##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|                               |  |                                                                                             
|------------------------------ |  | --------------------------------------------------------------------------------------------
|þ                              |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                              
|                               |  | For the quarterly period ended March 31,
    2003                                           
|                              
|or                            
|                              
|o                              |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                              
|                               |  | For the transition period
    from           to                                             
|Commission file number 0-31807



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SureBeam Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                                    |  |                                         
|--------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                            |  | 33-0921003                              
|(State or other jurisdiction of
    incorporation or organization)                                  |  | (I.R.S. Employer
    Identification No.)
|                                                                                                   
|9276 Scranton Road, Suite 600
    San Diego, California(Address of principal executive
    offices) |  | 92121(Zip code)                         

(858) 795-6300

(Registrants telephone number, including
area code)


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



---

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

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

The number of shares of registrants
Class A common stock, $.001 par value, outstanding as of
May 9, 2003, was 75,388,332.



---






---

TABLE OF CONTENTS



|                                |                                                                                               |                                                 |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | Item 1. Financial Statements                                                                 
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                                |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|                                |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3. Qualitative and Quantitative Disclosures about Market Risk                           
|                                | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION   
|                                | Item 1. Legal Proceedings                                                                    
|                                | Item 2. Changes in Securities and Use of Proceeds                                            
|                                | Item 3. Defaults Upon Senior Securities                                                      
|                                | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                | Item 5. Other Information                                                                    
|                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                     
|CERTIFICATIONS                 
|EXHIBIT 99.1                   
|EXHIBIT 99.2                   



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##### Table of Contents



SUREBEAM CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2003

Index

|                                  |  |                                                                                                        |    |  |    | 
|--------------------------------- |  | ------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|PART I  FINANCIAL
    INFORMATION
|Item 1.                           |  | Financial Statements                                                                                   |    |  | 2  | 
|                                  |  | Consolidated Statements of Operations for the
    three months ended March 31, 2003 and 2002           |    |  | 2  | 
|                                  |  | Consolidated Balance Sheets as of March 31,
    2003 and December 31, 2002                             |    |  | 3  | 
|                                  |  | Consolidated Statements of Cash Flows for the
    three months ended March 31, 2003 and 2002           |    |  | 4  | 
|                                  |  | Consolidated Statements of Stockholders
    Equity for the three months ended March 31, 2003 and 2002 |    |  | 5  | 
|                                  |  | Notes to Consolidated Financial Statements                                                             |    |  | 6  | 
|Item 2.                           |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations              |    |  | 21 | 
|Item 3.                           |  | Qualitative and Quantitative Disclosures About
    Market Risk                                         |    |  | 32 | 
|Item 4.                           |  | Controls and Procedures                                                                                |    |  | 33 | 
|PART II  OTHER INFORMATION        |  |                                                                                                        |    | 
|Item 1.                           |  | Legal Proceedings                                                                                      |    |  | 34 | 
|Item 2.                           |  | Changes in Securities and Use of Proceeds                                                              |    |  | 34 | 
|Item 3.                           |  | Defaults Upon Senior Securities                                                                        |    |  | 34 | 
|Item 4.                           |  | Submission of Matters to a Vote of Security
    Holders                                                |    |  | 34 | 
|Item 5.                           |  | Other Information                                                                                      |    |  | 34 | 
|Item 6.                           |  | Exhibits and Reports on Form 8-K                                                                       |    |  | 34 | 
|Signatures                        |  |                                                                                                        | 35 | 
|Certifications                    |  |                                                                                                        | 36 | 

1



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

SUREBEAM CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)


(In thousands, except per share
data)


|                                            |                            |                        |        |       |       |   |        |       |       | 
|------------------------------------------- | -------------------------- | ---------------------- | ------ | ----- | ----- | - | ------ | ----- | ----- | 
|                                            |                            |                       
|                                            |                            | Three Months Ended    
|                                            |                            | March 31,             
|                                            |                            |                       
|                                            |                            | 2003                   |        | 2002 
|                                            |                            |                        |        |      
|Revenues:                                   |                            |                        |        |       |       |   |        |      
|                                            | Systems sales and support: |                        |        |       |       |   |        |       |      
|                                            |                            | Non-affiliated parties |        | $     | 1,845 |   |        | $     | 1,155 | 
|                                            |                            | Investee               |        |       | 2,334 |   |        |       | 1,096 | 
|                                            |                            | The Titan Corporation  |        |       | 1,638 |   |        |       | 4,502 | 
|                                            | Food processing services   |                        |        | 309   |       |   |        | 263   |      
|                                            |                            |                        |        |       |       |   |        |      
|Total revenues                              |                            |                        | 6,126  |       |       |   | 7,016  |      
|                                            |                            |                        |        |       |       |   |        |      
|Cost of revenues:                           |                            |                        |        |       |       |   |        |      
|                                            | Systems sales and support: |                        |        |       |       |   |        |       |      
|                                            |                            | Non-affiliated parties |        |       | 1,392 |   |        |       | 1,229 | 
|                                            |                            | Investee               |        |       | 1,530 |   |        |       | 627   | 
|                                            |                            | The Titan Corporation  |        |       | 1,552 |   |        |       | 2,831 | 
|                                            | Food processing services   |                        |        | 2,641 |       |   |        | 1,161 |      
|                                            |                            |                        |        |       |       |   |        |      
|Total cost of revenues                      |                            |                        | 7,115  |       |       |   | 5,848  |      
|                                            |                            |                        |        |       |       |   |        |      
|Gross profit (loss)                         |                            |                        | (989   | )     |       |   | 1,168  |      
|Selling, general and administrative expense |                            |                        | 6,411  |       |       |   | 6,153  |      
|Stock-based compensation                    |                            |                        | (28    | )     |       |   | 3,800  |      
|Research and development                    |                            |                        | 317    |       |       |   | 315    |      
|                                            |                            |                        |        |       |       |   |        |      
|Loss from operations                        |                            |                        | (7,689 | )     |       |   | (9,100 | )    
|Interest income                             |                            |                        | 84     |       |       |   | 25     |      
|Interest expense                            |                            |                        | (59    | )     |       |   | (886   | )    
|Other income (expense), net                 |                            |                        | 998    |       |       |   | 982    |      
|                                            |                            |                        |        |       |       |   |        |      
|Loss before income tax benefit              |                            |                        | (6,666 | )     |       |   | (8,979 | )    
|Income tax benefit                          |                            |                        |       |       |       |   |       |      
|                                            |                            |                        |        |       |       |   |        |      
|Net loss                                    |                            | $                      | (6,666 | )     |       | $ | (8,979 | )    
|                                            |                            |                        |        |       |       |   |        |      
|Basic loss per share:                       |                            |                        |        |       |       |   |        |      
|                                            | Net loss                   |                        | $      | (0.09 | )     |   | $      | (0.14 | )    
|                                            |                            |                        |        |       |       |   |        |      
|Weighted average shares  basic             |                            |                        | 74,110 |       |       |   | 62,794 |      
|                                            |                            |                        |        |       |       |   |        |      
|Diluted loss per share:                     |                            |                        |        |       |       |   |        |      
|                                            | Net loss                   |                        | $      | (0.09 | )     |   | $      | (0.14 | )    
|                                            |                            |                        |        |       |       |   |        |      
|Weighted average shares  diluted           |                            |                        | 74,110 |       |       |   | 62,794 |      
|                                            |                            |                        |        |       |       |   |        |      

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

2



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


(Unaudited)


(In thousands, except share
information)


|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |          |         | 
|------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                  |                                                                                                                                                                                                                        | March 31,                                  |        | December 31,
|                                                  |                                                                                                                                                                                                                        | 2003                                       |        | 2002        
|                                                  |                                                                                                                                                                                                                        |                                            |        |             
|ASSETS (PLEDGED)                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|Current Assets:                                   |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  | Cash and cash equivalents                                                                                                                                                                                              |                                            | $      | 20,227       |         |  | $      | 27,336   |        
|                                                  | Cash, restricted                                                                                                                                                                                                       |                                            |        | 1,250        |         |  |        |         |        
|                                                  | Accounts receivable, net of allowance of $250 at
    March 31, 2003 and December 31, 2002                                                                                                                              |                                            |        | 19,669       |         |  |        | 18,143   |        
|                                                  | Receivable from The Titan Corporation                                                                                                                                                                                  |                                            |        | 1,844        |         |  |        | 10,123   |        
|                                                  | Inventories                                                                                                                                                                                                            |                                            |        | 16,058       |         |  |        | 16,670   |        
|                                                  | Other current assets                                                                                                                                                                                                   |                                            |        | 5,892        |         |  |        | 4,859    |        
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  |                                                                                                                                                                                                                        | Total current assets                       |        |              | 64,940  |  |        |          | 77,131  | 
|Property and equipment, net                       |                                                                                                                                                                                                                        |                                            | 60,858 |              |         |  | 60,132 |         
|Due from The Titan Corporation                    |                                                                                                                                                                                                                        |                                            | 2,319  |              |         |  | 2,319  |         
|Intangible assets, net                            |                                                                                                                                                                                                                        |                                            | 2,941  |              |         |  | 3,164  |         
|Other assets                                      |                                                                                                                                                                                                                        |                                            | 9,120  |              |         |  | 9,251  |         
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  |                                                                                                                                                                                                                        | Total assets                               |        | $            | 140,178 |  |        | $        | 151,997 | 
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY          |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|Current Liabilities:                              |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  | Accounts payable                                                                                                                                                                                                       |                                            | $      | 5,514        |         |  | $      | 6,064    |        
|                                                  | Accrued compensation and benefits                                                                                                                                                                                      |                                            |        | 1,506        |         |  |        | 2,050    |        
|                                                  | Deferred revenue and other income                                                                                                                                                                                      |                                            |        | 3,615        |         |  |        | 4,324    |        
|                                                  | Due to The Titan Corporation                                                                                                                                                                                           |                                            |        | 217          |         |  |        | 3,591    |        
|                                                  | Other current liabilities                                                                                                                                                                                              |                                            |        | 1,152        |         |  |        | 1,383    |        
|                                                  | Senior credit facility with The Titan Corporation                                                                                                                                                                      |                                            |        | 3,438        |         |  |        |         |        
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  |                                                                                                                                                                                                                        | Total current liabilities                  |        |              | 15,442  |  |        |          | 17,412  | 
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|Senior credit facility with The Titan Corporation |                                                                                                                                                                                                                        |                                            | 21,562 |              |         |  | 25,000 |         
|Other long-term liabilities                       |                                                                                                                                                                                                                        |                                            | 3,150  |              |         |  | 2,952  |         
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  |                                                                                                                                                                                                                        | Total liabilities                          |        |              | 40,154  |  |        |          | 45,364  | 
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|Commitments and Contingencies                     |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|Stockholders Equity                              |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  | Preferred stock, $.001 par value,
    5,000,000 shares authorized, none issued and outstanding                                                                                                                         |                                            |        |             |         |  |        |         |        
|                                                  | Class A common stock, $.001 par value,
    200,000,000 shares authorized, 74,231,758 issued and 74,228,229
    outstanding at March 31, 2003 and 73,736,873 issued and
    73,733,344 outstanding at December 31, 2002 |                                            |        | 74           |         |  |        | 73       |        
|                                                  | Additional paid-in capital                                                                                                                                                                                             |                                            |        | 238,794      |         |  |        | 244,440  |        
|                                                  | Deferred stock-based compensation                                                                                                                                                                                      |                                            |        | (4,639       | )       |  |        | (10,350  | )      
|                                                  | Accumulated other comprehensive income (loss)                                                                                                                                                                          |                                            |        | (9           | )       |  |        |         |        
|                                                  | Treasury stock, at cost: 3,529 shares at
    March 31, 2003 and December 31, 2002                                                                                                                                      |                                            |        | (42          | )       |  |        | (42      | )      
|                                                  | Accumulated deficit                                                                                                                                                                                                    |                                            |        | (134,154     | )       |  |        | (127,488 | )      
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  |                                                                                                                                                                                                                        | Total stockholders equity                 |        |              | 100,024 |  |        |          | 106,633 | 
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         
|                                                  |                                                                                                                                                                                                                        | Total liabilities and stockholders equity |        | $            | 140,178 |  |        | $        | 151,997 | 
|                                                  |                                                                                                                                                                                                                        |                                            |        |              |         |  |        |         

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

3



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


(In thousands)


|                                                                                              |                                                                               |                                                         |        |        |        |   |        |        |        |  
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                              |                                                                               |                                                        
|                                                                                              |                                                                               | Three Months Ended                                     
|                                                                                              |                                                                               | March 31,                                              
|                                                                                              |                                                                               |                                                        
|                                                                                              |                                                                               | 2003                                                    |        | 2002  
|                                                                                              |                                                                               |                                                         |        |       
|Cash Flows from Operating
    Activities:                                                     |                                                                               |                                                         |        |        |        |   |        |       
|Net loss                                                                                      |                                                                               | $                                                       | (6,666 | )      |        | $ | (8,979 | )     
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Nonmonetary research consideration                                            |                                                         |        | 282    |        |   |        | (1,168 | )     
|                                                                                              | Depreciation and amortization                                                 |                                                         |        | 1,424  |        |   |        | 1,516  |       
|                                                                                              | Amortization of deferred stock-based compensation                             |                                                         |        | (28    | )      |   |        | 3,800  |       
|                                                                                              | Loss on disposal of property and equipment                                    |                                                         |        | 2      |        |   |        |       |       
|Change in operating assets and liabilities:                                                   |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Increase in restricted cash                                                   |                                                         |        | (1,250 | )      |   |        |       |       
|                                                                                              | Accounts receivable                                                           |                                                         |        | (1,526 | )      |   |        | (494   | )     
|                                                                                              | Inventories                                                                   |                                                         |        | 612    |        |   |        | (1,454 | )     
|                                                                                              | Prepaid expenses and other                                                    |                                                         |        | (1,174 | )      |   |        | 473    |       
|                                                                                              | Other assets                                                                  |                                                         |        | (413   | )      |   |        | (419   | )     
|                                                                                              | Accounts payable                                                              |                                                         |        | (550   | )      |   |        | (4,819 | )     
|                                                                                              | Accrued compensation and benefits                                             |                                                         |        | (544   | )      |   |        | (575   | )     
|                                                                                              | Other accrued liabilities                                                     |                                                         |        | 2,430  |        |   |        | 4,521  |       
|                                                                                              | Due to The Titan Corporation                                                  |                                                         |        | 4,905  |        |   |        | 13,059 |       
|                                                                                              | Deferred revenue and other                                                    |                                                         |        | (3,172 | )      |   |        |       |       
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              |                                                                               | Net cash provided by (used in) operating
    activities |        |        | (5,668 | ) |        |        | 5,461  |  
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|Cash Flows from Investing
    Activities:                                                     |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Capital expenditures                                                          |                                                         |        | (1,526 | )      |   |        | (3,961 | )     
|                                                                                              | Sale of available-for-sale investments                                        |                                                         |        |       |        |   |        | 3,719  |       
|                                                                                              | Advances to Hawaii Pride                                                      |                                                         |        |       |        |   |        | (195   | )     
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              |                                                                               | Net cash used in investing activities                   |        |        | (1,526 | ) |        |        | (437   | )
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|Cash Flows from Financing
    Activities:                                                     |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Proceeds from exercise of stock options and
    warrants                      |                                                         |        | 94     |        |   |        | 112    |       
|                                                                                              | Borrowings on subordinated promissory note                                    |                                                         |        |       |        |   |        | 792    |       
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              |                                                                               | Net cash provided by financing activities               |        |        | 94     |   |        |        | 904    |  
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Effect of exchange rate changes on cash and cash
    equivalents              |                                                         |        | (9     | )      |   |        |       |       
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Net increase (decrease) in cash and cash
    equivalents                      |                                                         |        | (7,109 | )      |   |        | 5,928  |       
|                                                                                              |                                                                               | Cash and cash equivalents at beginning of period        |        |        | 27,336 |   |        |        | 4,131  |  
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              |                                                                               | Cash and cash equivalents at end of period              |        | $      | 20,227 |   |        | $      | 10,059 |  
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       
|Supplemental Cash Flow Information:                                                           |                                                                               |                                                         |        |        |        |   |        |       
|Cash Paid for:                                                                                |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Interest                                                                      |                                                         | $      | 1,211  |        |   | $      |       |       
|                                                                                              | Income taxes                                                                  |                                                         | $      | 11     |        |   | $      |       |       
|Non-Cash Financing and Investing
    Activities:                                              |                                                                               |                                                         |        |        |        |   |        |       
|                                                                                              | Reversal of deferred stock-based compensation due
    to employee termination |                                                         | $      | 5,739  |        |   | $      |       |       
|                                                                                              | Conversion of subordinated promissory note to
    common stock                |                                                         |        |       |        |   |        | 73,000 |       
|                                                                                              | Increase in fair value of investments,
    available-for-sale                 |                                                         |        |       |        |   |        | 47     |       
|                                                                                              |                                                                               |                                                         |        |        |        |   |        |       

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

4



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


(Unaudited)


(In thousands)


|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------ |  | ---------- | ------ | -------- |  | ------------- | -- | ------------ |  | ------ | -- | -------- |  | ----------- | ------- | ----- |  | - | ------- | - |  | - | --- | - |  | - | --- | - |  | - | -------- | - |  | - | ------- | -
|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |         
|                                                                                                                |  | Shares of    |        | Common |  |            |        |          |  | Accumulated   |    |              |  |        |    |         
|                                                                                                                |  | Common Stock |        | Stock  |  |            |        |          |  | Other         |    |              |  |        |    |         
|                                                                                                                |  |              |        |        |  | Additional |        | Deferred |  | Comprehensive |    |              |  |        |    |         
|                                                                                                                |  | Class        |        | Class  |  | Class      |        | Class    |  | Paid-in       |    | Stock-Based  |  | Income |    | Treasury |  | Accumulated |         |      
|                                                                                                                |  | A            |        | B      |  | A          |        | B        |  | Capital       |    | Compensation |  | (Loss) |    | Stock    |  | Deficit     |         | Total
|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |      
|Three Months Ended
    March 31, 2003:                                                                          |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  
|Balances at December 31, 2002                                                                                   |  |              | 73,733 |        |  |            |       |          |  | $             | 73 |              |  | $      |   |          |  | $           | 244,440 |       |  | $ | (10,350 | ) |  | $ |    |   |  | $ | (42 | ) |  | $ | (127,488 | ) |  | $ | 106,633 |  
|Net loss                                                                                                        |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             |        |       |  |   |        |   |  |   |    |   |  |   |    |   |  |   | (6,666   | ) |  |   | (6,666  | )
|Proceeds from issuance of common stock in
    conjunction with exercise of stock options and other stock grants |  |              | 495    |        |  |            |       |          |  |               | 1  |              |  |        |   |          |  |             | 93      |       |  |   |        |   |  |   |    |   |  |   |    |   |  |   |         |   |  |   | 94      |  
|Reversal of deferred stock-based compensation on
    unvested options related to employee termination           |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             | (5,739  | )     |  |   | 5,739   |   |  |   |    |   |  |   |    |   |  |   |         |   |  |   |        |  
|Amortization of deferred stock-based compensation                                                               |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             |        |       |  |   | (28     | ) |  |   |    |   |  |   |    |   |  |   |         |   |  |   | (28     | )
|Foreign currency translation loss                                                                               |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             |        |       |  |   |        |   |  |   | (9  | ) |  |   |    |   |  |   |         |   |  |   | (9      | )
|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  
|Balances at March 31, 2003                                                                                      |  |              | 74,228 |        |  |            |       |          |  | $             | 74 |              |  | $      |   |          |  | $           | 238,794 |       |  | $ | (4,639  | ) |  | $ | (9  | ) |  | $ | (42 | ) |  | $ | (134,154 | ) |  | $ | 100,024 |  
|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  
|Three Months Ended
    March 31, 2002:                                                                          |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  
|Balances at December 31, 2001                                                                                   |  |              | 11,602 |        |  |            | 46,774 |          |  | $             | 11 |              |  | $      | 47 |          |  | $           | 147,607 |       |  | $ | (26,918 | ) |  | $ | 47  |   |  | $ | (42 | ) |  | $ | (92,400  | ) |  | $ | 28,352  |  
|Net loss                                                                                                        |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             |        |       |  |   |        |   |  |   |    |   |  |   |    |   |  |   | (8,979   | ) |  |   | (8,979  | )
|Issuance of common stock in conjunction with
    conversion of subordinated promissory note to equity           |  |              | 4,441  |        |  |            | 3,226  |          |  |               | 5  |              |  |        | 3  |          |  |             | 72,992  |       |  |   |        |   |  |   |    |   |  |   |    |   |  |   |         |   |  |   | 73,000  |  
|Proceeds from issuance of common stock in
    conjunction with exercise of stock options and other stock grants |  |              | 781    |        |  |            |       |          |  |               | 1  |              |  |        |   |          |  |             | 111     |       |  |   |        |   |  |   |    |   |  |   |    |   |  |   |         |   |  |   | 112     |  
|Amortization of deferred stock-based compensation                                                               |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             |        |       |  |   | 3,800   |   |  |   |    |   |  |   |    |   |  |   |         |   |  |   | 3,800   |  
|Unrealized loss on investments                                                                                  |  |              |       |        |  |            |       |          |  |               |   |              |  |        |   |          |  |             |        |       |  |   |        |   |  |   | (47 | ) |  |   |    |   |  |   |         |   |  |   | (47     | )
|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  
|Balances at March 31, 2002                                                                                      |  |              | 16,824 |        |  |            | 50,000 |          |  | $             | 17 |              |  | $      | 50 |          |  | $           | 220,710 |       |  | $ | (23,118 | ) |  | $ |    |   |  | $ | (42 | ) |  | $ | (101,379 | ) |  | $ | 96,238  |  
|                                                                                                                |  |              |        |        |  |            |        |          |  |               |    |              |  |        |    |          |  |             |         |       |  |   |         |   |  |   |     |   |  |   |     |   |  |   |          |   |  |   |         |  

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

5



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


March 31, 2003


(Unaudited)




|         |                                             
|-------- | --------------------------------------------
|Note (1) | Basis of Financial Statement
    Preparation

The accompanying consolidated financial
information of SureBeam Corporation and subsidiaries
(SureBeam or the Company) should be read
in conjunction with the Companys audited consolidated
financial statements and notes thereto for the year ended
December 31, 2002 included in its Form 10-K filed with
the Securities and Exchange Commission on March 31, 2003.
The information as of March 31, 2003, and for the three
months ended March 31, 2003 and 2002 is unaudited. The
accompanying consolidated financial information includes all
normal recurring adjustments, which are considered necessary by
the Companys management for a fair presentation of the
consolidated financial position, results of operations and cash
flows for the periods presented. However, these results are not
necessarily indicative of results for a full fiscal year.
Certain prior year amounts have been reclassified to conform to
the 2003 financial statement presentation.

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

On October 16, 2001, The Titan Corporation,
or Titan, adopted a definitive plan to spin-off its ownership
interest in SureBeam in the form of a tax-free dividend to
Titans stockholders. Effective August 5, 2002, Titan
distributed all of its shares of the Companys common stock
to the stockholders of Titan. Holders of record of Titan common
stock as of the close of business on July 26, 2002, the
record date for the distribution, received 0.6986 shares of
SureBeams common stock for every share of Titan common
stock held. Previously, Titan held over eighty percent of the
Companys common stock and held a higher percentage of the
voting power due to Titans ownership of shares of
Class B common stock, which had ten votes per share, as
compared to the Class A common stock, which has one vote
per share and is traded on the Nasdaq under the symbol SURE.
Prior to the distribution of shares of SureBeams common
stock, Titan converted all of its shares of SureBeams
Class B common stock, into shares of SureBeams
Class A common stock. Therefore, stockholders of Titan
receiving shares of SureBeam common stock received only shares
of Class A common stock. The Class B common stock has
now been retired and cannot be reissued. The Company has
negotiated other agreements with Titan in connection with the
Companys spin-off including a tax sharing and
disaffiliation agreement that will subject the Company to
liability if it sells the Companys equity or equity linked
securities in a manner that causes a change in the
Companys ownership of 50% or more in voting power or value
as part of Titans spin-off plan.

Also on October 16, 2001, Titan purchased a
perpetual and exclusive, non-royalty bearing license to use the
Companys intellectual property for all applications and
fields other than the food (excluding water), animal hide and
flower markets in consideration of the following: 1) to
make available to the Company a $50.0 million senior credit
facility, 2) to exchange the outstanding $75.0 million
debt owed by the Company to Titan for additional shares of the
Companys Class B common stock and Class A common
stock, and 3) a cash payment of $8.0 million, with a
$4.0 million payment on September 30, 2001 and four
installments of $1.0 million payable on each of
March 31, 2002, June 30, 2002, September 30, 2002
and December 31, 2002. With respect to the exchange of the
Companys $75.0 million non-convertible debt for
common stock, the Company followed guidance in APB Opinion
No. 29, Accounting For Nonmonetary
Transactions, and determined that the use of the fair
value of the license on the date of the exchange was
appropriate. The Company recognized $1.0 million of the
cash payments related to the license agreement as other income in

6



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the three months ended March 31, 2003. The
Company will recognize $1.0 million as other income each
quarter through September 30, 2003.

The accompanying consolidated financial
statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business.
Consistent with its business plan, the Company has incurred
substantial losses from operations primarily resulting from its
marketing and brand awareness campaign. Management believes it
will continue to incur losses for 2003, as the Company will
continue to expend significant funds on sales and marketing.
Additionally, the Companys construction and implementation
period for systems sales to strategic alliances will require a
substantial use of cash for at least 12 months. The
Companys arrangements to sell food irradiation systems to
strategic alliances typically contain milestone provisions for
payment, which are typically based upon time, stage of
completion, etc. where no material uncertainties exist. Also, it
has advanced funds aggregating $6.0 million to Hawaii
Pride, LLC, or Hawaii Pride. The Company has also entered into a
number of commitments to lease land and facilities in connection
with construction of its four company-owned service centers of
which three are operational with the fourth expected to be
operational in the second quarter of 2003. In addition, based on
the Companys customer requirements, the Company may expend
funds to construct and install in-line systems that the Company
will own and operate.

In addition to managements current
operating plans, which focus on improving cash flow from
operations, the Company is also evaluating a number of
alternative plans to meet its future operating cash needs. These
plans include raising additional funds from the capital markets.
As of the date of the filing of this report, the Company has
obtained $25.0 million under its senior secured credit
facility with Titan. The Company does not plan to borrow further
funds under this credit facility. If funds from the capital
markets are not sufficient for the Company or if it is unable to
generate sufficient cash flow from operations, management may
need to consider additional actions, including reducing or
deferring capital expenditures, reducing or deferring research
and development projects, curtailing construction of systems for
customers in advance of payment and reducing marketing and other
expenditures, which actions may have a material adverse impact
on the Companys ability to meet its business objectives.

A variety of currently unanticipated events could
require additional capital resources such as the acquisition of
complementary businesses or technologies or increased working
capital requirements to fund, among other things, construction
of systems for the Companys strategic alliances in advance
of payment.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Allowance for doubtful accounts.The Company provides a reserve against
    its receivables for estimated losses that may result from its
    customers inability to pay. These reserves are based on
    potential uncollectible accounts, aged receivables, historical
    losses, and its customers credit-worthiness. Should a
    customers account become past due, the Company generally
    will place a hold on the account and discontinue further
    shipments and/or services provided to that customer, minimizing
    further risk of loss.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys accounts receivable balances
    include unbilled receivables, which are comprised of
    work-in-process which will be billed in accordance with contract
    terms and delivery schedules, as well as amounts billable upon
    final execution of contracts, contract completion or milestones.
    The Company continually monitors the contracts and bills based
    on the milestone payments. At March 31, 2003, 97% of its
    unbilled balance relates to its RESAL contract. The Company
    believes the likelihood of a

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |  |                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | material loss to us on an uncollectible account
    in its unbilled account would be substantially increased if the
    political conditions in Saudi Arabia deteriorate due to the war
    in Iraq.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Valuation of Inventory.Inventories include the cost of
    material, labor and overhead, and are stated at the lower of
    cost or market. The Company reviews the components of its
    inventory on a regular basis for excess, obsolete and impaired
    inventory based on estimated future usage and sales. The
    likelihood of any material inventory write-downs is dependent on
    changes in competitive conditions, new product introductions by
    the Company or its competitors or customer demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Valuation of intangible and other long-lived
    assets.The Company uses assumptions
    in establishing the carrying value and estimated lives of its
    intangible and other long-lived assets. Management evaluates
    long-lived assets for impairment in accordance with
    SFAS 144. The criteria used for these evaluations include
    managements determination of whether a triggering event
    has occurred which would require long-lived assets to be tested
    for recoverability. If management determines that a triggering
    event has occurred and a long-lived asset needs to be tested for
    recoverability, then the Company must estimate future cash flows
    of the related long-lived asset over its remaining useful life.
    The Companys primary long-lived assets, which could be
    subject to impairment in the near term, are approximately
    $60.6 million of assets used in the operation of its food
    processing centers located in Brazil, Los Angeles, Chicago and
    Sioux City. As of March 31, 2003, the Brazil facility has
    not opened, the Los Angeles facility has been open six months,
    the Chicago facility has been open for 15 months, and the
    Sioux City facility has been open for 36 months.
    Managements primary indicator of a triggering event is a
    shortfall in actual operating results of the processing
    facilities when compared to budgeted amounts. As of
    March 31, 2003, none of the four processing facilities have
    generated positive cash flows. Accordingly, management was
    required to perform cash flow recoverability tests to assess
    impairment of each processing facility. Based on
    managements projections of future cash flows to be
    generated from the operation of the processing facilities over
    their remaining useful life, the Company determined that no
    impairment was required to be recorded. In estimating the future
    cash flows, management has projected that the Company will
    continue to receive processing revenue from its existing
    customers, and the Company will be successful in securing new
    customers which will result in the individual facilities
    operating at processing capacities of from 35% to 50% by 2005
    compared with actual capacities at March 31, 2003, ranging
    from 0% to 7.5%. If managements projected processing
    capacities are not achieved by their estimated dates, then
    projected cash flows used in the recoverability test will be
    adjusted downward and may indicate a fair value that is lower
    than the carrying value of the long-lived asset. If assets are
    considered to be impaired, the impairment recognized is the
    amount by which the carrying value of the assets exceeds the
    fair value of the assets. Useful lives and related amortization
    or depreciation expense are based on the Companys estimate
    of the period that the assets will generate revenues or
    otherwise be used by the Company. Factors that would influence
    the likelihood of a material change in the Companys
    reported results include significant changes in the assets
    ability to generate a positive cash flow, a significant decline
    in the economic and competitive environment on which the asset
    depends, significant changes in the Companys strategic
    business objectives, utilization of the asset, and a significant
    change in the political and or economic conditions in certain
    countries, particularly Brazil and Saudi Arabia, in which the
    Company has investments or assets.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In July 2001, the Financial Accounting Standards
    Board, or FASB, issued Statement of Financial Accounting
    Standards, or SFAS, SFAS No. 142, Goodwill and Other
    Intangible Assets, which supersede Accounting Principles
    Board Opinion 17, Intangible Assets. Under SFAS
    No. 142, goodwill and intangible assets with indefinite
    lives are no longer amortized but are tested at least annually
    for impairment. Separable intangible assets with defined lives
    will continue to be amortized over their useful lives. There was
    not an impact to the Companys consolidated financial
    statements related to adoption of this statement.

8



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Valuation of deferred income taxes.Valuation allowances are established,
    when necessary, to reduce deferred tax assets to the amount
    expected to be realized. The likelihood of a material change in
    the Companys expected realization of these assets is
    dependent on future taxable income, its ability to deduct tax
    loss carryforwards against future taxable income, the
    effectiveness of its tax planning and strategies among the
    various tax jurisdictions that the Company operates in, and any
    significant changes in the tax treatment received on its
    business combinations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Revenue recognition.The Company recognizes a portion of
    its revenue using the percentage-of-completion method, which
    includes revenues recognized in accordance with Statement of
    Position 81-1, Accounting for Performance of
    Construction-Type and Certain Production-Type Contracts
    (SOP 81-1). Total estimated costs are based on
    managements assessment of costs to complete the project
    based upon evaluation of the level of work achieved and costs
    expended to date. To the extent that the Companys
    estimated costs materially change, due to added costs of
    performing under the contract in a foreign country, its revenues
    recorded under such contracts could materially be affected and
    could have a material adverse effect on its operations in the
    future periods. In 2003, approximately 87% of revenues were
    generated by fixed price contracts, which are recognized using
    the percentage-of-completion method of accounting. In 2003,
    approximately 13% of total revenues were generated by cost-plus
    fixed fee contracts, time and material contracts and units of
    delivery for which percentage-of-completion is not used, and
    revenues are generally recognized as work is performed and
    billed to the customer. The Company contracts with its customers
    using cost-plus fixed fee and fixed-price contracts. Revenues
    and profits are recognized in accordance with Accounting
    Research Bulletin No. 45, Long-term Construction-Type
    Contracts, and SOP 81-1. Revenues are recognized
    under fixed price contracts based on the
    percentage-of-completion basis, using the cost-to-cost method.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | One of the three criteria necessary to use the
    percentage-of-completion method of accounting is the Company
    believes that the buyer can be expected to satisfy his
    obligations under the contract. At the inception of a new
    contract, management performs an evaluation of the buyers
    ability to perform and make payments in accordance with
    contractual terms. Based on an evaluation of the buyers
    credit worthiness and wherewithal to pay, management considers
    the need to obtain a third party letter of credit or initial
    payment prior to commencing construction and recognizing
    revenue. The Companys largest contract in which revenue is
    recognized using the percentage-of-completion method of
    accounting is with RESAL. The Company did not obtain an initial
    payment or a third party letter of credit prior to commencing
    construction on the contract in 2001. However, the Company made
    an initial assessment in 2001 and has made periodic assessments
    through March 31, 2003, as to RESALs ability to
    perform under the contract and concluded that collection was
    probable at inception of the contract and as of March 31,
    2003. The Company made this determination without regard to
    RESALs ability to transfer its obligation, as allowed
    under the contract, to SureBeam Middle East, LLC. In assessing
    the probability of collection, the Company performed financial
    due diligence on RESAL and its principals, which included
    discussions with Saudi banking officials, prominent Saudi
    business professionals, Saudi government agencies and review of
    available RESAL financial information. Through March 31,
    2003, the Company has recognized $23.6 million of revenue,
    has collected $5.3 million, of which $1.3 million is
    restricted cash, and has an unbilled receivable of
    $18.4 million. The restricted cash represents the money
    received as payment on the RESAL contract in anticipation of the
    first shipment of equipment. The cash will become unrestricted
    upon shipment, which is scheduled for the second quarter of 2003.

Revenue Recognition.Revenues derived from providing
medical equipment sterilization and electronic food irradiation
services are recorded at the time services are performed and
collectibility is reasonably assured. Revenues derived from
sales of electronic irradiation systems to Titan are recognized
under cost-plus 20% or fixed price contracts. Revenues derived
from sales of medical equipment sterilization and electronic
food irradiation systems under fixed-price contracts are
accounted for using the percentage-of-completion

9



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

method of accounting. The Company applies the
percentage-of-completion method of accounting using the
cost-to-cost method whereby revenues are recorded based on the
percentage that total costs incurred bears to the total
estimated costs at completion. These contracts to provide
customized medical equipment sterilization and electronic food
irradiation systems also include the installation and
integration into its customers production lines. Estimated
losses on fixed-price contracts are recorded in the period the
losses are determinable. In determining the applicability of the
percentage-of-completion method of accounting for fixed-price
contracts, the Company considers the risks associated with
estimating its costs to complete a contract and the buyers
ability to perform under the contract. If these estimates are
deemed unreliable or contain a significant degree of risk, the
Company will seek to modify the contract to time-and-materials
or use the completed-contract method. To date, the Company has
not recorded any revenues under the completed-contract method.
See Note (5).

Cash, Cash Equivalents and Restricted Cash.The Company records all short-term,
highly liquid investments with original maturities of less than
three months as cash, cash equivalents and restricted cash.

Inventories.Generally, the Companys systems
are customized and are produced on a made to order basis. The
Company does, however, maintain a stock of long lead-time and
general stock items. These inventories include the cost of
material, labor and overhead, and are stated at the lower of
cost, determined on the first-in, first-out (FIFO) method,
or market. The Company periodically evaluates its on-hand
inventories and makes appropriate disposition of any inventories
deemed excess or obsolete.

Property and Equipment.Property and equipment are stated at
acquisition cost. Depreciation is provided using the
straight-line method, with estimated useful lives of five to
40 years for leasehold improvements (or the life of the
lease if shorter) and three to seven years for machinery and
equipment and furniture and fixtures. Depreciation on the
electronic food irradiation systems is based on the
units-of-production method, determined upon hours utilized,
which approximates fifteen years.

Warranties.The
Company typically provides a limited warranty on systems sold
that covers parts for a 12 month period commencing after
system acceptance or beneficial use by the buyer, whichever
occurs first. The Company has recorded a reserve for the
estimated costs it may incur under its warranty program.

The following summarizes the Companys
warranty reserve at March 31, 2003 and 2002 (in thousands):

|                  |           |              |     |      |  |   |     |   | 
|----------------- | --------- | ------------ | --- | ---- |  | - | --- | - | 
|                  |           |             
|                  |           | Three Months
|                  |           | Ended       
|                  |           | March 31,   
|                  |           |             
|                  |           | 2003         |     | 2002
|                  |           |              |     |     
|Beginning balance |           | $            | 347 |      |  | $ | 375 |  
|                  | Provision |              |     |     |  |   |     |  | 
|                  | Claims    |              |     |     |  |   |     |  | 
|                  |           |              |     |      |  |   |     |  
|Ending balance    |           | $            | 347 |      |  | $ | 375 |  
|                  |           |              |     |      |  |   |     |  

Impairment of Long-Lived Assets.Periodically, the Company reviews for
possible impairment its long-lived assets and certain
identifiable intangibles to be held and used. Whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable, asset values are adjusted
accordingly. In evaluating whether an impairment exists, the
Company compares the carrying value of the asset to the
estimated undiscounted future cash flows. If an impairment is
deemed to exist, the assets carrying value is adjusted to
the present value of its estimated future cash flows.

On January 1, 2002, the Company adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long Lived
Asset and for Long-Lived Assets to be Disposed of, which
the Company followed in 2001 and prior.

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under SFAS No. 144, the Company periodically
assesses long-lived assets for impairment based on expectations
of future undiscounted cash flows from the related operations,
and when circumstances dictate, adjusts the asset to the extent
carrying value exceeds the fair value of the asset. These
factors, along with managements plans with respect to the
operations, are considered in assessing the recoverability of
long-lived assets. There were no assessments of long-lived
assets resulting in write-downs during the three months ended
March 31, 2003.

Stock-Based Compensation.The Company has elected to adopt the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS 123. Accordingly, the Company
will continue to account for its stock-based compensation plans
under the provisions of APB No. 25.

As permitted, the Company has adopted the
disclosure only provisions of SFAS 123. Had stock-based
compensation been determined based on the fair value at the date
of the grant for the three months ended March 31, 2003 and
2002 consistent with the provisions of SFAS 123, the
Companys net loss and net loss per common share would have
been reported as the pro forma amounts indicated below (in
thousands, except share information):

|                                                                    |         |                    |        |        |   |   |        |        |  
|------------------------------------------------------------------- | ------- | ------------------ | ------ | ------ | - | - | ------ | ------ | -
|                                                                    |         |                   
|                                                                    |         | Three Months Ended
|                                                                    |         | March 31,         
|                                                                    |         |                   
|                                                                    |         | 2003               |        | 2002  
|                                                                    |         |                    |        |       
|Net loss                                                            |         | $                  | (6,666 | )      |   | $ | (8,979 | )     
|Less APB No. 25 stock-based compensation
    expense  see Note (2) |         |                    | (28    | )      |   |   | 3,800  |       
|Add SFAS No. 123 stock-based compensation
    expense               |         |                    | 1,278  |        |   |   | 1,716  |       
|                                                                    |         |                    |        |        |   |   |        |       
|Pro forma net loss                                                  |         | $                  | (7,972 | )      |   | $ | (6,895 | )     
|                                                                    |         |                    |        |        |   |   |        |       
|Net loss per common share:                                          |         |                    |        |        |   |   |        |       
|                                                                    | Basic   |                    | $      | (0.09  | ) |   | $      | (0.14  | )
|                                                                    | Diluted |                    | $      | (0.09  | ) |   | $      | (0.14  | )
|Pro forma loss per common share:                                    |         |                    |        |        |   |   |        |       
|                                                                    | Basic   |                    | $      | (0.11  | ) |   | $      | (0.11  | )
|                                                                    | Diluted |                    | $      | (0.11  | ) |   | $      | (0.11  | )
|Weighted average shares:                                            |         |                    |        |        |   |   |        |       
|                                                                    | Basic   |                    |        | 74,110 |   |   |        | 62,794 |  
|                                                                    | Diluted |                    |        | 74,110 |   |   |        | 62,794 |  

Fair value under SFAS No. 123 is determined
using the Black-Scholes option-pricing model with the following
assumptions:

|              |  |                    |         |      |  |  |         |  
|------------- |  | ------------------ | ------- | ---- |  |  | ------- | -
|              |  |                   
|              |  | Three Months Ended
|              |  | March 31,         
|              |  |                   
|              |  | 2003               |         | 2002
|              |  |                    |         |     
|Expected term |  |                    | 5 years |      |  |  | 5 years |  
|Interest rate |  |                    | 2.86    | %    |  |  | 5.15    | %
|Volatility    |  |                    | 98      | %    |  |  | 115     | %
|Dividends     |  |                    |        |      |  |  |        |  

Income Taxes.The
Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes, or SFAS 109, which requires the use of the
asset and liability method of accounting for deferred income
taxes. Under this method, deferred income taxes are recorded to
reflect the tax consequences on future years of temporary
differences between the tax bases of

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assets and liabilities and their financial
reporting amounts at each year-end. If it is more likely than
not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.

Prior to the spin-off date, the Company was
included in Titans consolidated federal and certain state
income tax returns. A tax sharing agreement was also in place
between the Company and Titan. Under the agreement, the Company
is reimbursed a sum equal to the amount of benefit realized by
Titan that is attributable to the utilization of net operating
losses and other tax attributes generated by the Company. Such
reimbursement is due from Titan upon the earlier of (1) the
year in which the Company would have utilized the loss and
obtained a tax benefit had the Company filed a separate federal
income tax return in all tax years, and (2) the year in
which the applicable carryforward period expires. Subsequent to
the spin-off, the Company is no longer included in the
consolidated federal and state income tax returns with Titan.
Accordingly, tax periods beginning after August 5, 2002
will not be governed by this agreement.

Minority Equity Investments.The Company follows APB Opinion
No. 18 The Equity Method of Accounting for
Investments in Common Stock. As the Company owns less than
20% of SureBeam Middle East, LLC, but has significant influence,
the Company accounts for its ownership interest using the equity
method of accounting. The Company periodically reviews its
investment in its investee for possible impairment. Whenever
events or changes in circumstances indicate that the carrying
value of an investment may not be fully recoverable, the
investment value is adjusted accordingly. See Note (5).

Per Share Information.Basic and diluted loss per share is
presented in conformity with Statement of Financial Accounting
Standards No. 128, Earnings per Share, or
SFAS 128, for all periods presented. In accordance with
SFAS 128, basic loss per share has been computed using the
weighted-average number of shares of common stock outstanding
during the period. Diluted loss per common share includes the
effects of potentially dilutive securities using the as
converted and treasury stock methods.

The following data summarizes information
relating to the per share computation for continuing operations
(in thousands, except per share data):

|                                     |                                             |                    |        |        |  |   |        |        | 
|------------------------------------ | ------------------------------------------- | ------------------ | ------ | ------ |  | - | ------ | ------ | 
|                                     |                                             |                   
|                                     |                                             | Three Months Ended
|                                     |                                             | March 31,         
|                                     |                                             |                   
|                                     |                                             | 2003               |        | 2002  
|                                     |                                             |                    |        |       
|Net loss                             |                                             | $                  | (6,666 | )      |  | $ | (8,979 | )     
|Weighted average shares outstanding: |                                             |                    |        |        |  |   |        |       
|                                     | Basic                                       |                    |        | 74,110 |  |   |        | 62,794 | 
|                                     | Effective diluted securities: stock options |                    |        |       |  |   |        |       | 
|                                     |                                             |                    |        |        |  |   |        |       
|                                     | Diluted                                     |                    |        | 74,110 |  |   |        | 62,794 | 
|                                     |                                             |                    |        |        |  |   |        |       
|Net loss per common share  basic    |                                             | $                  | (0.09  | )      |  | $ | (0.14  | )     
|                                     |                                             |                    |        |        |  |   |        |       
|Net loss per common share  diluted  |                                             | $                  | (0.09  | )      |  | $ | (0.14  | )     
|                                     |                                             |                    |        |        |  |   |        |       

In the three months ended March 31, 2003,
the weighted average number of options to purchase approximately
3,347,000 shares of common stock at prices ranging from $0.14 to
$16.09 per share were not included in the computation of diluted
EPS, as the effect would have been anti-dilutive due to the loss
from continuing operations. Similarly, the weighted average
number of options and warrants to purchase approximately
5,106,000 shares of common stock at prices ranging from
$0.14 to $7.51 per share were not included in the computation of
diluted EPS for the three month period ended March 31, 2002.

Fair Value of Financial Instruments.The carrying amounts of the
Companys financial instruments, including accounts
receivable, accounts payable and accrued liabilities,
approximate their fair values due to their short-term nature,
except for the nonmonetary transaction with Texas A&M as
described in Note (5).

12



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily
of trade accounts receivable.

Reclassifications.Certain prior period amounts have been
reclassified to conform to the current period presentation.



|         |                        
|-------- | -----------------------
|Note (2) | Initial Public Offering

In connection with the completion of the
Companys initial public offering on March 16, 2001,
stock options granted under the Nonstatutory Stock Option Plan
were converted from variable plan options to fixed plan options.
Accordingly, deferred stock-based compensation of
$78.6 million was recorded, representing the extent to
which the $10.00 per share offering price exceeded the exercise
price of the options. Additionally, since a substantial portion
of these options was vested at the time of completion of the
offering, approximately $38.7 million was recognized as
stock-based compensation at that time. For the three months
ended March 31, 2003, a credit of $230,000 of stock-based
compensation associated with these options was recorded due to
the reversal of stock-based compensation on unvested options
related to employee terminations. In conjunction with the
completion of the Companys spin-off from Titan on
August 5, 2002, all options held by Titan employees and
directors under this plan became fully vested. The remaining
deferred stock-based compensation balance related to these
options will be recognized as stock-based compensation of
approximately $2.6 million and $1.3 million in 2003
and 2004, respectively, the remaining four-year vesting period
of the options.



|         |                            
|-------- | ---------------------------
|Note (3) | Other Financial Information

During the quarter ended March 31, 2003, the
Company had a cumulative translation adjustment of $9,000. The
Company had no elements of comprehensive income at
March 31, 2002.

Following are details concerning certain balance
sheet data as of March 31, 2003 and December 31, 2002:

The Company has established guidelines relative
to diversification and maturities that maintain safety and
liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest
rates. Cash equivalents and restricted cash are short-term,
highly liquid investments with original maturities of less than
three months. Cash, cash equivalents and restricted cash of
$21.5 million and $27.3 million at March 31, 2003
and December 31, 2002, respectively, are primarily invested
in commercial paper and money market funds.

|                                    |                       |                                      |        |              |        |   |        |   |        |  
|----------------------------------- | --------------------- | ------------------------------------ | ------ | ------------ | ------ | - | ------ | - | ------ | -
|                                    |                       | March 31,                            |        | December 31,
|                                    |                       | 2003                                 |        | 2002        
|                                    |                       |                                      |        |             
|Accounts receivable (in thousands): |                       |                                      |        |              |        |   |        |  
|                                    |                       | Billed                               |        | $            | 925    |   |        | $ | 902    |  
|                                    |                       | Unbilled                             |        |              | 18,994 |   |        |   | 17,491 |  
|                                    |                       | Less allowance for doubtful accounts |        |              | (250   | ) |        |   | (250   | )
|                                    |                       |                                      |        |              |        |   |        |  
|                                    |                       | $                                    | 19,669 |              |        | $ | 18,143 |  
|                                    |                       |                                      |        |              |        |   |        |  
|                                    | The Titan Corporation |                                      |        |              |        |   |        |   |       
|                                    |                       | Billed                               |        | $            | 529    |   |        | $ | 8,973  |  
|                                    |                       | Unbilled                             |        |              | 1,315  |   |        |   | 1,150  |  
|                                    |                       |                                      |        |              |        |   |        |  
|                                    |                       | $                                    | 1,844  |              |        | $ | 10,123 |  
|                                    |                       |                                      |        |              |        |   |        |  

Unbilled receivables primarily represent
work-in-process that will be billed in accordance with contract
terms and delivery schedules. Also included in unbilled
receivables are amounts billable upon final execution

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of contracts, contract completion or milestones.
Unbilled receivables are generally expected to be collected
within one year.

|                            |                 |           |        |              |  |   |        |        | 
|--------------------------- | --------------- | --------- | ------ | ------------ |  | - | ------ | ------ | 
|                            |                 | March 31, |        | December 31,
|                            |                 | 2003      |        | 2002        
|                            |                 |           |        |             
|Inventories (in thousands): |                 |           |        |              |  |   |        |       
|                            | Materials, net  |           | $      | 12,835       |  |   | $      | 12,126 | 
|                            | Work-in-process |           |        | 3,223        |  |   |        | 4,544  | 
|                            |                 |           |        |              |  |   |        |       
|                            |                 | $         | 16,058 |              |  | $ | 16,670 |       
|                            |                 |           |        |              |  |   |        |       

Generally, the Companys systems are
customized and are produced on a made-to-order basis. The
Company does, however, maintain a stock of long lead-time and
general stock items. Inventories include the cost of material,
labor and overhead, and are stated at the lower of cost,
determined on the first-in, first-out (FIFO) method, or market.
The Company periodically evaluates its on-hand stock and makes
appropriate disposition of any stock deemed excess or obsolete.

|                                               |                                                |           |        |              |  |   |        |        | 
|---------------------------------------------- | ---------------------------------------------- | --------- | ------ | ------------ |  | - | ------ | ------ | 
|                                               |                                                | March 31, |        | December 31,
|                                               |                                                | 2003      |        | 2002        
|                                               |                                                |           |        |             
|Property and equipment (in
    thousands):     |                                                |           |        |              |  |   |        |       
|                                               | Machinery and equipment                        |           | $      | 29,870       |  |   | $      | 28,755 | 
|                                               | Furniture, fixtures and leasehold improvements |           |        | 12,976       |  |   |        | 12,926 | 
|                                               | Construction in progress                       |           |        | 23,630       |  |   |        | 23,270 | 
|                                               |                                                |           |        |              |  |   |        |       
|                                               |                                                |           | 66,476 |              |  |   | 64,951 |       
|Less accumulated depreciation and amortization |                                                |           | (5,618 | )            |  |   | (4,819 | )     
|                                               |                                                |           |        |              |  |   |        |       
|Property and equipment, net                    |                                                | $         | 60,858 |              |  | $ | 60,132 |       
|                                               |                                                |           |        |              |  |   |        |       

Construction in progress primarily represents
costs incurred for the construction of our food irradiation
service center in Brazil and in-line systems. Such costs remain
in construction in progress until the facilities are completed
and placed in service.

|                             |           |           |       |              |  |   |       |       | 
|---------------------------- | --------- | --------- | ----- | ------------ |  | - | ----- | ----- | 
|                             |           | March 31, |       | December 31,
|                             |           | 2003      |       | 2002        
|                             |           |           |       |             
|Other assets (in thousands): |           |           |       |              |  |   |       |      
|                             | Texas A&M |           | $     | 7,966        |  |   | $     | 8,107 | 
|                             | Other     |           |       | 1,154        |  |   |       | 1,144 | 
|                             |           |           |       |              |  |   |       |      
|                             |           | $         | 9,120 |              |  | $ | 9,251 |      
|                             |           |           |       |              |  |   |       |      

The long-term asset arising from the transaction
with Texas A&M represents the cumulative revenues recognized
related to the design, construction, installation, integration
and delivery of the system for Texas A&M, net of
amortization related to discounted services received. See
Note (5).



|         |                                 
|-------- | --------------------------------
|Note (4) | Recent Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Boards, or FASB, issued Interpretation No. 46, or
FIN No. 46, Consolidation of Variable Interest
Entities. FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. A variable
interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient
financial resources for the entity to support its

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

activities. FIN No. 46 requires a
variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period
beginning after June 15, 2003. FIN No. 46 will
also affect leasing transactions where the lessor may constitute
as variable interest entities, or VIEs. The adoption of
FIN No. 46 has not had a material impact on the
Companys results of operations or financial position.

In December 2002, the FASB issued Statement of
Financial Accounting Standards, or SFAS, No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  An Amendment of FASB
Statement No. 123, or SFAS 148. This Statement
provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation and requires prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. The Company elected not to adopt the recognition and
measurement provisions of SFAS No. 123 and continues to
account for its stock-based employee compensation plan under APB
Opinion No. 25 and related interpretations. The Company
adopted the interim disclosure provisions required by SFAS 148
for our March 31, 2003 interim financial statements.

In November 2002, the FASB issued Interpretation
No. 45, or FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN
No. 45 expands on the accounting guidance of Statements
No. 5, 57, and 107 and incorporates without change the
provisions of FASB Interpretation No. 34, which is being
superseded. FIN No. 45 will affect leasing transactions
involving residual guarantees, vendor and manufacturer
guarantees, and tax and environmental indemnities. All such
guarantees, including accrued warranty for system sales, will
need to be disclosed in the notes to the financial statements
starting with the period ending after December 15, 2002.
For guarantees issued after December 31, 2002, the fair
value of the obligation must be reported on the balance sheet.
Existing guarantees will be grand fathered and will not be
recognized on the balance sheet. The Company does not believe it
has any guarantees, which are covered under the provisions of
FIN No. 45.

In July 2002, SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities was
issued. SFAS 146 provides guidance on the recognition and
measurement of liabilities associated with exit and disposal
activities. Under SFAS 146, liabilities for costs associated
with exit or disposal activities should be recognized when the
liabilities are incurred and measured at fair value. This
statement is effective prospectively for exit or disposal
activities initiated after December 31, 2002. The adoption
of SFAS No. 146 has not had a material impact on the
Companys results of operations or financial position.

In April 2002, SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections was issued. SFAS 145 provides guidance on
the classification of gains and losses from the extinguishment
of debt and on the accounting for certain specified lease
transactions. This statement is effective for fiscal years
beginning after May 31, 2002. The adoption of SFAS
No. 145 has not had a material impact on the Companys
results of operations or financial position.

In June 2001, FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
for the associated asset retirement costs. The standard applies
to tangible long-lived assets that have a legal obligation
associated with their retirement that results from the
acquisition, construction or development or normal use of the
asset. SFAS 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value
can be made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional
carrying amount is depreciated over the remaining life of the
asset. The liability is accreted at the end of each period
through charges to operating expense. The provisions of
SFAS 143 are required to be

15



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

applied during the quarter ending March 31,
2003. The adoption of SFAS No. 143 has not had a material
impact on the Companys results of operations or financial
position.



|         |                       
|-------- | ----------------------
|Note (5) | Strategic Transactions

In November 2002, the Company entered into an
equipment purchase agreement with Salubris Limited Partnership,
or Salubris, to sell a SureBeam system for $8.9 million.
The purchase of this system will allow Salubris to build and
operate a new service center in the Fort Worth, Texas area. The
Company will receive per pound processing royalties once the
service center is operational. This agreement allows Fort
Worth-San Diego Investments, LLC, the general partner in
Salubris, the right of first negotiation on certain future
opportunities in the five-state area of Texas, New Mexico,
Oklahoma, Arkansas and Louisiana to purchase the Companys
systems and to provide SureBeam processing. The Company has
commenced construction on this system and has recognized, under
the percentage-of-completion method of accounting, $719,000 in
revenues from non-affiliated parties during the three months
ended March 31, 2003. Through April 2003, the Company has
received payments of $2.8 million and expects to receive
milestone payments as they become due and payable on this
contract.

In September 2002, the Company received an order
from Titan for $6.0 million in connection with a new
contract with the USPS. Under this agreement, the Company is to
provide two linear accelerators to sanitize the mail. During the
three months ended March 31, 2003, the Company recorded
revenue of $877,000. Through April 2003, the Company received
payments of $1.2 million and expects to receive milestone
payments as they become due and payable on this contract.

In March 2002, the Company received an order in
the aggregate amount of approximately $5.3 million from Son
Son Co. Ltd., a private food-processing corporation
headquartered in Vietnam, for one electronic food irradiation
system to operate in Vietnam for irradiating shrimp, seafood,
and frog legs and prolonging shelf life of foods. SureBeam
commenced construction on this system and has recognized, under
the percentage-of-completion method of accounting,
$4.4 million in revenue, which has been recorded on this
contract through March 31, 2003, of which $1.1 million
was recognized during the three months ended March 31,
2003. The Company received an aggregate of $3.8 million in
milestone payments on this contract through March 31, 2003.
It expects to receive the final milestone payment six months
after a third party certification system acceptance test
completion.

During March 2003, the outbreak of Severe Acute
Respiratory Syndrome, or SARS, in Asia resulted in the
U.S. State Department warning U.S. Citizens not to travel
to Vietnam because of the lack of adequate medical facilities
for proper treatment of SARS. Therefore the Companys
personnel, who had been constructing the system in Vietnam, left
the country pending resolution of the medical crisis. In April
2003, The Center for Disease Control, or CDC, and the World
Health Organization, or WHO, lifted the warning regarding SARS
in Vietnam and the Companys personnel returned to Vietnam
in May 2003. It is now anticipated that the service center will
be completed during the third quarter of 2003.

In June 2001, the Company received a purchase
order contract with an aggregate value of $50.0 million
from RESAL Saudi Corp., or RESAL, for ten electronic food
irradiation systems to operate in multiple service centers in
the Saudi Arabia region for irradiating poultry and disinfesting
dates. In 2002, the purchase order contract for these systems
was modified to $53.0 million to construct systems for three
large service centers with a combination of high power x-ray and
electron beam technology. The Company commenced construction of
these systems for RESAL and has recognized, under the
percentage-of-completion method of accounting, $2.3 million
in revenue from investee during the three months ended
March 31, 2003. Due to the war in Iraq, certain shipments
of equipment to Saudi Arabia that were scheduled to take place
in March 2003 have been delayed. The Company anticipates making
this shipment in the second quarter of 2003. This delay and any
future delays may cause delays in payments due upon contractual
milestones.

16



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In April 2002, the Company formed a joint venture
under the name SureBeam Middle East, LLC with RESAL. As of
March 31, 2003, SureBeam owns a 19.9% interest in SureBeam
Middle East, LLC and RESAL and other Saudi nationals own the
remaining 80.1%. As the Company owns less than 20%, but has
significant influence, the Company accounts for its ownership
interest in SureBeam Middle East, LLC using the equity method of
accounting under APB Opinion No. 18 The Equity Method
of Accounting for Investments in Common Stock. In
accordance with the joint venture agreement, RESALs
purchase order contract dated June 2001 may be assigned to
SureBeam Middle East, LLC at such time as the joint venture
receives sufficient funds from third party investors. As of
March 31, 2003, a portion of the purchase order contract
has been assigned to SureBeam Middle East, LLC. As a result,
revenue recognized under the contract is presented in the
consolidated statements of operations as revenues from investee
and the Company has eliminated its 19.9% interest in the profit
recognized under the percentage-of-completion method of
accounting in connection with the purchase order contract. The
Company has received payments of $5.3 million, of which
$1.3 million is restricted cash, through April 2003 from
SureBeam Middle East, LLC based on milestone payments and
expects to continue to receive milestone payments as they become
due and payable until the contract is complete. The restricted
cash represents the money received as payment on the RESAL
contract in anticipation of the first shipment of equipment. The
cash will become unrestricted upon shipment, which is scheduled
for the second quarter of 2003. The joint venture will govern
the strategic relationship with the operator of these systems,
including royalty and management fees and a minority equity
ownership of the operator that will operate the service centers.

In connection with the Companys agreement
with Texas A&M, SureBeam agreed to provide three electronic
food irradiation linear accelerators, material handling and
auxiliary equipment, which are referred to collectively as the
system, pursuant to a ten-year lease with title passing to Texas
A&M at the end of the ten-year term. The agreement provides
the Company access to Texas A&M employees for a variety of
free or discounted services, as well as rights to use the system
for performing irradiation services for its customers. The
Company is currently working with Texas A&M on several
research projects which include studies on shelf life extension,
food products application testing, and the effectiveness of
SureBeams technology versus other technologies. Since the
Company retains the right to use the system through the end of
the term of the arrangement, it has accounted for this
transaction as a sale-leaseback.

As the consideration in this lease is
nonmonetary, the Company has accounted for this element of the
agreement in accordance with APB No. 29, Accounting
for Nonmonetary Transactions. Sales are recorded on a
percentage-of completion basis at the fair market value of the
electronic food irradiation system sold to Texas A&M and
total system profits of approximately $600,000 are deferred and
recognized ratably over the remaining term of the arrangement
commencing upon delivery of the system.

The asset arising from the total cumulative
revenues of $10.0 million, net of $896,000 of amortization,
has been recorded as a short-term and long-term asset at
March 31, 2003. The short-term and long-term assets arising
from this transaction represents the cumulative revenues
recognized related to the design, construction, installation,
integration and delivery of the system for Texas A&M, net of
amortization. During the three months ended March 31, 2003,
the Company has recorded $289,000 of amortization expense
related to the free and discounted services it received during
this period. As of March 31, 2003, the Company had
unamortized deferred profits amounting to approximately
$559,000, which are included as other short-term and long-term
liabilities in the accompanying consolidated balance sheet.
These deferred profits, which represent the difference between
the cumulative costs incurred and the cumulative revenues
recognized, are amortized ratably to reduce cost of sales over
the remaining term of the ten-year term of the arrangement. As
of March 31, 2003, $41,000 of the deferred profit had been
amortized.

With respect to the impact of the transaction
with Texas A&M on the Companys liquidity, the Company
has expended funds of approximately $9.4 million related to the
construction of the system through December 31, 2002. These
costs have been incurred primarily related to the design of the
system, construction

17



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of and modification to the physical structure,
which house the system, and for the manufacture of the linear
accelerators and x-ray components as well as the material
handling and conveyor systems. During the third quarter of 2002,
the Company completed the delivery of the system to Texas
A&M.



|         |                                                              
|-------- | -------------------------------------------------------------
|Note (6) | Senior Secured Credit Facility with The Titan
    Corporation

During 2002, Titan extended a $50.0 million
senior secured credit facility to SureBeam that allows SureBeam
to borrow, in addition to its previous borrowings, up to
$12.5 million per quarter during the fourth quarter of 2002
through the fourth quarter of 2003, subject to the
$50.0 million limitation on borrowing. The amount available
for borrowing in each of the second, third and fourth quarters
of 2003 is based upon SureBeams earnings before interest,
taxes, depreciation and amortization (EBITDA) for the prior
quarter as a percentage of the EBITDA target in its annual
operating plan. If EBITDA is less than 25% of target EBITDA,
then the amount available in the applicable quarter is
$5.0 million, provided that no amounts are available unless
the Company covenants during the current quarter to limit its
total operating expenses (defined as research and development
and selling, general and administrative expenses) to
$5.0 million. If EBITDA is 25% of target, then the amount
available is $6.25 million or 50% of the quarterly maximum
and for each percentage of EBITDA above 25% of target, the
percentage of the quarterly maximum above 50% will be increased
on a pro rata basis. The Company is unable to borrow additional
amounts if it has greater than $5.0 million of cash on
hand. As of March 31, 2003, SureBeam had borrowed
$25.0 million on this facility. If SureBeam is unable to
receive funds as anticipated under this credit facility or if
its capital requirements vary from its current plans, it may
require additional financing sooner than it anticipates. In such
circumstance no assurance can be made that the Company would be
able to obtain additional financing on terms reasonable to the
Company, or at all, which could have a material adverse effect
on its results of operations and financial condition.

The Company has not borrowed additional amounts
on the credit facility since October 30, 2002, and, the
Company does not anticipate borrowing, or being able to borrow,
additional amounts on the credit facility during 2003 or during
the remaining period that the credit facility is outstanding. As
of March 31, 2003, SureBeam was in compliance with all
covenants of the credit facility; however, the Company was not
able to borrow additional funds during the second quarter
because it did not meet the earnings before interest, taxes,
depreciation and amortization (EBITDA) target for the first
quarter of 2003 in our annual operating plan. The Company does
not anticipate that we will have availability under the credit
facility during the remaining period that the credit facility is
outstanding.

The Company is obligated, with some exceptions,
to use net proceeds from the sale of assets and securities to
repay amounts advanced under the credit facility. During March
2003, the credit facility was amended to allow SureBeam to
receive net proceeds of up to $25.0 million resulting from
transactions involving the issuance of equity securities through
September 30, 2004, without having to apply such net
proceeds towards repayment of the credit facility, provided that
no default or event of default had occurred. The Company will be
required to make a mandatory prepayment on the credit facility
in an amount equal to 50% of any net proceeds in excess of
$25.0 million resulting from transactions involving the
issuance of equity securities. In consideration for this
amendment the Company agreed to complete five existing cost-plus
20% contracts at a negotiated cost to Titan starting in 2003.

Under the existing senior secured credit facility
with Titan, the Company is obligated to make quarterly principal
payments as follows: 13.75% of the outstanding principal balance
as of December 31, 2003 during each quarter in 2004; 25% of
the outstanding principal balance as of December 31, 2004
during each quarter in 2005; and all remaining principal by
December 31, 2005. In addition, with some exceptions, the
Company is obligated to use net proceeds from the sale of assets
and its securities to repay amounts advanced under this
facility. The interest rate is Titans effective weighted
average term debt rate under Titans credit agreement plus
three percent. As of March 31, 2003, the interest rate on
the credit facility was 7.92%. Interest is payable

18



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

monthly beginning in January 2003. The credit
agreement contains affirmative and negative covenants, including
covenants limiting the Companys incurrence of debt,
capital expenditures, operating expenses, investments,
declaration of dividends and other restricted payments, sale of
stock of subsidiaries and consolidations and mergers. The credit
agreement, however, does not contain any financial covenants
requiring the Company to maintain specific financial ratios. As
of March 31, 2003, we were in compliance with all covenants
of the credit facility; however, we are not able to borrow
additional funds during the second quarter because we did not
meet the earnings before interest, taxes, depreciation and
amortization (EBITDA) target for the first quarter of 2003
in our annual operating plan. The credit agreement is secured by
a first priority lien on all of the Companys assets.



|         |                              
|-------- | -----------------------------
|Note (7) | Commitments and Contingencies

The Company periodically is a defendant in cases
incidental to its business activities. Furthermore, providers of
products and services to the U.S. government are generally
subject to multiple levels of audit and investigation by various
U.S. government agencies. Any liabilities arising from audits by
the federal government are being retained by Titan as part of
the contribution by Titan to SureBeam. In the opinion of
management, the amount of ultimate liability, if any, with
respect to these actions will not materially affect the
financial position or results of operations of the Company.



|         |                    
|-------- | -------------------
|Note (8) | Segment Information

The Company reports its business segment
information in accordance with Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information, or SFAS 131. The
Company has two operating and reportable segments: food
processing services and system sales and support.

Management evaluates the performance of its
operating segments separately to individually monitor the
different factors affecting financial performance. Segment gross
profit or loss includes substantially all of the segments
direct costs of operations. Costs for accounting, sales and
marketing, administrative and legal activities, as well as gains
and losses, interest income and expense and income taxes are
managed at the corporate segment. The Company evaluates segment
performance based on gross profit or loss. Consequently, the
results of operations of the segments may not be indicative of
the actual results that would be shown in the financial
statements of these segments if prepared on a stand-alone basis.

The food processing services segment which was
established in August 2000, represents all irradiation services
from the Company owned service centers for all food (excluding
water), flowers and animal hides. The processing services apply
a specific dose of irradiation to the product as it passes
through our system. Revenues are recognized at the time the
processing is completed. The costs associated with this segment
represent the operating costs of the service center, which
include labor, utilities, depreciation and supplies.

The system sales and support segment represents
revenues derived from sales of electronic irradiation systems
and support for food services, medical sterilization services
and mail sanitation services. Also included are revenues related
to selling linear electron beam accelerator systems for use by
the federal government. System sale revenues for this segment
are recognized using the percentage-of-completion method of
accounting for fixed price contracts and time and materials plus
a fee for cost-plus contracts, which are recognized at the time
services are performed. The costs associated with this segment
represent the labor, material and overhead allocated to the
specific contracts.

19



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following tables summarize segment data for
the periods presented (in thousands):

|          |                          |                    |       |       |  |   |       |       | 
|--------- | ------------------------ | ------------------ | ----- | ----- |  | - | ----- | ----- | 
|          |                          |                   
|          |                          | Three Months Ended
|          |                          | March 31,         
|          |                          |                   
|          |                          | 2003               |       | 2002 
|          |                          |                    |       |      
|Revenues: |                          |                    |       |       |  |   |       |      
|          | System sales and support |                    | $     | 5,817 |  |   | $     | 6,753 | 
|          | Food processing services |                    |       | 309   |  |   |       | 263   | 
|          |                          |                    |       |       |  |   |       |      
|          |                          | $                  | 6,126 |       |  | $ | 7,016 |      
|          |                          |                    |       |       |  |   |       |      

|                     |                          |                    |      |        |   |   |       |       |  
|-------------------- | ------------------------ | ------------------ | ---- | ------ | - | - | ----- | ----- | -
|                     |                          |                   
|                     |                          | Three Months Ended
|                     |                          | March 31,         
|                     |                          |                   
|                     |                          | 2003               |      | 2002  
|                     |                          |                    |      |       
|Gross profit (loss): |                          |                    |      |        |   |   |       |      
|                     | System sales and support |                    | $    | 1,343  |   |   | $     | 2,066 |  
|                     | Food processing services |                    |      | (2,332 | ) |   |       | (898  | )
|                     |                          |                    |      |        |   |   |       |      
|                     |                          | $                  | (989 | )      |   | $ | 1,168 |      
|                     |                          |                    |      |        |   |   |       |      

|                     |                          |           |         |              |  |   |         |        | 
|-------------------- | ------------------------ | --------- | ------- | ------------ |  | - | ------- | ------ | 
|                     |                          | March 31, |         | December 31,
|                     |                          | 2003      |         | 2002        
|                     |                          |           |         |             
|Identifiable assets: |                          |           |         |              |  |   |         |       
|                     | System sales and support |           | $       | 21,377       |  |   | $       | 28,137 | 
|                     | Food processing services |           |         | 60,696       |  |   |         | 59,114 | 
|                     | General corporate assets |           |         | 58,105       |  |   |         | 64,746 | 
|                     |                          |           |         |              |  |   |         |       
|                     |                          | $         | 140,178 |              |  | $ | 151,997 |       
|                     |                          |           |         |              |  |   |         |       

General corporate assets are principally cash and
cash equivalents, prepaid expenses, property and equipment,
deferred income taxes and other assets. Included in the assets
of food processing services, are $22.9 million and
$22.3 million at March 31, 2003 and December 31,
2002, respectively, of property and equipment located in Brazil.

|                                                                                                     |  |                    |     |      |  |   |     | 
|---------------------------------------------------------------------------------------------------- |  | ------------------ | --- | ---- |  | - | --- | 
|                                                                                                     |  |                   
|                                                                                                     |  | Three Months Ended
|                                                                                                     |  | March 31,         
|                                                                                                     |  |                   
|                                                                                                     |  | 2003               |     | 2002
|                                                                                                     |  |                    |     |     
|Depreciation and amortization expense of property
    and equipment and other assets (in thousands): |  |                    |     |      |  |   |     | 
|System sales and support                                                                             |  | $                  |    |      |  | $ |    | 
|Food processing services                                                                             |  |                    | 680 |      |  |   | 498 | 
|Corporate                                                                                            |  |                    | 280 |      |  |   | 219 | 
|                                                                                                     |  |                    |     |      |  |   |     | 
|                                                                                                     |  | $                  | 960 |      |  | $ | 717 | 
|                                                                                                     |  |                    |     |      |  |   |     | 

All capital expenditures relate to the food
processing services segment, other than certain leasehold
improvements and fixed assets of $194,000 and $195,000 at
March 31, 2003 and December 31, 2002, respectively,
which related to general corporate assets.

20



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion of the financial
condition and results of operations of SureBeam Corporation and
subsidiaries should be read in conjunction with the unaudited
financial statements and the related notes thereto included
elsewhere in this Form 10-Q, the audited financial
statements and notes thereto and Managements Discussion
and analysis of Financial Condition and Results of Operations
included in the Companys Form 10-K for the year ended
December 31, 2002. Our actual results may differ materially
from those contained in any forward-looking
statements.

When you read this section of this
Form 10-Q, it is important that you also read the unaudited
consolidated financial statements and related notes included
elsewhere in this Form 10-Q. This section of this
Form 10-Q contains forward-looking statements that involve
risks and uncertainties, such as statements of our plans,
objectives, expectations and intentions. We use words such as
may, will, should,
expect, plan, intend,
anticipate, believe,
estimate, predict,
potential, or continue, the negative of
such terms or other terminology to identify forward-looking
statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many
reasons These forward-looking statements involve risks and
uncertainties including, but not limited to, those referred to
in this report as well as in the Companys public filings
with the SEC, including the Companys Annual Report on
Form 10-K for the year ended December 31, 2002, regarding
the risk of gaining consumer acceptance, risks relating to the
Companys history of losses and liquidity and risks of
international operations.

Overview

We are a leading provider of electronic
irradiation systems and services for the food industry. The
Titan Corporation, or Titan, formed us in August 2000 in
connection with the contribution of the assets, liabilities and
operations related to its electronic food irradiation business.
Titans electronic food irradiation business had previously
been operated as part of a division of Titan, together with
Titans medical equipment sterilization business and its
government linear electron beam accelerator business. References
to SureBeam, the Company or us in this discussion and analysis
section and in the historical financial statements refer to this
division of Titan prior to the date of the contribution of the
electronic food irradiation business to us by Titan. Our
spin-off from Titan was completed on August 5, 2002 when
Titan distributed all of its shares of the common stock of
SureBeam to the stockholders of Titan.

To date, our agreements with the third parties to
our strategic relationships represent substantially all of our
sales of SureBeam systems for food irradiation. Food processing
service revenue was primarily derived in connection with our
customer production runs as well as test marketing programs. We
expect to derive increased revenues from providing
food-processing services in future periods as the use of our
systems for commercial processing grows. However, we cannot
predict the rate at which market adoption of irradiation will
occur and processing volumes increase. To date, our processing
revenue volume has increased at a slower rate than we
anticipated. We also expect to derive income from food
irradiation services through our equity ownership interests in
the companies that operate the service centers.

Food processing service revenues are derived from
electronic food irradiation services performed at our service
centers and are recorded at the time services are performed.
System sales and support revenues from non-affiliated parties
and investee are derived from sales of electronic food
irradiation systems under fixed-price contracts and are
accounted for using the percentage-of-completion method of
accounting. Systems sales and support revenues from Titan are
derived from sales of electronic irradiation systems under fixed
price contracts, using the percentage-of-completion method of
accounting, or under cost-plus contracts. Our electronic food
irradiation systems currently take a total of approximately 12
to 18 months to design, construct the equipment and
facility, install, integrate and deliver. These systems are
highly customized to meet a customers strict
specifications and require us to construct new facilities or
effect significant modifications to existing facilities to
ensure efficient operation as they are integrated into the
customers facilities. We plan to make advances in our
technology so that we may deliver complete systems in a shorter
time period. If a customer defaults on its payment obligations
under a contract accounted for using the
percentage-of-completion method of accounting, or the contract
is otherwise considered to be impaired, an impairment

21



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##### Table of Contents



charge to earnings for the receivable arising
from previously recorded revenues in respect of such contract
would be taken at that time.


We have two operating and reportable segments:
food processing services and system sales and support.
Management evaluates the performance of its operating segments
separately to individually monitor the different factors
affecting financial performance. Segment gross profit or loss
includes substantially all of the segments direct costs of
operations. Costs for accounting, sales and marketing,
administrative and legal activities, as well as gains and
losses, interest income and expense and income taxes are managed
at the corporate segment. We evaluate segment performance based
on gross profit or loss. Consequently, the results of operations
of the segments may not be indicative of the actual results that
would be shown in the financial statements of these segments if
prepared on a stand-alone basis.

The food processing services segment represents
all irradiation services from the company owned service centers
for all food (excluding water), flowers and animal hides. The
processing services apply a specific dose of irradiation to the
product as it passes through our system. Revenues are recognized
at the time the processing is completed. The costs associated
with this segment represent the operating costs of the service
center, which include labor, utilities, depreciation and
supplies.

The system sales and support segment represents
revenues derived from sales of electronic irradiation systems
and support for food services, medical sterilization services
and mail sanitation services. Also included are revenues related
to selling linear electron beam accelerator systems for use by
the federal government. System sale revenues for this segment
are recognized using the percentage-of-completion method of
accounting for fixed price contracts and time and materials plus
a fee for cost-plus contracts, which are recognized at the time
services are performed. The costs associated with this segment
represent the labor, material and overhead allocated to the
specific contracts.

Results of Operations



| |         
| | --------
| | Revenues

We have four classifications of revenues on the
face of our consolidated statements of operations: systems sales
and support revenues from non-affiliated parties, systems sales
and support revenues from investee, systems sales and support
revenues from Titan and food processing services revenues.
Systems sales and support revenues from non-affiliated parties
represent all revenue generated from electronic food irradiation
system sales not associated with Saudi RESAL Corp., or RESAL, or
Titan. Systems sales and support revenues from investee
represent electronic food irradiation system sales generated
from RESAL. To date, all of the revenues from investee relate to
our $53.0 million RESAL purchase order contract. Systems
sales and support revenues from Titan represents sales of our
electronic irradiation systems and services related to Titan
Scan Technologies medical sterilization business,
Titans government linear accelerator business and revenues
in support of Titans United States Postal Service
contracts. Although Titan has not been an affiliate of SureBeam
since August 5, 2002, we classify revenues from Titan
separately to provide comparability for earlier periods. The
food processing services revenues represents all irradiation
services from the company owned service centers for all food
(excluding water), flowers and animal hides.

Our total revenues decreased from
$7.0 million for the three months ended March 31, 2002
to $6.1 million for the three months ended March 31,
2003. The decrease is due to lower system sales and support
revenue from Titan of $2.9 million, which was offset by
increases in system sales and support revenues from
non-affiliated parties and Investee of $690,000 and
$1.2 million, respectively. Food processing services
increased $46,000 over the same period last year. The decrease
in systems sales and support from Titan was a result of a
reduction of $2.3 million related to our initial United
States Postal Service contract that was terminated in the second
quarter of 2002. The increase in systems sales and support from
non-affiliated parties was due to the two new contracts that
were signed in 2002 that we continued to work on. For the three
months ended March 31, 2003 the non-affiliated systems
sales and support revenue was derived from our Salubris Limited
Partnership, or Salubris, and Vietnam contracts while the
revenues for the three months ended March 31, 2002 was
derived from our Texas A&M University contract. The increase
in systems sales and support from Investee is a result of our
continued work on our RESAL contract. We expect our revenues to

22



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##### Table of Contents



increase as customer acceptance grows, thereby
leading to food processing revenue increases and additional
system sale contracts. We also anticipate further revenue from
performance of our existing system sale contracts. No assurance
can be given however, regarding whether, or when, customer
acceptance will grow, or at what pace such growth may actually
occur. If customer acceptance does not grow as projected, or if
food processing revenue and increased system sales do not occur
as projected, such would have a material adverse effect upon our
financial condition and results of operations.




| |                    
| | -------------------
| | Gross Profit (Loss)

Our cost of revenues consists primarily of the
components and materials associated with the linear accelerator,
material handling system and controls and direct labor to
assemble, install and integrate the medical equipment
sterilization and electronic food irradiation systems, as well
as overhead such as travel, indirect labor and fringe benefits
related to the production of the systems and the manufacturing
of linear electron beam accelerators. Also included in cost of
revenues are all direct and indirect costs associated with
providing medical equipment sterilization and electronic food
irradiation services. These costs are comprised of direct and
indirect labor, depreciation, rent, dosimetry supplies,
maintenance and utilities as well as other related costs to
operate a service center. Dosimetry supplies are consumables
used during facility operations to monitor performance and to
ensure the integrity of the dose of the irradiation delivered to
the product for quality assurance purposes and to satisfy
federal requirements.

Our gross profit decreased from $1.2 million
for the three months ended March 31, 2002 to a gross loss
of $989,000 for the three months ended March 31, 2003. As a
percentage of total revenues the gross profit decreased from 17%
to a gross loss of 16%. The decrease is due to an increased
gross loss on food processing services due to an
underutilization of our service centers and lower gross profit
from Titan due to reduced revenue from the initial United States
Postal Service contract. We believe our gross profit will
improve and eventually increase significantly as our service
centers become more utilized. The service centers are highly
capital intensive and we believe increased processing volumes
are the key to our liquidity and profitability. If significant
increased processing volumes are not realized at our service
centers in our current cost structure, our gross profit will
continue to suffer and we may be required to record an
impairment charge associated with our service centers.



| |                       
| | ----------------------
| | Segment Financial Data

We report our business segment information in
accordance with Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise
and Related Information. We have two operating and
reportable segments: food processing services and system sales
and support.

Management evaluates the performance of its
operating segments separately to individually monitor the
different factors affecting financial performance. Segment gross
profit or loss includes substantially all of the segments
direct costs of operations. Costs for accounting, sales and
marketing, administrative and legal activities, as well as gains
and losses, interest income and expense and income taxes are
managed at the corporate segment. We evaluate segment
performance based on gross profit or loss. Consequently, the
results of operations of the segments may not be indicative of
the actual results that would be shown in the financial
statements of these segments if prepared on a stand-alone basis.

The food processing services segment which was
established in August 2000, represents all irradiation services
from the company owned service centers for all food (excluding
water), flowers and animal hides. The processing services apply
a specific dose of irradiation to the product as it passes
through our system. Revenues are recognized at the time the
processing is completed. The costs associated with this segment
represent the operating costs of the service center, which
include labor, utilities, depreciation and supplies.

The system sales and support segment represents
revenues derived from sales of electronic irradiation systems
and support for food services, medical sterilization services
and mail sanitation services. Also included are revenues related
to selling linear electron beam accelerator systems for use by
the federal government. System sale revenues for this segment
are recognized using the percentage-of-completion method of
accounting for fixed price contracts and time and materials plus
a fee for cost-plus contracts, which are

23



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##### Table of Contents



recognized at the time services are performed.
The costs associated with this segment represent the labor,
material and overhead allocated to the specific contracts.


The following tables summarize segment data for
the three months ended March 31, 2003 and 2002 (in
thousands):

|          |                          |                    |       |       |  |   |       |       | 
|--------- | ------------------------ | ------------------ | ----- | ----- |  | - | ----- | ----- | 
|          |                          |                   
|          |                          | Three Months Ended
|          |                          | March 31,         
|          |                          |                   
|          |                          | 2003               |       | 2002 
|          |                          |                    |       |      
|Revenues: |                          |                    |       |       |  |   |       |      
|          | System sales and support |                    | $     | 5,817 |  |   | $     | 6,753 | 
|          | Food processing services |                    |       | 309   |  |   |       | 263   | 
|          |                          |                    |       |       |  |   |       |      
|          |                          | $                  | 6,126 |       |  | $ | 7,016 |      
|          |                          |                    |       |       |  |   |       |      

|                     |                          |                    |      |        |   |   |       |       |  
|-------------------- | ------------------------ | ------------------ | ---- | ------ | - | - | ----- | ----- | -
|                     |                          |                   
|                     |                          | Three Months Ended
|                     |                          | March 31,         
|                     |                          |                   
|                     |                          | 2003               |      | 2002  
|                     |                          |                    |      |       
|Gross profit (loss): |                          |                    |      |        |   |   |       |      
|                     | System sales and support |                    | $    | 1,343  |   |   | $     | 2,066 |  
|                     | Food processing services |                    |      | (2,332 | ) |   |       | (898  | )
|                     |                          |                    |      |        |   |   |       |      
|                     |                          | $                  | (989 | )      |   | $ | 1,168 |      
|                     |                          |                    |      |        |   |   |       |      



| |         
| | --------
| | Revenues

Food processing services.Revenues from food processing services
increased from $263,000 in the three months ended March 31,
2002 to $309,000 for the three months ended March 31, 2003.
The increase was due to the increased number of pounds being
processed at our service centers. We began processing food at
our Los Angeles, California service center in January 2003. We
expect to begin processing in our Rio de Janeiro, Brazil service
center in the second half of 2003.

The volume of food products processed at our
service centers in the three months ended March 31, 2003
increased by 62% from the same period last year increasing from
approximately 3.0 million pounds to 4.9 million
pounds. During the three months ended March 31, 2003, we
made significant advances in implementing our strategy as
electronically irradiated fresh ground beef was introduced into
an additional 3,000 stores in the marketplace. Revenues from
food products processed increased 17% or 45% less than the
increase in pounds due to a lower average per pound processing
fee as a result of an increase in commercial processing versus
product testing, which is at a higher fee. In addition,
customers continue testing products at our Sioux City, Chicago,
and Los Angeles service centers and we continue discussions with
potential customers regarding the use of our electronic food
irradiation technology. Many of these discussions are
preliminary and no assurance can be made that we will enter into
agreements with these potential customers, or that any
agreements we enter into with these customers will prove to be
profitable to us. We have expanded the types of packaging
configurations that we can process using our patented technology
and our customers have increased the kinds of products we are
processing for them. We believe the increased level of
processing by our customers indicates an increasing level of
consumer acceptance of electronically irradiated food products.
This acceptance is further evidenced by the recent introduction
of electronically irradiated food products by several
restaurants, as well as major retail grocery stores, in the
United States. As of March 31, 2003, irradiated fresh
ground beef was in approximately 4,700 grocery stores. For three
months ended March 31, 2003 and 2002, food processing
services revenue represented a small portion, or 5%, and 4%,
respectively, of our total revenues.

System sales and support.Systems sales and support revenues
decreased from $6.8 million during the three months ended
March 31, 2002 to $5.8 million for the three months
ended March 31, 2003. The system sales and support segment
consists of sales of electronic irradiation systems for food
services to non-affiliated

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parties and Investee, medical sterilization
services, mail sanitation services and sales to the federal
government. The decrease is due to lower system sales and
support revenue from Titan of $2.9 million, which was
offset by increases in system sales and support revenues from
non-affiliated parties and investee of $690,000 and
$1.2 million, respectively. The decrease in systems sales
and support from Titan was a result of a reduction of $2.3
million related to our initial United States Postal Service
contract that was terminated in the second quarter of 2002. The
sales of electronic food irradiation systems for the three
months ended March 31, 2003 were recorded in connection
with our contracts with Salubris and our customer in Vietnam
while the revenues for the three months ended March 31,
2002 were recorded in connection with our Texas A&M
University contract that was completed in the third quarter of
2002.




| |                    
| | -------------------
| | Gross Profit (Loss)

Food processing services.The gross loss on the food processing
services segment increased from $898,000 for the three months
ended March 31, 2002 to $2.3 million for the three
months ended March 31, 2003. Our service centers are very
capital intensive and have high fixed costs associated with
their operations and these high costs along with service center
underutilization results in losses. The increased gross loss
resulted from added costs associated with our Los Angeles
service center that was opened in the fourth quarter of 2002,
and for which costs were incurred during the three months ended
March 31, 2003, thereby adding costs with minimal revenue.
We expect the utilization in our service centers to increase in
the future; however, no assurance can be made as to if, or how
rapidly utilization will increase, to the point where our fixed
and variable costs of operating the service centers are covered.

System sales and support.Gross profit on the system sales and
support segment decreased from $2.1 million for the three
months ended March 31, 2002 to $1.3 million for the
three months ended March 31, 2003. The reduction is due to
the lower gross margin on our current contracts for The Titan
Corporation of $1.5 million due to the reduction of the
United States Postal Service activity from March 31, 2002
to 2003, which had a higher gross margin than the current
contracts we are performing for Titan. This reduction was offset
by an increased gross margin of $527,000 related to
non-affiliated party contracts. In the three months ended
March 31, 2002 all of our non-affiliated system sales and
support revenue was generated by our Texas A&M University
contract, which had a zero gross margin. Our medical
sterilization system sales are with Titan which historically
been priced as cost-plus 20% fixed fee contracts. We believe
that as our food irradiation system sales become a greater
percentage of our revenue our gross margins will increase.



| |                                        
| | ---------------------------------------
| | Selling, General and
    Administrative

Our selling, general and administrative expenses
consist primarily of personnel costs, occupancy costs, staff
recruiting costs, travel expenses, depreciation expense, selling
expenses, marketing and promotional costs and amortization of
intangible assets. Administrative expenses also include an
expense allocation from Titan through August 4, 2002, the
date of our spin off from Titan, for its performance on our
behalf of routine corporate services, including insurance,
employee benefits, payroll, tax services and management
information systems and support.

Our selling, general and administrative expense
increased from $6.2 million for the three months ended
March 31, 2002 to $6.4 million for the three months
ended March 31, 2003. As a percentage of total revenues,
selling, general and administrative expenses increased from 88%
for the three months ended March 31, 2002 to 105% for the
three months ended March 31, 2003. The increase was a
result of added sales and marketing cost related to the
additional product rollouts and brand awareness initiatives. We
expect the selling, general and administrative expenses to
increase in total but reduce as a percentage of revenue in the
future, as we expand our processing and brand awareness and
continue build our infrastructure based on our expected growth,
thereby increasing our sales and marketing expenses. If the
growth does not occur as expected, it could result in a material
adverse effect on our financial condition and results of
operations, which could require us to scale back our business
plan and delay, curtail or eliminate some of our operations.

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| |                         
| | ------------------------
| | Stock-based Compensation

Our stock-based compensation decreased from a
$3.8 million expense for the three months ended
March 31, 2002 to a net credit of $28,000 for the three
months ended March 31, 2003. During the three months ended
March 31, 2003 we recorded stock-based amortization expense
of $2.6 million, which was offset by the reversal of
$2.6 million of deferred stock-based compensation expense
due to the termination of certain employees who forfeited
unvested options upon termination. During 2000, we granted
options under the 2000 Stock Option and Incentive Plan and
recorded deferred stock-based compensation of $3.2 million
for which the fair market value on the date of grant exceeded
the exercise price. We recognized stock-based compensation on
these options of $202,000 for the three months ended
March 31, 2002 and 2003, respectively. Unamortized deferred
stock-based compensation for these options at March 31,
2003 was $765,000. During 2001, in connection with the
completion of our initial public offering, stock options granted
under the Nonstatutory Stock Option Plan were converted from
variable plan options to fixed plan options. Accordingly,
deferred stock-based compensation of $78.6 million was
recorded, representing the extent to which the $10.00 per share
offering price exceeded the exercise price of the options.
Additionally, since substantial portions of these options were
vested at the time of completion of the public offering,
stock-based compensation of approximately $38.7 million was
immediately expensed at that time. The remaining deferred
stock-based compensation balance related to these options will
be recognized as compensation expense over the remaining
four-year vesting period of these options. We recorded an
expense of $3.6 million and a credit of $230,000 of
stock-based compensation related to these options during the
three months ended March 31, 2002 and 2003, respectively.
As a result of the termination of two employees during the three
months ended March 31, 2003 that held unvested stock
options under this plan, we have reduced the unamortized
deferred stock-based compensation balance by $5.7 million.
In conjunction with the completion of our spin-off from Titan on
August 5, 2002, all options held by Titan employees and
directors under this plan became fully vested. Unamortized
deferred stock-based compensation for these options at
March 31, 2003 was $3.9 million. We expect the
stock-based compensation to decrease over the next two years due
to options becoming fully vested.



| |                         
| | ------------------------
| | Research and Development

Our research and development expenses remained
flat for the three months ended March 31, 2002 and 2003.
Research and development expenses, as a percentage of total
revenues increased from 4% in the three months ended
March 31, 2002 to 5% for the three months ended
March 31, 2003 due to the decrease in revenues in 2003. Our
current research and development activities are focused on
increasing the capability and efficiency of our existing
technology, minimizing the space occupied by our SureBeam
systems, and developing new food product applications. We have
assembled a team of experts in our industry to enhance and drive
our research and development efforts. Our research and
development experts have many years of experience in the area of
enhancing food safety and extending shelf life using
irradiation, in addition to their broad experience with linear
accelerators and charged particle beams. In addition, we have an
agreement with Texas A&M University and the Texas
Agricultural Experiment Station for the purpose of researching
and developing product applications for our technology. We are
currently working with Texas A&M University on several
research projects, which include studies on flavor profiles,
viral destruction, food products applications and
consumers willingness to pay more for irradiated foods. In
addition, we often benefit from the research and development
efforts of our component suppliers. Historically, our research
and development activities were incidental to work being
performed under government contracts and were in the form of our
right to retain any technologies developed as a result of our
efforts on those contracts. We expect future research and
development expense to increase as we utilize the Texas A&M
University facility as well as develop the next generation of
equipment.



| |                
| | ---------------
| | Interest Income

Our interest income increased from $25,000 in the
three months ended March 31, 2002 to $84,000 in the three
months ended March 31, 2003. The increase from the three
months ended March 31, 2002 was a direct result of the
increased cash, cash equivalents and restricted cash that we had
during the three months ended March 31, 2003 received in
conjunction with our private placement in the fourth quarter of
2002. If we are

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unable to raise additional capital or collect our
receivables in a timely manner our cash balance may decrease
thus causing lower interest income in the future.




| |                 
| | ----------------
| | Interest Expense

Our interest expense decreased from $886,000 in
the three months ended March 31, 2002 to $59,000 in the
three months ended March 31, 2003. During the three months
ended March 31, 2003 our total interest costs were
$496,000, of which $437,000 was capitalized. The decreased
interest expense is due to the interest that was capitalized and
the reduced amount of borrowings we had from Titan. During the
three months ended March 31, 2002 we exchanged the
remaining $73.0 million we owed on the subordinated note
payable with Titan for additional shares of our common stock.
Titan has extended a $50.0 million senior secured credit
facility to us that allows us to borrow, in addition to our
previous borrowing, up to $12.5 million per quarter during
in the fourth quarter of 2002 through the fourth quarter of
2003, subject to the $50.0 million limitation on borrowing.
We have borrowed $25.0 million against this senior credit
facility at March 31, 2003. Based on this balance
outstanding, we expect interest expense to increase in the
future until the balance is repaid to Titan.



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Our other income (expense), net increased from
$982,000 in the three months ended March 31, 2002 to
$998,000 in the three months ended March 31, 2003. During
the three months ended March 31, 2002 and 2003 we recorded
$1.0 million of licensee fee income. During the fourth
quarter of 2001, Titan agreed to purchase a perpetual and
exclusive, non-royalty bearing license to use our intellectual
property for all applications and fields other than food
(excluding water), animal hide and flower markets for
$8.0 million. Cash received from this agreement has been
deferred and is being recognized ratably over two years. As
such, $1.0 million of license fee income is recorded in
each quarter for eight quarters, beginning in the fourth quarter
of 2001. The license fee income was offset by realized losses of
$18,000 for the three months ended March 31, 2002
associated with the investments available for sale.
Additionally, we recorded a loss on the disposal of assets of
$2,000 for the three months ended March 31, 2003. We expect
our other income (expense), net to decrease in 2003 based on the
completion of the recognition of the license fee income in the
third quarter of 2003.



| |             
| | ------------
| | Income Taxes

Income taxes reflect effective rates of 0% for
the three months ended March 31, 2002 and 2003,
respectively. Prior to the spin-off, we were included in the
consolidated federal income tax return of Titan. Pursuant to our
tax sharing agreement, Titan will compensate us for any tax
benefit received by Titan from the use of our net operating
losses in their consolidated federal income tax return. The
amount is payable on the earlier of when we could have used the
loss ourselves or when the losses expire (20 years). We had
an operating loss for the three months ended March 31, 2003
and 2002, and expect to continue to incur losses for the
remainder of 2003. Our tax benefit is dependent upon the usage
of our losses by Titan. To date, a receivable of
$2.3 million has been recognized in connection with the use
of our losses by Titan. An additional amount may be recognized
depending upon our future profitability. In conjunction with the
spin-off, we have been subsequently deconsolidated from Titan
and the tax sharing agreement between us and Titan will no
longer apply to tax years beginning on or after August 6,
2002.



| |         
| | --------
| | Net Loss

Our net loss decreased from $9.0 million for
the three months ended March 31, 2002 to $6.7 million
for the three months ended March 31, 2003. The net loss for
the three months ended March 31, 2003 was positively
impacted by the reversal of stock based compensation on unvested
options related to employee termination of $2.6 million.
Excluding the impact of the stock-based compensation, our net
loss increased from $5.2 million for the three months ended
March 31, 2002 to $6.7 million for the three months
ended March 31, 2003. We expect that our net loss will
continue to decrease as we increase our gross profit by adding
capacity through our company owned service centers and reduce
the percentage of revenues derived through

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sales to Titan, which historically have lower
gross margins than our systems sales to other parties and we
continue to monitor our expenses.


Liquidity and Capital Resources

We have used cash principally to construct
systems for our strategic alliances and fund working capital
advances for these strategic alliances, to construct our
company-owned service center and systems in Brazil, and to fund
our working capital requirements. We spend significant funds to
construct systems for our strategic alliances in advance of
payment. We also are spending significant funds on sales and
marketing efforts relating to brand recognition and consumer
acceptance programs. In addition, our service centers have
operated at losses using significant funds. At March 31,
2003, we had available cash and cash equivalents of
$20.2 million and restricted cash of $1.3 million. The
restricted cash represents the money received as payment on our
RESAL contract in anticipation of our first shipment of
equipment. The cash will become unrestricted upon our shipment,
which is scheduled for the second quarter of 2003.



| |                                                           
| | ----------------------------------------------------------
| | Status of Our $50.0 Million Credit Facility
    with Titan

During 2002, Titan extended to us a senior
secured credit facility under which we could borrow up to a
maximum of $50.0 million, subject to the terms and
conditions of the credit facility. As of May 7, 2003, we
have borrowed $25.0 million on this credit facility. The
credit facility allows us to borrow, in addition to our previous
borrowings, up to a maximum of $12.5 million per quarter
through the fourth quarter of 2003, subject to the
$50.0 million cumulative limitation on borrowing and the
other terms and conditions of the credit facility. We are unable
to borrow additional amounts if our cash balance is greater than
$5.0 million.

We have not borrowed additional amounts on the
credit facility since October 30, 2002, and, we do not
anticipate borrowing, or being able to borrow, additional
amounts on the credit facility during 2003 or during the
remaining period that the credit facility is outstanding. As of
March 31, 2003, we were in compliance with all covenants of
the credit facility, however, we were not able to borrow
additional funds during the second quarter because we did not
meet the earnings before interest, taxes, depreciation and
amortization (EBITDA) target for the first quarter of 2003
in our annual operating plan. We do not anticipate that we will
have availability under the credit facility during the remaining
period that the credit facility is outstanding.

We are obligated, with some exceptions, to use
net proceeds from the sale of assets and securities to repay
amounts advanced under the credit facility. During March 2003,
the credit facility was amended to allow us to receive net
proceeds of up to $25.0 million resulting from transactions
involving the issuance of equity securities through
September 30, 2004, without having to apply such net
proceed towards repayment of the credit facility, provided that
no default or event of default had occurred. We are required to
make a mandatory prepayment on the credit facility in an amount
equal to 50% of any net proceeds in excess of $25.0 million
resulting from transactions involving the issuance of equity
securities.

Under our credit facility, we are obligated to
make minimum quarterly principal payments as follows: 13.75% of
the outstanding principal balance as of December 31, 2003
during each quarter in 2004; 25% of the outstanding principal
balance as of December 31, 2004 during each quarter in
2005; and, all remaining principal by December 31, 2005.
The interest rate is Titans effective weighted average
term debt rate under Titans credit agreement plus three
percent. As of March 31, 2003, the interest rate on the
credit facility was 7.92%. Interest is payable monthly beginning
in January 2003. Through May 7, 2003, we have paid
$1.4 million of interest related to the credit facility.
The credit facility is secured by a first priority lien on all
of our assets.



| |                             
| | ----------------------------
| | Credit Facility Availability

During the quarter ending March 31, 2003,
the maximum amount available for borrowing pursuant to the
credit facility was $12.5 million, subject to the terms and
conditions of the credit facility. The maximum amount available
for borrowing in each of the second, third and fourth quarters
of 2003 is based upon our earnings before interest, taxes,
depreciation and amortization (EBITDA) for the prior
quarter as a percentage of the EBITDA target in our annual
operating plan.

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If actual EBITDA is negative $2.4 million or
higher for the quarter ending March 31, 2003, then up to
100% of the quarterly maximum or $12.5 million will be
available for borrowing during the quarter ending June 30,
2003. If our actual EBITDA is negative $3.0 million during
the quarter ending March 31, 2003, then up to 50% of the
quarterly maximum or $6.3 million will be available for
borrowing during the quarter ending June 30, 2003. If our
actual EBITDA is between negative $2.4 million and negative
$3.0 million during the quarter ending March 31, 2003,
then the maximum amount available for borrowing during the
quarter ending June 30, 2003 shall be determined by linear
interpolation between $6.3 million and $12.5 million.
If our actual EBITDA is lower than negative $3.0 million
for the quarter ending March 31, 2003, no amounts will be
available for borrowing through the credit facility during the
quarter ending June 30, 2003. No amounts are available for
borrowing during the second quarter because our EBITDA was
$6.8 million and therefore is less than the negative
$3.0 million target.

For the quarter ending June 30, 2003, our
target EBITDA is $505,000. If our actual EBITDA for the quarter
ending June 30, 2003 is positive, but less than $126,000,
or 25% of the target EBITDA, then the maximum amount available
in the quarter ending September 30, 2003, would be
$5.0 million, provided that no amounts would be available
unless we covenant during the quarter ended September 30,
2003 to limit our total operating expenses (defined as research
and development and selling, general and administrative
expenses) to $5.0 million. No amounts would be available
under the credit facility during the quarter ended
September 30, 2003, if we have negative EBITDA for the
quarter ending June 30, 2003. If our actual EBITDA for the
quarter ended June 30, 2003 is $126,000, or 25% of the
target EBITDA, then the maximum amount available in the quarter
ended September 30, 2003, would be $6.3 million or 50%
of the quarterly maximum and for each percentage of actual
EBITDA above $126,000, or 25% of target EBITDA, the percentage
of the quarterly maximum above 50% would be increased on a pro
rata basis.

For the quarter ending September 30, 2003,
our target EBITDA is $4.1 million. Therefore, if our actual
EBITDA for the quarter ended September 30, 2003 is
positive, but less than $1.0 million, or 25% of the target
EBITDA, then the maximum amount available in the quarter ended
December 31, 2003, would be $5.0 million, provided
that no amounts would be available unless we covenant during the
quarter ended December 31, 2003 to limit our total
operating expenses (defined as research and development and
selling, general and administrative expenses) to
$5.0 million. No amounts would be available under the
credit facility during the quarter ending December 31,
2003, if we have negative EBITDA for the quarter ending
September 30, 2003. If our actual EBITDA for the quarter
ended September 30, 2003 is $1.0 million, or 25% of
the target EBITDA, then the maximum amount available in the
quarter ended December 31, 2003, would be $6.3 million
or 50% of the quarterly maximum and for each percentage of
actual EBITDA above $1.0 million, or 25% of target EBITDA,
the percentage of the quarterly maximum above 50% would be
increased on a pro rata basis.

We do not anticipate that we will have further
availability under the credit facility during the remaining
period that the credit facility is outstanding.

The credit agreement also includes covenants
limiting our incurrence of debt, investments, declaration of
dividends and other restricted payments, sale of stock of
subsidiaries and consolidations and mergers. The credit
agreement, however, does not contain any financial covenants
requiring us to maintain specific financial ratios.

In addition, Titan has guaranteed some of our
lease obligations, and we are obligated to reimburse Titan for
any payments they make under these guaranties. Any guarantee
payments Titan makes reduces amounts available for future
borrowing under the credit agreement. We will pay Titan a
monthly fee of 10% of the guaranteed monthly payments. Some of
the guaranteed leases have longer terms than the credit
facility. If Titan remains a guarantor at the maturity date for
the credit facility, then we plan to enter into a reimbursement
agreement with Titan covering the outstanding guarantees.

For the three months ended March 31, 2003,
we used cash in operations of $5.7 million as compared to
having cash provided by operations of $5.5 million for the
three months ended March 31, 2002. During the first quarter
of 2003, our net loss plus depreciation and amortization were
offset by an increase in working capital usage, particularly an
increase in accounts receivable related to the increase of our
unbilled receivables

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and restricted cash and was offset by the
decrease in the amount due from Titan due to the
$8.7 million we received for payment on our receivables
during the quarter. Also during the quarter, we received
$1.3 million of restricted cash related to a payment made
based in a milestone payment on our RESAL contract. The release
of the funds is tied to our initial shipment of equipment to
Saudi Arabia that was delayed due to the war in Iraq but is now
scheduled to ship in the second quarter of 2003. For the three
months ended March 31, 2002, our net loss plus depreciation
and amortization were offset by an increase in working capital
usage, particularly an increase in our unbilled receivables and
inventories and was offset by the decrease in the amount due
from Titan due to the $19.5 million we received as payment
on our receivables during the quarter.


We used approximately $1.5 million and
$437,000 for investing activities for the three months ended
March 31, 2003 and 2002, respectively. For the three months
ended March 31, 2003 we had capital expenditures of
$1.5 million primarily related to the continued
construction of our company owned service centers.

In June 2001, we received a purchase order
contract in the aggregate amount of $50.0 million from
RESAL for ten electronic food irradiation systems to operate in
multiple service centers in the Saudi Arabia region for
irradiating poultry and disinfesting dates. In 2002, the
purchase order contract for these systems was modified to
$53.0 million to construct systems for three large service
centers with a combination of high power x-ray and electron beam
technology. We commenced construction on these systems for RESAL
and have recognized, under the percentage-of-completion method
of accounting, $23.6 million in revenue, which has been
recorded on this contract through March 31, 2003, of which
$2.3 million was recognized during the three months ended
March 31, 2003. Revenues derived from this order are
classified as systems sales and support revenues from investee
in the accompanying consolidated statements of operations.
Certain shipments of equipment to Saudi Arabia that were
scheduled to take place in March 2003 have been delayed due to
the war in Iraq and we anticipate that these shipments will
occur in the second quarter of 2003. The remaining systems are
scheduled to be shipped within the next 15 to 18 months
thereafter. We received payments aggregating $5.3 million,
of which $1.3 million is restricted cash, through
May 7, 2003 based on milestone payments and expect to
continue to receive additional milestone payments as they become
due and payable until the contract is complete.

In April 2002, we formed a joint venture under
the name SureBeam Middle East, LLC with RESAL. SureBeam Middle
East, LLC will provide, among other things, food irradiation
services through planned service centers in the Saudi Arabian
region. As of March 31, 2003, we own a 19.9% interest in
SureBeam Middle East, LLC and RESAL and other Saudi nationals
own the remaining 80.1%. We account for our ownership interest
in SureBeam Middle East, LLC using the equity method of
accounting under APB Opinion No. 18 The Equity Method
of Accounting for Investments in Common Stock. In
accordance with the joint venture agreement, RESALs
purchase order contract dated June 2001 may be assigned to
SureBeam Middle East, LLC at such time as the joint venture
receives sufficient funds from the third party investors. As of
March 31, 2003, a portion of the purchase order contract
has been assigned to SureBeam Middle East, LLC As a result,
revenue recognized under the contract is presented in the
consolidated statements of operations as revenue from investee
and we have eliminated our 19.9% interest in the profit
recognized under the percentage-of-completion method of
accounting in connection with the original purchase order
contract. We estimate that the total profit under the original
contract that will be eliminated as a result of our equity
interest in SureBeam Middle East, LLC will be approximately
$4.5 million to $5.5 million. Pursuant to the joint
venture agreement, for five years following the date of SureBeam
Middle East, LLCs commercial registration, SureBeam Middle
East, LLC has an exclusive right of first negotiation to
negotiate and enter into agreements to provide irradiation
services for the treatment of food products (excluding water),
animal hides and flowers in Saudi Arabia, Egypt, Lebanon, Syria,
Iraq, Iran, Libya, Tunisia and Algeria. The joint venture will
govern our strategic relationship with the operator of these
systems, including royalty and management fees and a minority
equity ownership of the operator that will operate the service
centers.

In September 2002, we received an order from
Titan for $6.0 million in connection with a new contract
with the United States Postal Service. Under this agreement, we
are to provide two linear accelerators to sanitize the mail. We
commenced construction on these systems and have recognized,
under the percentage-of-completion method of accounting,
$2.0 million in revenue, which has been recorded on this
contract through March 31, 2003, of which $877,000 was
recognized during the three months ended March 31, 2003.

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We received payments aggregating
$1.2 million through May 7, 2003 based on milestone
payments and expect to continue to receive additional milestone
payments as they become due and payable until the contract is
complete.


In June 2002, we received an order in the
aggregate amount of approximately $5.3 million from Son Son
Company, a private food-processing corporation headquartered in
Vietnam, for one electronic food irradiation system to operate
in Vietnam for irradiating shrimp, seafood, and frog legs and
prolonging shelf life of foods. We commenced construction on
this system and have recognized, under the
percentage-of-completion method of accounting, $4.4 million
in revenue, which has been recorded on this contract through
March 31, 2003, of which $1.1 million was recognized
during the three months ended March 31, 2003. We received
an aggregate of $3.8 million in milestone payments on this
contract through March 31, 2003. We expect to receive the
final milestone payment six months after a third party
certification system acceptance test completion.

In November 2002, we entered into an equipment
purchase agreement with Salubris Limited Partnership, or
Salubris, to sell a SureBeam system for $8.9 million. The
purchase of this system will allow Salubris to build and operate
a new service center in the Fort Worth, Texas area. We will
receive per pound processing royalties once the service center
is operational. This agreement allows Fort Worth-San Diego
Investments, LLC, the general partner in Salubris, the right of
first negotiation on certain future opportunities in the
five-state area of Texas, New Mexico, Oklahoma, Arkansas and
Louisiana to purchase our systems and to provide SureBeam
processing. We commenced construction on these systems and have
recognized, under the percentage-of-completion method of
accounting, $2.6 million in revenue, which has been
recorded on this contract through March 31, 2003, of which
$720,000 was recognized during the three months ended
March 31, 2003. We received payments aggregating
$2.8 million through May 7, 2003 based on milestone
payments and expect to continue to receive additional milestone
payments as they become due and payable until the contract is
complete.

The accompanying consolidated financial
statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business.
During the three months ended March 31, 2003, we have
incurred substantial losses from operations and investments in
infrastructure. Management believes that as we continue to
expand significant funds on, sales and marketing, it is not
anticipated that our revenues will sufficiently offset these
expenses until at least 2004. Additionally, our construction and
implementation period for systems sales to strategic alliances
require a substantial use of cash for at least 12 to
18 months. Our arrangements to sell food irradiation
systems to strategic alliances typically contain milestone
provisions for payment, which are typically based upon time,
stage of completion, and other factors. As a result, our
unbilled receivables from our customers have increased
$1.7 million for the three months ended March 31,
2003. Also, we have advanced funds aggregating $6.0 million
to Hawaii Pride of which $230,000 was advanced during the three
months ended March 31, 2003 and is included in selling,
general and administrative expense in the accompanying
consolidated financial statements. These advances were used
primarily for land acquisition, for facility construction and
for working capital purposes. We are not obligated to continue
the funding of Hawaii Pride. We also have entered into a number
of commitments to lease land and facilities in connection with
construction of our four company-owned service centers all of
which are operational. In addition, based on our customer
requirements, we may expend funds to construct and install
in-line systems that we will own and operate.

In addition to our current operating plans, which
focus on increasing cash flow from operations, we are also
evaluating a number of alternative plans to meet our future
operating cash needs. These plans include raising additional
funds from the capital markets. As of the date of the filing of
this report, we have obtained $25.0 million under the
senior secured credit facility with Titan. We do not anticipate
making any additional borrowings under this credit facility. If
the funds available from the capital markets are not available
or not sufficient for us, or if we are unable to generate
sufficient cash flow from operations, we may need to consider
additional actions, including reducing or deferring capital
expenditures, reducing or deferring research and development
projects, curtailing construction of systems for customers in
advance of payment and reducing marketing expenditures, which
actions may have a material adverse impact on our ability to
meet our business objectives.

31



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##### Table of Contents



On October 16, 2001, Titan adopted a
definitive plan to spin-off its ownership interest in SureBeam
in the form of a tax-free dividend to Titans stockholders.
Effective August 5, 2002, Titan distributed all of its
shares of our common stock to its stockholders. We have
negotiated other agreements with Titan in connection with our
spin-off including a tax sharing and disaffiliation agreement
that will subject us to liability if we sell our equity or
equity linked securities in a manner that causes a change in our
ownership of voting power greater than that allowed by IRS rules
within a two year period following the spin. This risk could
limit our ability to access public equity markets. In addition,
the recent downturn in the capital markets may limit our ability
to raise capital through public equity or debt offerings. If
existing funds and/or other sources are not sufficient to us
and/or if we are unable to generate sufficient cash flow from
operations, we may need to consider additional actions,
including reducing or deferring capital expenditures, reducing
or deferring research and development projects, reducing
construction of systems for customers in advance of payment and
reducing marketing expenditures. The deferral or cancellation of
these projects may have a material adverse impact on our ability
to meet our short-term business objectives. In order to borrow
funds under our senior secured credit facility, we must be in
compliance with our operating expense and capital expenditure
covenants and we may have to curtail these activities to be in
compliance with these covenants. At March 31, 2003, we had
$20.2 million of cash and cash equivalents and
$1.3 million of restricted cash. We believe that this
balance will be sufficient to meet our cash needs through 2003.
However, a variety of currently unanticipated events could
require additional capital resources such as the acquisition of
complementary businesses or technologies or increased working
capital requirements to fund, among other things, construction
of systems for our strategic alliances in advance of payment.
Additionally, if our requirements vary from our current plans,
we may require additional financing sooner than we anticipate.
An inability in such circumstance to obtain additional financing
on terms reasonable to us, or at all, could have a material
adverse effect on our results of operations and financial
condition.

Contractual Obligations and Commercial
Commitments

The following summarizes our contractual
obligations and other commitments at March 31, 2003, and
the effect such obligations could have on our liquidity and cash
flows in future periods:

|                                   |  |           |       |        |  |        |        |            |  |       |       |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | --------- | ----- | ------ |  | ------ | ------ | ---------- |  | ----- | ----- |  |  | - | ------ |  |  | - | ------ | 
|                                   |  | Less than |       | Years  |  | Years  |        |            |  |      
|                                   |  | 1 year    |       | 2 to 3 |  | 4 to 5 |        | Thereafter |  | Total
|                                   |  |           |       |        |  |        |        |            |  |      
|Long-term debt                     |  | $         | 3,438 |        |  | $      | 21,562 |            |  | $     |      |  |  | $ |       |  |  | $ | 25,000 | 
|Operating leases                   |  |           | 2,569 |        |  |        | 4,765  |            |  |       | 4,065 |  |  |   | 16,653 |  |  |   | 28,052 | 
|                                   |  |           |       |        |  |        |        |            |  |       |       |  |  |   |        |  |  |   |        | 
|Total contractual cash obligations |  | $         | 6,007 |        |  | $      | 26,327 |            |  | $     | 4,065 |  |  | $ | 16,653 |  |  | $ | 53,052 | 
|                                   |  |           |       |        |  |        |        |            |  |       |       |  |  |   |        |  |  |   |        | 






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Qualitative and Quantitative Disclosures
    about Market Risk

We currently are exposed to market risks related
to changes in interest rates. Titan has extended us a
$50.0 million senior secured credit facility, which bears
interest equal to Titans effective weighted average term
debt rate under Titans credit agreement plus three
percent. As of May 7, 2003, we have drawn
$25.0 million against this credit facility. See
Note (6) in Notes to Consolidated Financial Statements. At
March 31, 2003, the effective interest rate on this credit
facility was 7.92%. We anticipate our future borrowings will
have a variable component that will fluctuate as interest rates
change. If market interest rates were to increase immediately
and uniformly by 10%, there would not be a material impact on
our financial condition or results of operations.

32



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

We maintain a system of disclosure controls and
procedures designed to ensure the reliability of our
consolidated financial statements and other disclosures. Within
the 90 day period prior to the date of filing of this
quarterly report, our Senior Vice President, Global Business
Operations and our Senior Vice President and Chief Financial
Officer carried out, under the supervision and with the
participation of our management, an evaluation of the
effectiveness of design and operation of our disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended). Our
Senior Vice President, Global Business Operations and our Senior
Vice President and Chief Financial Officer concluded that, as of
the date of the evaluation, our disclosure controls and
procedures were effective in all material respects in alerting
them in a timely manner to the material information about us
that we are required to include in the periodic reports that we
file with the Securities and Exchange Commissions. There have
been no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect
internal controls subsequent to that evaluation.

33



---



##### Table of Contents






PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

Periodically, we are a defendant in cases
incidental to our business activities. Furthermore, providers of
products and services to the U.S. government are generally
subject to multiple levels of audit and investigation by various
U.S. government agencies. Any liabilities arising from
audits by the federal government are being retained by Titan as
part of the contribution by Titan to SureBeam. In the opinion of
management, the amount of ultimate liability, if any, with
respect to these actions will not materially affect the
financial position or results of operations.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

Not applicable.






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

Not applicable.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

Not applicable.






|        |                  
|------- | -----------------
|Item 5. | Other Information

Not applicable.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

|    |  |           |  |                                                                                                                                                                  
|--- |  | --------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits:
|    |  | 99.1      |  | Periodic Report Certifications by the
    Co-Principal Executive Officers of Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2003.
|    |  | 99.2      |  | Periodic Report Certification by Chief Financial
    Officer of Quarterly Report on Form 10-Q for the quarterly
    period ended March 31, 2003.                 

|    |  |                      |  |                                                                                                                                                                                             
|--- |  | -------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | Reports on Form 8-K:
|    |  | (1)                  |  | Current Report on Form 8-K dated
    January 31, 2003 and filed on February 3, 2003,
    describing the status of the Titan credit facility.                                                
|    |  | (2)                  |  | Current Report on Form 8-K dated
    March 5, 2003 and filed March 6, 2003, regarding the
    resignation of our Chairman, President and Chief Executive
    Officer, Lawrence A. Oberkfell.
|    |  | (3)                  |  | Current Report on Form 8-K dated May 7,
    2003 and filed May 7, 2003, regarding the Companys
    financial results for the quarter ended March 31, 2003.                                 

34



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##### Table of Contents






SIGNATURES

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



| |                     
| | --------------------
| | SUREBEAM CORPORATION

|                    |  |     |  |                                                                                                   
|------------------- |  | --- |  | --------------------------------------------------------------------------------------------------
|Dated: May 15, 2003 |  | By: |  | /s/ KEVIN K. CLAUDIO                                                                              
|                    |  |     |  |                                                                                                   
|                    |  |     |  | Kevin K. ClaudioSenior Vice President,
    Global Business Operations                             
|                   
|                    |  | By: |  | /s/ DAVID A. RANE                                                                                 
|                    |  |     |  |                                                                                                   
|                    |  |     |  | David A. RaneSenior Vice President,
    Chief Financial Officer
    (Principal Accounting Officer)

35



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##### Table of Contents






CERTIFICATION OF CO-PRINCIPAL EXECUTIVE
OFFICER

I, David A. Rane, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of SureBeam Corporation;                                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report.                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                    |  |     |  |                                                                                                    
|------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------
|Dated: May 15, 2003 |  | By: |  | /s/ DAVID A. RANE                                                                                  
|                    |  |     |  |                                                                                                    
|                    |  |     |  | David A. RaneSenior Vice President and Chief Financial Officer
    (Co-Principal Executive Officer)

36



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##### Table of Contents



CERTIFICATION OF CO-PRINCIPAL EXECUTIVE
OFFICER

I, Kevin K. Claudio, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of SureBeam Corporation;                                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report.                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                    |  |     |  |                                                                                                       
|------------------- |  | --- |  | ------------------------------------------------------------------------------------------------------
|Dated: May 15, 2003 |  | By: |  | /s/ KEVIN K. CLAUDIO                                                                                  
|                    |  |     |  |                                                                                                       
|                    |  |     |  | Kevin K. ClaudioSenior Vice President, Global Business Operations
    (Co-Principal Executive Officer)

37



---



##### Table of Contents



CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER

I, David A. Rane, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of SureBeam Corporation;                                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report.                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                    |  |     |  |                                                                                                 
|------------------- |  | --- |  | ------------------------------------------------------------------------------------------------
|Dated: May 15, 2003 |  | By: |  | /s/ DAVID A. RANE                                                                               
|                    |  |     |  |                                                                                                 
|                    |  |     |  | David A. RaneSenior Vice President and Chief Financial Officer (Principal
    Financial Officer)

38