeam's core patent.  Titan and SureBeamagreed that IBA and its customers may continue to operate or useIBA's electronic irradiation facility in Bridgeport, NewJersey.  The settlement terms include, among other things,that IBA will purchase its requirements in the United States fore-beam and x-ray systems for use for processing food and sanitizingmail from Titan and SureBeam during the next four years, providedTitan and SureBeam offer competitive terms.  Titan andSureBeam also agreed to purchase their requirements of acceleratorswith above 150 kilowatts of power from IBA during the samefour-year period, provided IBA offers competitive terms. Other terms of the settlement agreement are immaterial and were notdiscloseable.

    Inthe ordinary course of business, defense contractors are subject tomany levels of audit and investigation by various governmentagencies.  Further, we are subject to claims and from time totime are named as defendants in various types of legalproceedings.  We may also assert claims from time totime.  In the opinion of management, the amount of ultimateliability or recovery with respect to these actions will notmaterially affect our financial position or results of operationstaken as a whole.  However, our evaluation of the likelyimpact of these actions could change in the future and anunfavorable outcome, depending upon the amount and timing, couldhave a material adverse effect on our results of operations or ourcash flows in a future period.

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

     At the AnnualMeeting of Stockholders held on May 16, 2002, the following matterswere submitted and approved by shareholders:

1.

     

Election of Directors. Theholders of proxies solicited by the Board cast the following votes(no other votes were cast):

 

Affirmative

Negative/Abstaining

Michael B. Alexander                                                

68,965,922

   782,959

Edward H. Bersoff,Ph.D.

68,980,511

   768,370

Joseph F.Caliguiri

68,980,190

   768,691

Peter A. Cohen

68,979,004

   769,877

Daniel J. Fink

68,985,366

   763,515

Susan Golding

68,982,486

   766,395

Robert M.Hanisee

68,985,466

   763,415

Robert E. LaBlanc

68,985,366

   763,515

Gene W. Ray,Ph.D.

68,982,744

   766,137

James Roth

68,984,366

   764,515

Joseph R. Wright.Jr.

68,985,466

   763,415

2.

     

 

Ratification of Selectionof KPMG LLP as the Company's Auditors.

      

Affirmative Votes                                                                                                  

68,759,027

 

      

Negative Votes

913,005

 

 

Abstaining and brokernon-votes

76,848

 

3.

     

 

Adoption of The TitanCorporation 2002 Employee Stock Purchase Plan.

      

Affirmative Votes                                                                                                  

41,746,332

 

 

Negative Votes

2,369,485

 

 

Abstaining and brokernon-votes

202,582

 

4.

     

 

Adoption of The TitanCorporation 2002 Employee and Director Stock Option and IncentivePlan.

      

Affirmative Votes                                                                                                  

36,405,656

 

 

Negative Votes

7,586,623

 

 

Abstaining and brokernon-votes

326,122

 

**Item 6. Exhibits and Reports on Form8-K.**

a.

      

List ofexhibits:

 

             

99.1

      

Certification

              

b.

 

During the three monthsended June 30, 2002, and through the date of this filing, theCompany filed the following Forms 8-K and 8-K/A:

 

 

(1)

 

Current report on Form8-K/A dated March 21, 2002, to provide the required pro formafinancial information giving effect to the GlobalNet and Jaycoracquisitions, which were completed on March 21, 2002.

 

 

(2)

 

Current report on Form 8-Kdated April 15, 2002, to report a change in Registrant’scertifying accountant from Arthur Andersen LLP to KPMG LLP, toserve as the Company’s principal public accountants forfiscal year 2002.

 

 

(3)

 

Current report on Form 8-Kdated May 23, 2002 and filed June 4, 2002 and current report onForm 8-K/A dated May 23, 2002 and filed June 21, 2002, to reportthat the Company had entered into a Senior Secured Credit Agreementfor $485 million of financing from a syndicate of 68institutions and commercial banks, with Wachovia Securities as solehead Arranger, the Bank of Nova Scotia and Comerica Bank asCo-Syndication Agents and Branch Banking Trust Company and TorontoDominion Bank as Co-Documentation Agents.  The filingsincluded the Senior Secured Credit Agreement and attachments datedas of May 23, 2002, and the Company’s Press Release datedJune 3, 2002.

          

(4)

Current report on Form8-K/A dated May 23, 2002 and filed August 9, 2002, to provide as anexhibit Annex I to Exhibit D to the Registrant’s SeniorSecured Credit Agreement previously filed.

             

(5)

Current report on Form 8-Kdated June 24, 2002, to report a change in Registrant’scertifying accountant from Arthur Andersen LLP to KPMG LLP forfiscal year 2002, and to report that the Administrative Committeeof the Titan Corporation Consolidated Retirement Plan has engagedKPMG to provide audit services related to the plan.

            

(6)

Current report on Form 8-Kdated June 24, 2002, to report a change in Registrant’scertifying accountant from Arthur Andersen LLP to KPMG LLP forfiscal year 2002, and to report that the Administrative Committeeof the AverStar, Inc. Profit Sharing and Savings Plan has engagedKPMG to provide audit services related to the plan.

             

(7)

Current Report on Form 8-Kdated July 30, 2002, to report that the Company announced the ratioof SureBeam Corporation shares owned by the Company to the numberof Company common shares outstanding.  The ratio will be usedto determine the SureBeam Corporation dividend to be received bythe holders of Titan common stock in connection with the tax-freespin-off of SureBeam Corporation by the Company.  Thedistribution date will be August 5, 2002.

**THE TITAN CORPORATIONSIGNATURES**

    Pursuant to therequirements of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

Dated:  August11, 2002

 

THE TITANCORPORATION

  

  

 By:

 /s/ GENE W. RAY

Gene W.Ray*Chief Executive Officer, Chairman of the Board*

  

  

 By:

 /s/ MARK W. SOPP

Mark W.Sopp*Senior Vice President, Chief Financial Officer*

  

  

 By:

 /s/ DEANNA J. HOM

Deanna J.Hom*Vice President, Corporate Controller (Principal Accounting Officer)*

QuickLinks

Part I—FINANCIALINFORMATIONItem 1. Financial Statements

THETITAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONSTHE TITAN CORPORATION CONSOLIDATED BALANCESHEETSTHE TITAN CORPORATION CONSOLIDATED STATEMENTSOF CASH FLOWSTHE TITAN CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

THE TITANCORPORATION NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Part II—OTHERINFORMATION THE TITAN CORPORATIONItem 1. LegalProceedings.Item 4. Submission of Matters to a Vote ofSecurity Holders.Item 6. Exhibits and Reports on Form8-K.

THETITAN CORPORATION SIGNATURES |