**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM10-K**

 

|                                                 | **ý** | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|                                                 |
| **For the fiscal year ended December 31, 2003** |
|                                                 |
| **-OR-**                                             |
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|                                                 | **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 No. 1-6035**

 

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**THETITAN CORPORATION**

(Exactname of registrant as specified in its charter) 

 

| **Delaware**                                                                            |   | **95-2588754**                     |
|-----------------------------------------------------------------------------------------|--------|------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                         |   | (IRS  Employer Identification No.) |
|                                                                                    |   |                               |
| **3033 Science Park Road  San Diego, California 92121-1199**                            |
| (Address  of principal executive offices, zip code)                                     |
|                                                                                    |   |                               |
| Registrant’s  telephone number, including area code:  **(858) 552-9500** |
|                                                                                    |   |                               |
| Securities  registered pursuant to Section 12(b) of the Act:                       |

 

| **Title of  each class**                                                                                                      |   | **Name of  exchange on which registered** |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|
| $1.00 Cumulative  Convertible Preferred Stock, $1.00 par value  Common Stock, $.01 par value  Preferred Stock Purchase Rights |   | New  York Stock Exchange                  |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicate bycheck mark whether the registrant is an accelerated filer as defined in Rule12b-2 of the Securities Exchange Act of 1934.  Yes ý  No o

 

Aggregatemarket value of the voting stock held by non-affiliates of the registrant as ofJune 30, 2003, the last business day of the registrant’s most recentlycompleted second fiscal quarter:  $794,342,426.

 

Number of shares of CommonStock outstanding as of February 20, 2004 was:  82,785,863.

 

**Documents Incorporated By Reference:**

 

The information required byPart III of this Form 10-K will be filed by amendment not later than April 29,2004 or, if applicable, incorporated by reference to the registrant’sdefinitive proxy statement involving the election of directors to be filedpursuant to Regulation 14A under the Securities Exchange Act of 1934 if theregistrant is required to file such a definitive proxy statement in 2004 anddoes so by April 29, 2004.

 

 

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**PART I**

**Item1.  Business**

 

**CorporateOverview**

 

The Titan Corporation is aleading technology developer and systems integrator for the Department ofDefense, the Department of Homeland Security, and intelligence and other keygovernment agencies.  We provide a rangeof services and systems solutions. These solutions and services include research and development, design,installation, integration, test, logistics support, maintenance andtraining.  We also provide services andsolutions to government agencies with sophisticated information systems.  These include information processing,information fusion, data management, and communication systems.  In addition, we develop and produce digitalimaging products, sensors, lasers, electro-optical systems, threat simulation/trainingsystems, intelligence electronic hardware, signal intercept systems, andcomplex military specific systems.

 

Our consolidated revenueswere approximately $1.8 billion for the year ended December 31, 2003.

 

Lockheed Martin Corporation(Lockheed Martin) and Titan have entered into a definitive agreement forLockheed Martin to acquire Titan.  See“Recent Developments” and “Item 3 - Legal Proceedings” for additionalinformation on the proposed transaction.

 

*Our Core Markets.*  We apply our core capabilities to providetechnology, products, and services with a focus in four often overlapping andsynergetic market areas:  C4ISR (Command, Control, Communications,Computers, Intelligence, Surveillance and Reconnaissance), TransformationalPrograms, Enterprise Information Technology, and the War on Terrorism/HomelandSecurity.  Each of these markets isdescribed in greater detail in the following sections, including specificexamples of the work we are doing in these areas.

 

*Command, Control, Communications, Computers,Intelligence, Surveillance, and Reconnaissance (C4ISR)*

 

C4ISR has beenthe cornerstone of our expertise since we were founded in 1981, and it is theprincipal business foundation on which we have grown over the years.  C4ISR can be described as the process ofgathering military information through intelligence, surveillance, andreconnaissance measures, and transmitting this information digitally throughhigh-technology communications systems, processing the digitized information tofacilitate command and control decision making, and disseminating such commandselectronically back to military and intelligence platforms for execution.  Computers and communications systems are thecommon vehicle for this information gathering, processing and deploymentprocess.  We are a key contributor tothe significant C4ISR systems that support the Department of Defense,the Department of Homeland Security, and intelligence and other key governmentagencies.    Through systems engineering, technicalassistance, program management, products, and systems integration, we have beenin the forefront of assisting our customers in reaching their C4ISR missiongoals.  The following are examples ofour efforts in C4ISR:

 

•                                          *The Joint Range Extension.*  We have developed an informationsolution that allows real-time tactical data link information-gleaned from avariety of sensors-to be transmitted over any communications medium.  This innovative capability allows commandersto “see” and share the actual tactical events of a campaign at differentlocations simultaneously.  Thiscapability was recently used  in theIraq war and Afghanistan to provide commanders with a view of the battle spaceat extended ranges, thus allowing forces to be coordinated, sequenced, anddeployed rapidly to meet the needs of the operational commander.

 

•                                          *Advanced Digital Waveformfor the U.S. Navy.*  OurAdvanced Digital Waveform, or ADW, increases data throughput rates on dedicatedultra-high frequency satellite communication channels by up to four timescurrent rates.  Increased data transportis critical to support new platforms such as Unmanned Air Vehicles (UAV), andto enhance weapons coordination and the command and control of naval forces.

 

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Our Miniaturized DemandAssigned Multiple Access, or Mini-DAMA, terminals are the first U.S. Navysystems to receive ADW capability.  Wheninstalled, the terminals are capable of passing information at three to fourtimes the previous rate.  The currentproject contemplates that the majority of the U.S. Navy’s Mini-DAMA terminalswill be outfitted with this improved communications feature within the nextyear.

 

•                                          *System-Level Solutions*.  Wedevelop, deliver and support system-level solutions for a wide range of weapon,sensor, surveillance, and reconnaissance systems. Additionally, we areconducting analysis of aircraft and ship structures, applying advancedcorrosion control methodologies, and supporting the development of advancedmaterials. In support of information operations, we provide highly specializedinformation security and signal intelligence systems and services to theintelligence community. In the key national imperative areas of missile defenseand combating terrorism, we conduct weapons effects analysis services anddevelop computer models for effects prediction.

* *

•                                          *Communications Products*.  We have provided the Departmentof Defense and intelligence community with state-of-the-art products from ourearliest days as a company.  Ourcommunications product specialization is in the development, manufacture andsupport of satellite communications (UHF, SHF, EHF) radios, modems, basebandsystems, power amplifiers and complete terminals.  We design and produce the AN/USC-42 DAMA terminal, which providesbandwidth efficient mobile satellite services at UHF for military users.  We are an industry leader in small,lightweight, low-power signal intercept, direction finding and signalprocessing systems for Signal Intelligence (SIGINT) applications. These high-valueSIGINT products include 2MHz to 2GHz manportable, ground vehicle, maritimepatrol craft and fixed-site applications. 

* *

•                                          *The Naval Air SystemsCommand/Naval Air Warfare Center.*  We are helping with the systems engineering and integrationof Naval Aviation Reconnaissance and Surveillance systems under a multi-yearcontract.  Under current tasking, ourengineers provide design and analysis support for the installation andintegration of state-of-the-art sensor systems in both manned and unmanned reconnaissanceplatforms.  Systems level supporttypically includes concept exploration, specification preparation, interfacedesign, laboratory integration, and test and evaluation.  We also support tactical manned and unmannedplatforms and avionics equipment.  Ourengineers provide design and analysis support for the integration ofsophisticated subsystems into the avionics and weapons systems of many types ofmilitary aircraft.  These subsystemsinclude electro-optic/infrared devices, radar, electronic warfare systems,mission planning modules, and tactical data links.

* *

•                                          *Military SatelliteCommunications.*  Ourengineers and technicians provide engineering, program and operational supportto the Space and Naval Warfare Systems Command and the Space Warfare SystemsCenters in San Diego, California, and Charleston, South Carolina.  Our satellite communications experts areinvolved in all aspects of U.S. Navy and other military satellite programsincluding: the determination of requirements, laboratory and in-fieldoperational testing, on-the-job and formal training, maintenance, operation,technical assistance, integration, and installation.  Our members of the Fleet System Engineering Team provide on-sitesupport at U.S. Navy satellite communications sites in Virginia, Hawaii, Italyand Bahrain.

 

*Transformational Programs*

 

We aredeveloping new transformational systems for the Department of Defense thatfocus on specific national security challenges faced by the United States andits allies.  One aspect of thetransformation is the development of new weapon systems and weapondelivery.  We are seeking to winengineering development contracts and ultimately full-scale productioncontracts to provide low-cost, mission critical new weapon systems.  The following are several key initiatives inour portfolio of active transformational efforts:

 

•                                          *X-Craft*.  We have a contract todesign, build and integrate a vessel for the United States Navy that is unlikeany other currently in the fleet today. The X-Craft will be a high-speed, 262-foot aluminum

 

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catamaran witha combined gas turbine and diesel propulsion plant, capable of speeds greaterthan 50 knots.  The X-Craft’s deck willhave two helicopter landing spots capable of handling a variety of aircraft upto the size of the H-60-series helicopter. With a design displacement ofapproximately 1,100 long tons, the X-Craft will be self-deployable overtrans-Atlantic ranges. The unique X-Craft’s mission module bay will be capableof simultaneously supporting the development of multiple mission packages thatwill be key to the follow-on new ship class, the Littoral Combat Ship(LCS).  The X-Craft program incorporatesnot only innovative design, development and management methods, but also isusing revolutionary acquisition processes intended to get this craft and theinformation derived from its use into the hands of naval forces as rapidly aspossible.  The X-Craft is expected to bein the water in the summer of 2004. Extensive testing will follow to demonstrate tactics, techniques,procedures, and technology for the LCS, the Navy’s planned next generation ofwarship.

 

•                                          *Affordable Weapon*.  We aredeveloping and testing a loitering Unmanned Aerial Vehicle (UAV) that isdesigned to carry a 200-pound warhead at extended ranges and remain airborneand ready for rapid deployment for up to 24 hours.  The UAV will be built using commercially-available, off-the-shelfcomponents at a cost expected to be approximately one-tenth of the cost ofcomparable missiles currently used by the military.  To date, we have built and tested 18 of these UAV’s, which can belaunched from land, ship or aircraft.

 

•                                          *KaBand Satellite Terminal*.  In2002, we received a contract from the U.S. Army to develop a new terminal forthe KaSAT, the military’s new wideband gapfiller satellite communicationssystem, scheduled for deployment in 2005. The terminal will provide KaSAT connectivity to ground forces as anadjunct to existing satellite communications and is expected to become anintegral part of the Army’s Warfighter Information Network – Tactical, WIN-T,program.  This program is an importantpart of the Army’s transformational concept of “SATCOM on the Move” allowingmaneuvering forces to receive and transmit critical voice and data at high bandwidthwithout having to stop and erect satellite equipment.

 

*Enterprise Information Technology*

 

We provide completeenterprise information technology solutions that enable seamless connectivityfrom the strategic to the tactical level of a customer’s criticalenterprise.  By necessity, the defenseand intelligence organizations require technology that enables information toflow into multi-disciplined, cross-organizational teams of commanders andtechnicians that respond quickly and effectively to continuing threats andimmediate crises.  Information isgathered through all source collection methods and is assessed, and in manycases, enriched to assure its relevance and use.  We support many enterprise information technology andmodernization efforts within our nation’s defense and intelligence communities,as well as mission critical networks for civilian agencies.  The following are several examples ofEnterprise Information Technology contracts: 

 

•                                          *USSOCOM.*  Under the Enterprise InformationTechnology Contract (EITC), we are providing enterprise network management andengineering services across all of the U.S. Special Operations Command’s(USSOCOM) communication and network infrastructures for data, voice, and video.EITC is an innovative solution to meet USSOCOM’s worldwide enterpriseneeds.  We are delivering strategicimprovements, increased interoperability, and efficient support at all USSOCOMsites and locations, including planning, management, operations andmaintenance, and training for all garrison and deployed Wide Area, MetropolitanArea, and Local Area Networks.  We alsoprovide development, integration, testing, training, and customer support forall desktops, portable computing devices, applications, messaging systems,databases, and web services used by Special Operations Forces. The program alsoincludes information assurance, transmission, and communication securityrequirements, requirements management, configuration management, hardwaremaintenance, and disaster recovery.

* *

*•**                                         **Navy Cash.*  We are assisting the U.S.Treasury, Naval Supply Systems Command, JP Morgan Chase and others in providinga cashless environment on naval craft for sailors and marines deployedthroughout the world.    The systemcovers point of sales, ATMs, and other automated financial services

 

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provided to service members.

 

•                                          *Information Assurance ande-Government Services.*  Weprovide systems and solutions related to information assurance, securityconsulting and e-government applications. We also focus on the design, installation and maintenance of local andwide area networks used to operate the various U.S government’s Internet-basedinitiatives.  We design electronicfiling, procurement and payment systems for the government agencies involved inthose initiatives, along with Internet portals used to electronicallydistribute confidential and non-confidential information to other governmententities and the public at large. Several government agencies have e-governmentapplications designed by Titan, including the Federal CommunicationsCommission, the Federal Deposit Insurance Corporation, and the Department ofHousing and Urban Development.

 

*The War on Terrorism/Homeland Security*

 

We have been providing homeland security solutions to variousgovernment agencies for over 15 years. As with our efforts in our traditional defense business, Titan bringsinnovation, integration, deployment, and life cycle service to the national imperativeof homeland security and counter terrorism measures.  We provide products and services in the following key homelandsecurity areas:

 

*•**                                         **Support of First Responders*.  We support first respondersthrough our communications systems such as APCO 25 compliant radio systemsthat greatly facilitate interoperability and crisis response.** **Inaddition, we develop, integrate and build emergency mobile command vehicles andsystems to provide backup communications capability to governmental agenciesand first responders.  We also providevery realistic training facilities through our contract to run the Center forNational Response and exercises to prepare first responders for a variety ofpotential terrorist threats.

 

*•**                                         **Defending AgainstBio-terrorism.*  Weprovide engineering, analytical support, systems development, and integrationof key systems to agencies protecting our country against the threat ofchemical and bio-terrorism.  Someexamples of our efforts in this area include supporting over 200 cities throughthe HHS Metropolitan Medical Response System, and supporting the U.S. ArmySoldier and Biological Chemical Command, which would be the center of anyfederal government effort to fight a bio-terrorism attack.

 

*•**                                         **Securing America’s Borders*.  Protecting America’s cyberborders is a major Titan endeavor, as network and information technologysecurity and protecting critical infrastructure have become increasinglyimportant initiatives in national security. We are also working in the areas of intelligence informationdistribution, which integrates and fuses near real-time correlated intelligencedata via satellite to intelligence agencies and combatant commanders worldwide.Additionally, Titan provides the information technology support for the U.S.Customs Service’s Air & Marine Interdiction Coordination Center, ournation’s focal point for protecting the security of the United States’ bordersfrom smugglers and terrorists.

 

*•**                                          21stCentury Technology to Secure the Homeland.*  We are in variousstages of developing several new technologies to support homeland security,including a new digital data link between aircraft and the ground, concealedweapons detectors, through-the-wall surveillance capabilities, buried minedetection devices, fissile material detectors and RF (radio frequency) attackwarning chips.

 

*Competition.*  We are one of many companies involved in providinginformation systems solutions, support services and communications products fora variety of programs for agencies of the U.S. government and civilgovernments.  Most activities in whichwe engage are very competitive and require that we have highly skilled andexperienced technical personnel to compete. Many of our competitors have significantly greater financial, personneland other resources than we have.  Thesecompetitors include Computer Sciences Corporation, General DynamicsCorporation, Lockheed Martin Corporation (with whom we have entered into adefinitive merger agreement), Northrop Grumman Corporation, Raytheon Company,and Science Applications International Corporation.  In addition, we compete with smaller and medium sized companiessuch as:  Anteon Corporation, CACIInternational Inc., 

 

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Dynamics Research Corporation,and ViaSat, Inc.  We believe that theprimary competitive factors for our information systems solutions, supportservices and communications products include reputation, technical skills, pastcontract performance, experience in the industry, cost competitiveness, andcustomer relationships.

 

We view our competitivestrengths as follows:

 

*Long Standing Customer Relationships and ExperiencedManagement.*  Wehave an extensive history of providing comprehensive information andcommunications products, solutions and services to U.S. defense, intelligence,and civil government agencies. Collectively, Titan’s executives and general managers have on averageapproximately 29 years of industry experience and have developed long-standing,key customer relationships across all of the U.S. military services and severalallied countries.  The industryexperience of Titan’s executives and general managers has also helped todevelop a significant presence with many civilian government agencies, whichhas contributed to Titan’s success in securing new contracts.

 

*Broad Solution Capabilities.*  We have extensive industryexpertise in the development of comprehensive information and communicationsproducts, solutions and services for government customers.  We provide products and solutions in areassuch as signal processing, antenna design, low-detection waveforms,computer-aided target and image recognition, satellite communications hardwareand software, and real-time object tracking and targeting.  In addition, we have significant knowledgeof legacy information technology and C4ISR systems currently in operation andthe ability to integrate new solutions into existing systems.  This ability to provide full-serviceproducts, solutions and services, coupled with our employee base of over 8,700“Secret” and above-cleared personnel, has enabled us to bid on larger, morecomprehensive government contracts than at any time in our history.  During 2003, we won eight of twelvecompetitive procurements that we bid with potential values each exceeding $100million.

 

**CommercialBusinesses**

 

We have restructured ourorganization to focus our primary efforts on our core national securitybusiness.  However, we continue to ownall or minority portions of commercial businesses that were built on technologywe developed under government contracts, or acquired through our acquisition ofother defense companies.

 

For example, Titan Scan Technologies sells medical equipmentsterilization systems and provides medical equipment sterilization services,utilizing electron beam irradiation technology.  Titan Scan Technologies’ medical equipment sterilization systemsare currently used in the medical device production lines of GuidantCorporation in San Diego, California, Baxter Corporation in the DominicanRepublic and in France, Mediscan in Austria, Rochialle Corporation in Wales,and Isotron in the United Kingdom. Titan Scan Technologies also offers contract sterilization services formedical product manufacturers at facilities that it owns in San Diego, California;Denver, Colorado; and Lima, Ohio. Titan Scan has also begun to market the useof electron beam technology outside of its traditional medical device customerbase, including the use of electron beam technology to improve materialperformance in semiconductors, aerospace composites, wire and cable, plasticsand packaging films.

 

**DiscontinuedOperations**

 

During 2002, our board ofdirectors made the decision to exit a substantial portion of our commercialbusinesses, consisting of Titan Wireless, Cayenta, and AverCom and LinComWireless, both formerly parts of our Titan Technologies segment.  Prior to these decisions to exit thesebusinesses, we grouped our business into five segments – Titan Systems, TitanWireless, Software Systems (including Cayenta), Titan Technologies and theSureBeam business.  We are no longerreporting the results of operations by these segments, however, reference maybe made to these segments in discussions of other historical information.

 

***Titan Wireless (Discontinued July 11, 2002)***

 

Titan Wireless providedtelecommunications services and systems to developing countries primarily inAfrica, Central Asia, the Middle East and Latin America.  Despite our low cost technology andefficiency advantages,

 

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competition in the internationaltelecommunications sector drove market rates to levels that made operations ofour telecommunications systems at our size uneconomical. Notably, thebankruptcies of Global Crossing Ltd., WorldCom, Inc. and Phone1GlobalwideCorporation (formerly Globaltron Corporation), and the dire financial conditionof other providers such as ibasis, imposed a rapid and sudden deterioration inwholesale prices in 2002.  In July 2002,we decided to exit our international telecommunications businesses through a combinationof selling assets or businesses and shutting down operations.  These actions were substantially completedin 2003.  Refer to Note 8 to ourconsolidated financial statements for further discussion.

 

For the year ended December31, 2003, Titan Wireless had revenues of approximately $71.5 million,which primarily reflected the revenues of our GlobalNet business until we soldthe business in the third quarter of 2003.

 

***Cayenta (Discontinued March 1, 2002)***

 

Cayentaprovided software applications and implementation and integration services tocustomers to solve specific business and operating problems.  These software applications were tailoredfor the customers’ business and operating requirements and made accessible viathe Internet. These businesses were sold in July 2002.  Refer to Note 8 to our consolidatedfinancial statements for further discussion.

 

***Titan Technologies (SubstantiallyDiscontinued August 2002)***

 

In 2002, Titandiscontinued its AverCom business which was sold in 2002, its LinCom Wirelessbusiness which was shut down in 2002, and its commercial information technologybusiness which is currently held for sale.

 

For the yearended December 31, 2003, the discontinued operations of Titan Technologies,comprised of the remaining commercial information technology business, hadrevenues of approximately $13.8 million.

 

**RecentDevelopments**

 

*Proposed Merger withLockheed Martin Corporation. * LockheedMartin Corporation (Lockheed Martin) and Titan have entered into a definitiveagreement for Lockheed Martin to acquire Titan.  Under the merger agreement, stockholders of Titan may elect toreceive $22 per share in cash, an equivalent amount of Lockheed Martin commonstock, or a 50/50 combination of cash and Lockheed Martin common stock.  Stockholders who elect to receive all cashor stock will be subject to pro-ration, so that the aggregate number of sharesof Titan’s common stock to be exchanged for cash and the aggregate number to beexchanged for Lockheed Martin common stock will each equal 50 percent of thetotal number of shares of Titan common stock outstanding on the closing date,other than shares held by Titan and Lockheed Martin and shares for whichdissenter’s rights have been exercised. The total value of this transaction,including the assumption of about $550 million of Titan debt, isapproximately $2.4 billion before accumulated tax benefits.  The transaction has been approved by theboards of directors of each company and is subject to approval by Titanstockholders and satisfaction or waiver of the other closing conditionsdescribed in the merger agreement, including that there has not been a materialadverse change in Titan.  Among otherterms, the merger agreement provides that the exchange rate for stockholderswho receive Lockheed Martin common stock will be determined by dividing $22 pershare by the average of the daily high and low sales prices per share ofLockheed Martin common stock on the New York Stock Exchange (NYSE) compositetransaction tape for the 10 trading days preceding the third trading day priorto the effective date of the merger, subject to specified collars. If theaverage price exceeds $58 per share (the Upper Collar), then the exchange ratewill be calculated using the Upper Collar instead of the average price. If theaverage price is less than $46 per share (the Lower Collar), then the exchangerate will be calculated using the Lower Collar instead of the average price.

 

On February 9,2004, Titan announced that all outstanding shares of its cumulative convertiblepreferred stock will be redeemed at 5:00 p.m., New York City time, on March 15,2004.  The redemption is beingundertaken in anticipation of and as a condition to the close of the proposedmerger with Lockheed Martin but is not contingent on the merger closing.  The convertible preferred shares areredeemable at Titan’s option at a redemption price of $20 per share, pluscumulative dividends in arrears, for an aggregate redemption price of $20.03per share.  Titan will redeem the sharesusing available cash balances.  Thepreferred stock is listed on the New York Stock Exchange

 

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under the symbol “TTN_Pr” andclosed at $19.85 per share on March 8, 2004. Holders of Titan’s convertible preferred stock also have an existingright to convert each of their shares into 0.781 shares of Titan’s commonstock.  The right to convert theconvertible preferred stock will terminate at 5:00 p.m., New York City Time, onMarch 15, 2004, the date of redemption. As of February 9, 2004, there were 686,724 shares of convertiblepreferred stock outstanding.  To theextent that all of these shares are converted, then approximately 536,331shares of Titan common stock would be issued. Any shares of convertible preferred stock that are not converted will beredeemed.

 

In response toconcerns raised by the U.S. government concerning organizational conflicts ofinterest certain of our contracts might create with Lockheed Martin’s existingbusinesses, in the first quarter of 2004, we have divested certain contractswith organizational conflict of interest provisions and the related businessunit where these conflicts could not be mitigated to the satisfaction of thecustomer.  Neither the revenuesassociated with the divested contracts, nor the divestiture transaction itself,were material to us.

 

Refer to Note11 to our consolidated financial statements for a discussion of the impact ofthe proposed merger on Titan’s outstanding debt.

 

                Refer to “Item 3 - Legal Proceedings” and “Item7 – Management’s Discussion and Analysis of Results of Operations and FinancialCondition – Risk Factors – Risks Related to our Business ” for discussion oflegal and other matters relating to the recently announced internal andgovernmental investigations into whether payments involving our foreignconsultants were made in violation of applicable law and related issues.  In relation to the investigations, afterconsideration of publicly available information of recent resolutions of otherForeign Corrupt Practices Act issues, and following discussions with legalcounsel, we have recorded a $3.0 million provision as of and for the year endedDecember 31, 2003, representing our estimate of potential liabilities relatedto this matter.  This provision was notincluded in the consolidated statements of operations that we previously issuedin connection with our announcement of fourth quarter and full year results andfiled with the SEC on Form 8-K dated February 23, 2004.

 

In the yearended December 31, 2003, Titan incurred $2.2 million in transaction costsrelated to the proposed merger, which are reflected as merger related costs inthe accompanying consolidated statements of operations.

 

**GovernmentContracts**

 

A substantial portion of ourrevenues are dependent upon continued funding of United States and alliedgovernment agencies, as well as continued funding of the programs targeted byour businesses.  Our revenues from U.S.government business represented approximately 96% of our total revenues for theyear ended December 31, 2003.  Anysignificant reductions in the funding of United States government agencies orin the funding of programs targeted by our businesses could materially andadversely affect our operating results.

 

U.S. government contractsare subject to termination for convenience by the government, as well astermination, reduction or modification in the event of budgetary constraints orany change in the government’s requirements. When we subcontract with prime contractors, such subcontracts are alsosubject to the ability of the prime contractor to perform its obligations underits prime contract.  We often havelittle or no control over the resources allocated by the prime contractor tothe prime contract, and any failure by the prime contractor to perform itsobligations under the prime contract could result in our loss of oursubcontract.  In 2003, approximately 20%of our revenue was derived under subcontracts with prime contractors.  In addition, our contract-related costs andfees, including allocated indirect costs, are subject to audits and adjustmentsby negotiation between us and the U.S. government.  As part of the audit process, the government audit agencyverifies that all charges made by a contractor against a contract are legitimateand appropriate.  Audits may result inrecalculation of contract revenues and non-reimbursement of some contract costsand fees.  Any audits of ourcontract-related costs and fees could result in material adjustments to ourrevenues.  In addition, U.S. governmentcontracts are conditioned upon the continuing availability of congressionalappropriations.  Congress usuallyappropriates funds on a fiscal year basis even though contract performance maytake several years.  Consequently, atthe outset of a major program, the contract is usually incrementally funded andadditional funds are normally committed to the contract by the procuring agencyas Congress makes appropriations for future fiscal years.  Any failure of such agencies to continue tofund such contracts could have a material adverse effect on our operatingresults.

 

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Our business with the U.S.government and prime contractors is generally performed under costreimbursable, fixed-price or time and materials contracts.  Cost reimbursable contracts for thegovernment provide for reimbursement of costs plus the payment of a fee.  Some cost-reimbursable contracts include incentivefees that are awarded based on performance on the contract. Under fixed-pricecontracts, we agree to perform certain work for a fixed price.  Under time and materials contracts, we arereimbursed for labor hours at negotiated hourly billing rates and arereimbursed for travel and other direct expenses at actual costs plus appliedgeneral and administrative expense.  Thefollowing table gives the percentage of revenues realized by us from the threeprimary types of government contracts during the periods indicated. 

 
|               |   | **Year Ended December 31,** |       |
|--------------------|--------|-----------------------------|------------|
| **Contract  Type** |   | **2003**                    |       | **2002** |   | **2001** |   |
|               |   |                        | ** ** |   | ** ** |   | ** ** |
| Time and Materials |   | 38.9                        | %          | 42.6 | % | 41.5 | % |
| Cost Reimbursable  |   | 43.8                        |       | 36.3 |   | 39.3 |   |
| Fixed-Price        |   | 17.3                        |       | 21.1 |   | 19.2 |   |
|               |   |                        |       |   |   |   |   |
|               |   | 100.0                       | %          | 100.0 | % | 100.0 | % |

 

**Backlog**

 

Many of our contracts withthe U.S. government are funded by the procuring agency from year to year,primarily based on its fiscal requirements. This results in two different categories of U.S. government backlog:funded and unfunded backlog.  “Fundedbacklog” consists of the aggregate contract revenues remaining to be earned byus at a given time, but only to the extent such amounts have been appropriatedby Congress and allocated to the contract by the procuring governmentagency.  Although funded backlog isappropriated by Congress, we cannot guarantee that cancellations or scopeadjustments will not occur.  Themajority of funded backlog represents contracts under the terms of whichcancellation by the customer would entitle us to all or a portion of our costsincurred and potential cancellation fees. “Unfunded backlog” consists of the aggregate contract revenues expectedto be earned as our customers incrementally allot funding to existingcontracts, whether we are acting as a prime contractor or subcontractor, andthe aggregate contract revenues expected to be earned on funding of newcontracts awarded to us.  Unfundedbacklog includes priced options, which consist of the aggregate contractrevenues expected to be earned as a result of a customer exercising an optionperiod that has been specifically defined in the original contract award.  “Backlog” is the total of the government andcommercial funded and unfunded backlog.

 

Our backlog consisted of thefollowing approximate amounts as of the following dates: 

 
|                             |   | **As of December 31,** |       |
|----------------------------------|--------|------------------------|------------|
| **Backlog**                      |   | **2003**               |       | **2002** |   | **2001** |   |
|                             |   | **(in  thousands)**    | ** ** |
| U.S. Government funded backlog   |   | $                      | 913,582    |   | $ | 695,598 |   | $ | 545,569 |   |
| U.S. Government unfunded backlog |   | 4,263,641              |       | 3,306,244 |   | 2,231,052 |   |
| Commercial backlog               |   | 29,529                 |       | 39,568 |   | 26,788 |   |
| Total backlog                    |   | $                      | 5,206,752  |   | $ | 4,041,410 |   | $ | 2,803,409 |   |

 

We expect to realizeapproximately 34.2% of our December 31, 2003, total backlog byDecember 31, 2004.

 

10

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Management believes thatyear-to-year comparisons of backlog are not necessarily indicative of future revenues.The actual timing of receipt of revenues, if any, on projects included inbacklog could change because many factors affect the scheduling of projects andthe amount of funding of projects.  Inaddition, cancellations or adjustments to contracts may occur.  Backlog is subject to large variations fromquarter to quarter as existing contracts are renewed or new contracts areawarded.  Additionally, all UnitedStates government contracts included in backlog, whether or not funded, may beterminated at the convenience of the United States government.  No assurance can be given as to when and ifrevenue will be realized on projects included within our backlog.

 

**Manufacturing**

 

We operate both fabricationand assembly facilities and also purchase certain components and assembliesfrom other suppliers.  We also usecontract manufacturers for some of our products.  No one contract manufacturer or supplier accounts for asignificant portion of total purchases or revenues.  With the exception of the contract manufacturer we are utilizingto manufacture and construct our X-Craft vessel, we do not rely on any onesupplier as a single source for a material project.  While we use care in selecting our manufacturers, our use ofcontract manufacturers gives us less control over the reliability of supply,quality and price of products or components than if we manufactured ourproducts ourselves.  We risk disruptionsin our supply of products and components if these suppliers fail or are unableto perform because of strikes, natural disasters, financial condition or otherfactors.

 

**Patents,Trademarks and Trade Secrets**

 

Our policy is to apply forpatents and other appropriate statutory protection when we develop new orimproved technology, although we do not rely on patent protection in the normalcourse of our government contract operations. We presently hold over 100 U.S. and foreign issued patents, as well as anumber of trademarks and copyrights.  Wedo not rely, however, solely on these statutory protections to protect ourtechnology and intellectual property. In addition to seeking patent protection for our inventions, we rely onthe laws of unfair competition and trade secrets to protect our unpatentedproprietary rights.  We attempt toprotect our trade secrets and other unpatented proprietary information throughagreements with customers, vendors, employees and consultants.  In addition, various names used by us forour products and services have been registered with the United States Patentand Trademark Office.

 

Third parties couldindependently develop competing technology or design around ourtechnology.  If we are unable tosuccessfully detect infringement and enforce our rights in our technology, wemay lose competitive position in the applicable market.  We cannot be certain that our means ofprotecting our proprietary rights in the U.S. or abroad will be adequate orthat competing companies will not independently develop similar technology.

 

To date we have not beennotified that our technologies infringe the proprietary rights of any thirdparties, but third parties may, in the future, claim that our current or futuretechnologies infringe upon their proprietary rights.  In addition, third parties have and may continue to challenge thevalidity or enforceability of our proprietary rights.  Any such claim, whether meritorious or not, could be timeconsuming, result in costly litigation, cause delays in our development oftechnologies and products, or require us to enter into royalty or licensingagreements.  Such royalty or licensingagreements may not be available on terms acceptable to us, or at all.  As a result, any such claim could harm ourbusiness and prospects.

 

**Researchand Development**

 

We maintain a staff ofengineers, other scientific professionals and support personnel engaged indevelopment of new applications of technology and improvement of existingproducts.  These programs’ costs areexpensed as incurred.  Titan-fundedresearch and development expenditures were $11.3 million in the year endedDecember 31, 2003. A portion of our research and development activities during2003 was customer-funded and as such was paid for through contract revenueswith an associated expense in operating expenses.  All of our customer-funded research and development activity isfunded under contracts with the U.S. government and is not included in researchand development expense.

 

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**Governmentand Environmental Regulations**

 

We must comply with and areaffected by various government regulations. These regulations affect how we and our customers can do business and,in some instances, impose added costs to our businesses.  Any changes in applicable laws couldadversely affect the financial performance of the business affected by thechanged regulations.  Any failure tocomply with applicable laws could result in material fines and penalties oraffect how we conduct our business in the future.

 

We are subject toenvironmental and safety laws and regulations governing the use, storage anddisposal of hazardous substances or wastes and imposing liability for thecleanup of contamination from these substances.  Although our business is not generally involved in the handlingof hazardous materials, we cannot completely eliminate the risk ofcontamination or injury from these substances or wastes, and in the event ofsuch an incident, we could be held liable for any damages that result.  From time to time, we have been notified ofviolations of government and environmental regulations.  We attempt to correct these violationspromptly without any material impact on our operations.  In addition, we may be required to incursignificant additional costs to comply with environmental laws and regulationsin the future.  These costs, and anyfuture violations or liability under environmental laws or regulations, couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

**Employees**

 

As of December 31,2003, we employed approximately 11,500 employees, most of whom were located inthe United States.  As of December 31,2003, we were subject to collective bargaining agreements with respect to 34employees.  We believe that ourrelationships with our employees are satisfactory.

 

**GeneralInformation**

 

We were incorporated inDelaware in 1969.  Our executive officesare at 3033 Science Park Road, San Diego, CA 92121, and our telephone number is(858) 552-9500.  Our website address iswww.titan.com.  We make available freeof charge through our website our Annual Report on Form 10-K, Quarterly Reportson Form 10-Q, Current Reports on Form 8-K and all amendments for those reportsas soon as reasonably practicable after such material is electronicallyfurnished to the Securities and Exchange Commission.

 

We also provide access onour website to our Corporate Governance Principles: our Code of Ethics, thecharters of our Audit, Nominating and Corporate Governance, and CompensationCommittees.  Copies of these documentsare available without charge to any stockholder upon written request to ourcorporate secretary at our headquarters address.  In addition, we will disclose on our website any changes to, orwaivers from, our Code of Ethics.

 

**Item2.  Properties**

 

Our operations’ facilitiesoccupy approximately 3,011,300 square feet of space located primarilythroughout the United States.  The largemajority of the space is office space. Substantially all of our facilities are leased.  We describe our lease commitments in Note 12to the accompanying consolidated financial statements.

 

As a result of the merger ofTitan Systems Corporation into The Titan Corporation in September 2002, acharge of approximately $32.2 million was taken in 2002 for theconsolidation of various Titan Systems facilities into centralized locations inVirginia and California.  This chargereflects the estimated losses, net of estimated sublease income, on futurelease commitments of facilities with terms extending through year 2009 andrepresenting approximately 395,000 square feet of excess space.  We have subleased certain of thesefacilities and continue to actively pursue additional sublease opportunitiesfor the remaining facilities.  However,the remaining available space is in markets adversely affected by the economyand may not be subleased at attractive rates or at all.  The actual amount of estimated losses onthese lease commitments could change based upon Titan’s ability to obtainsublease arrangements for these facilities.

 

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**Item 3.  LegalProceedings**

 

*RecentlyAnnounced Governmental Investigations*

 

On February13, 2004, we announced that representatives of Lockheed Martin and Titanrecently initiated meetings with the Department of Justice and the Securitiesand Exchange Commission to advise of an internal review relating to certainagreements between Titan and international consultants or representatives andrelated payments in foreign countries. We have been sharing the results of the internal review with theDepartment of Justice and the SEC.  Wealso announced we had learned that the SEC had commenced an investigation intowhether payments involving foreign consultants were made in violation ofapplicable law. On March 5, 2004, we learned that the Department of Justice hadopened a criminal inquiry into this matter. We have continued our internal review relating to these issues, incooperation with Lockheed Martin Corporation, which is conducting a parallelreview in connection with its proposed acquisition of Titan. The SEC has issueda subpoena for production of documents, but has suspended actual production ofdocuments at this time.  We intend tocontinue to cooperate fully with the Department of Justice and the SEC inconnection with their investigation of the matters under review.

 

Aspart of our ongoing review, we and Lockheed Martin learned of allegations thatimproper payments were made, or items of value were provided, by ourconsultants to foreign officials.  Thealleged payments or provision of items of value, if true, raise questionsconcerning whether there has been a violation of the Foreign Corrupt PracticesAct or other applicable law.  In thecourse of our investigation, information has been identified that may indicate that there have beenviolations of U.S. or foreign law arising out of payments involving ourforeign representatives.  These mattersare subject to ongoing Department of Justice and SEC review.  See “Item 7—Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Risk Factors.”  If the government determines that unlawfulpayments were made, the government could take action against us and/or some ofour employees.  These actions couldinclude criminal and civil fines, penalties, criminal sanctions and limitationson our or our affected businesses' ability to export products or enter intofuture U.S. government contracts.

 

                Information gathered as part ofthe internal review raises questions as to whether applicable law has beenviolated.  In relation to the governmentinvestigations, after consideration of factors including publicly availableinformation of recent resolutions of other FCPA issues, and followingdiscussions with legal counsel, we have recorded a $3.0 million provision as ofand for the year ended December 31, 2003, representing our estimate ofpotential liabilities related to this matter. The ultimate resolution of this matter is dependent upon the finalresults of such inquiries and investigations and associated liabilities, ifany, could be different from the amount currently estimated.

 

*OtherProceedings*

 

On January 23, 2004, Titan,together with its wholly owned subsidiaries, Titan Wireless, Inc. and TitanAfrica, Inc., were named as defendants in *GonzalesCommunications, Inc. v. Titan Wireless, Inc., Titan Africa, Inc., The TitanCorporation, Geolution International Inc., Mundi Development, Inc.,*alawsuit filed in the U.S. District Court for the Southern District ofCalifornia. The complaint relates to the purchase by Gonzales Communications ofequipment and related services under an equipment purchase agreement enteredinto with Titan Wireless in June 2001. Gonzales Communications contends thatthe equipment delivered was unsatisfactory. In the complaint, GonzalesCommunications seeks direct damages in the amount of $0.9 million plusinterest, representing the amount Gonzales Communications alleges to havepreviously paid under the agreement, and consequential damages of approximately$16.3 million. To date, Titan and its subsidiaries have not received payment infull under the agreement for the equipment that was delivered to GonzalesCommunications.  We believe that theclaims of Gonzales Communications are without merit, and we intend to defendour position vigorously.

 

Since September 2003, Titanhas been named as a defendant in the following purported class action lawsuitseach filed on behalf of holders of common stock of SureBeam Corporation, aformer subsidiary of Titan: (1) *BerndBilstein, IRA v. SureBeam Corporation, et. al.*, filed in the U.S.District Court for the Southern District of New York on September 10, 2003; (2)*Steven Morrow v. SureBeam Corporation, et.al.*, filed in the U.S. District Court for the Southern District ofCalifornia on October 23, 2003; and (3) *GordonReed v. Oberkfell, et. al,*filed in the U.S. District Court forthe Southern District of California on December 24, 2003. Both the *Bilstein* and *Morrow* complaints allege that Titan, as a “control person”of SureBeam within the meaning of the Securities Act, should be held liable forallegedly false and misleading statements contained in the prospectus issued inconnection with SureBeam’s initial public offering in March 2001. SureBeam andcertain investment banks serving as lead underwriters in SureBeam’s offeringalso were named as defendants in both the *Bilstein*and *Morrow* complaints. The *Reed* complaint alleges that Titan, as thethen majority stockholder of SureBeam, breached fiduciary duties owed to theminority stockholders by, among other things, causing SureBeam to go publicwith false and misleading statements contained in the prospectus for SureBeam’sinitial public offering, grossly mismanaging SureBeam to

 

13

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Titan’s benefit and by beingunjustly enriched at the expense and detriment of SureBeam. SureBeam andcertain officers and directors of SureBeam also were named as defendants in the*Reed* complaint. Dr. Ray and SusanGolding, two of Titan’s current directors, were named as defendants in the *Bilstein* and *Reed* complaints in their capacity as directors of SureBeam.The plaintiffs in the *Bilstein, Morrow*and *Reed* complaints seekunspecified statutory damages from Titan. We believe that the allegations contained in these complaints arewithout merit, and we intend to defend the claims vigorously.

 

OnAugust 16, 2002, Perimex International Corporation (Perimex) filed acomplaint against Titan, Titan Wireless and a former Titan Wireless employee inSan Diego Superior Court in San Diego, California.  The complaint alleged breach of contract, breach of the covenantof good faith and fair dealing, intentional interference with existingcontractual relationships and prospective business advantage and violation ofthe California unfair competition law arising from an alleged failure of TitanWireless to enter a joint venture with Perimex to provide wirelesstelecommunication services in Argentina and other related allegedmisconduct.  The complaint soughtdamages of $52.65 million and sought injunctive relief prohibiting Titanand Titan Wireless from transferring any of Titan Wireless’ assets.  The court denied Perimex’s request for apreliminary injunction, sustained Titan’s and Titan Wireless’ demurrer as toall causes of action in the complaint and granted Perimex leave to amend thecomplaint.  Perimex dismissed itscomplaint voluntarily without prejudice. On May 22, 2003, however, Perimex filed a new complaint in the UnitedStates district court for the Southern District of California allegingsubstantially similar causes of action and claiming a similar amount ofdamages.  We believe that Perimex’sclaims are without merit, and we intend to defend our position vigorously.

 

In October 2002, we received a grand jury subpoena from the AntitrustDivision of the Department of Justice requesting the production of documentsrelating to information technology services performed for the Air Force atHanscom Air Force Base in Massachusetts. We have been informed that other companies who have performed suchservices have received subpoenas as well. We are not aware of any illegal or inappropriate conduct, and we havebeen and will continue to cooperate fully with the investigation.

 

In March 2003,we received a subpoena from the Office of Inspector General for the NationalAeronautics and Space Administration, or NASA, seeking certain records relatingto billing for labor services in connection with our contracts with NASA.  We also received a subpoena from the Officeof Inspector General for the General Services Administration, or GSA, seekingsimilar records relating to billing for labor categories in connection withcontracts with GSA.  We are not aware ofany illegal or inappropriate conduct, and we are fully cooperating with thegovernment’s inquiries in these areas.

 

We areinvolved in legal actions in the normal course of our business, includingaudits and investigations by various governmental agencies that result from ourwork as a defense contractor.  Titan andits subsidiaries are named as defendants in legal proceedings from time to timeand third parties, including the government, may assert claims againstTitan from time to time.  In addition,Titan has acquired companies from time to time that have legal actions pendingagainst them at the time of acquisition.

 

Based uponcurrent information available to us, in the opinion of management, the amountof ultimate liability or recovery with respect to these other actions andproceedings is not expected to materially affect our consolidated financialposition or results of operations taken as a whole.   However, our evaluation of the likely impact of these otheractions and proceedings could change in the future, and an unfavorable outcome,depending upon the amount and timing, could have a material adverse effect onour results of operations or cash flows in a future period.

 

**Item4.  Submission of Matters To a Vote of Security Holders**

 

No information is requiredby Item 4.

 

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**PART II**

 

**Item5.  Market for the Company’s Common Equity and Related StockholderMatters**

 

Titan’s common stock andcumulative convertible preferred stock are traded on the New York StockExchange (NYSE).  As of February 9,2004, there were approximately 3,590 holders of record of our common stock and430 holders of record of our preferred stock, excluding beneficial owners ofshares held in the names of brokers or other nominees.  The closing prices for the common andpreferred stock on the NYSE as of February 23, 2004, were $20.90 and$19.95, respectively.  The quarterlymarket price ranges based on the high and low sales prices for our common andpreferred stock on the NYSE in 2003 and 2002 were as follows: 

 
| **Common  Stock**                           |   |     |       |     |       |
|---------------------------------------------|--------|----------|------------|----------|------------|
|                                        |   | **2003** |       | **2002** |       |
| **Fiscal Quarter**                          |   | **High** |       | **Low**  |       | **High** |   | **Low** |   |
| First                                       |   | $        | 12.35      |     | $          | 6.82 |   | $ | 18.66 |   | $ | 12.64 |   |
| Second                                      |   | 10.88    |       | 6.80     |       | 17.43 |   | 12.72 |   |
| Third                                       |   | 21.60    |       | 10.01    |       | 13.64 |   | 6.62 |   |
| Fourth                                      |   | 21.89    |       | 20.80    |       | 13.94 |   | 8.86 |   |
|                                        |   |     |       |     |       |   |   |   |   |
| **Cumulative Convertible  Preferred Stock** |   |     |       |     |       |
|                                        |   | **2003** | ** ** | **2002** | ** ** |
| **Fiscal Quarter**                          |   | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First                                       |   | $        | 17.50      |     | $          | 15.15 |   | $ | 20.40 |   | $ | 18.20 |   |
| Second                                      |   | 17.40    |       | 15.50    |       | 19.80 |   | 17.15 |   |
| Third                                       |   | 20.35    |       | 16.85    |       | 17.10 |   | 13.30 |   |
| Fourth                                      |   | 20.25    |       | 19.84    |       | 17.35 |   | 15.30 |   |

 

No cash dividends were paidon Titan’s common stock in 2003 or 2002. Regular quarterly dividends of $.25 per share were paid on thecumulative convertible preferred stock in both years.

 

On August 5, 2002, wedistributed to our stockholders in the form of a dividend 0.6986 shares ofSureBeam Corporation for each outstanding share of Titan common stock.  The common stock prices presented above forperiods before August 5, 2002 are restated stock prices and reflect thedistribution of our ownership in SureBeam to our stockholders.  The market prices were restated by dividingby 1.345, the same adjustment made by Titan to outstanding Titan stock optionsto maintain the same aggregate intrinsic value of the stock options as beforethe spin-off.  See Note 14 to ourconsolidated financial statements.

 

**EquityCompensation Plan Information**

 

The following tablesummarizes our equity compensation plans as of December 31, 2003: 

 
| **(Shares in  thousands)**                             |   | **Number of securities  to be issued upon  exercise of options****(a)** |   | **Weighted average  exercise price of  outstanding options (b)** |   | **Number of securities   remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in  column (a))****(c)** |   |
|--------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Equity compensation plans approved by stockholders     |   | 9,648                                                                   |   | $                                                                | 9.04   |                                                                                                                                                           | 4,091  |   |
| Equity compensation plans not approved by stockholders |   | —                                                                  |   | —                                                           |   | —                                                                                                                                                         |   |
| Total                                                  |   | 9,648                                                                   |   | 9.04                                                             |   | 4,091                                                                                                                                                          |   |
|                                                        |        |                                                                         |        |                                                                  |        |                                                                                                                                                                |        |  |

 

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**Item6.  Selected Financial Data** (in thousands of dollars, except per share data)

 

The following selectedconsolidated financial data should be read in conjunction with our consolidatedfinancial statements and the related notes and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”  The selected consolidated statement ofoperations data presented below for each of the years ended December 31, 2003,2002 and 2001, and the balance sheet data at December 31, 2003 and 2002 arederived from our consolidated financial statements included in thisfiling.  The consolidated statement ofoperations data for the years ended December 31, 1999 and 2000 and the balancesheet data at December 31, 2001, 2000, and 1999 are derived from auditedconsolidated financial statements not included in this document.

 
|                                                                                                                   |   | **2003**  |      | **2002**  |   | **2001**  |   | **2000** |    | **1999** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|----------|---------|----------|--------|
| ***Operating Results:***                                                                                               |   |      |      |      |   |      |   |     |    |     |   |
| Revenues                                                                                                               |   | $         | 1,775,007 |      | $      | 1,392,160 |   | $        | 974,497 |     | $      | 846,208 |   | $ | 741,225 |   |
| Income (loss) from continuing operations before cumulative effect of  change in accounting principle                   |   | 29,951    |      | (13,244   | )      | (3,457    | )      | (15,334  | )       | 37,660   |   |
| Income (loss) from continuing operations before cumulative effect of  change in accounting principle per common share: |   |      |      |      |   |      |   |     |    |     |   |
| Basic                                                                                                                  |   | $         | 0.37      |      | $      | (.18      | )      | $        | (.13    | )        | $      | (0.34 | ) | $ | .78 |   |
| Diluted                                                                                                                |   | 0.35      |      | (.18      | )      | (.13      | )      | (0.34    | )       | .70      |   |
|                                                                                                                   |   |      |      |      |   |      |   |     |    |     |   |
| ***Financial Position:***                                                                                              |   |      |      |      |   |      |   |     |    |     |   |
| Cash, cash equivalents and investments                                                                                 |   | $         | 26,974    |      | $      | 34,123    |   | $        | 18,621  |     | $      | 6,447 |   | $ | 12,970 |   |
| Total assets                                                                                                           |   | 1,290,635 |      | 1,297,442 |   | 1,451,919 |   | 951,209  |    | 627,550  |   |
| Amounts outstanding under lines of credit, long-term                                                                   |   | 341,250   |      | 344,750   |   | 317,187   |   | 260,625  |    | 215,014  |   |
| Other long-term debt                                                                                                   |   | 200,988   |      | 2,045     |   | 5,612     |   | 1,250    |    | 5,749    |   |
| Company obligated mandatory redeemable convertible preferred  securities                                               |   | —    |      | 250,000   |   | 250,000   |   | 250,000  |    | —   |   |
| Stockholders’ equity                                                                                              |   | 371,409   |      | 312,313   |   | 496,958   |   | 167,416  |    | 166,348  |   |
| Preferred dividends                                                                                                    |   | 688       |      | 689       |   | 690       |   | 692      |    | 695      |   |

 

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**Item7.  Management’s Discussion And Analysis Of Financial Condition AndResults Of Operations**

 

(Amounts in thousands, except share and pershare data, or as otherwise noted.)

 

The following discussion isqualified in its entirety by the more detailed information and consolidatedfinancial statements, including the notes thereto, included in thisdocument.  The following discussion ofour financial condition and results of operations contains forward lookingstatements that involve risks and uncertainties.  Our actual results may differ materially from what is discussedin the forward-looking statements. Factors that might cause such differences include those discussed belowunder the heading “Risk Factors.”

 

**Overviewand Outlook**

 

The Titan Corporation is aleading technology developer and systems integrator for the Department ofDefense, the Department of Homeland Security, and intelligence and other keygovernment agencies.  We provide a rangeof services and systems solutions. These solutions and services include research and development, design,installation, integration, test, logistics support, maintenance andtraining.  We also provide services andsolutions to government agencies with sophisticated information systems.  These include information processing,information fusion, data management, and communication systems.  In addition, we develop and produce digitalimaging products, sensors, lasers, electro-optical systems, threatsimulation/training systems, intelligence electronic hardware, signal interceptsystems, and complex military specific systems.

 

We focus on the followingfour markets:  C4ISR (Command, Control,Communications, Computers, Intelligence, Surveillance and Reconnaissance),Transformational Programs, Enterprise Information Technology, and the War onTerrorism/Homeland Security.

 

During the past three years,our revenues have grown organically by using our broader capabilities to winlarger, more complex and long-term government contracts, and throughacquisitions of other government information technology companies.

 

Our operating margins areaffected by the mix of contract types (cost reimbursable, fixed-price or timeand materials) as well as by the mix of prime contracts versussubcontracts.  Significant portions ofour contracts are time and materials and cost reimbursable contracts.  We are reimbursed for labor hours atnegotiated hourly billing rates and other direct expenses under time and materialscontracts and reimbursed for all actual costs, plus a fixed or incentive-basedfee, or profit, under cost reimbursable contracts.  The financial risks under time and material and cost reimbursablecontracts generally are lower than those associated with other types ofcontracts, and margins are also typically lower than those on fixed-pricecontracts.  The U.S. government also hasawarded us fixed-price contracts.  Suchcontracts carry higher financial risks because we must deliver the products, systemsor contracted services at a cost below the fixed price in order to earn aprofit.  Of our total revenues from ourgovernment business in 2003, approximately 39% were generated by time andmaterials contracts, approximately 44% were generated by cost reimbursablecontracts, and approximately 17% were generated by fixed-price contracts.

 

As a result of our decisionin the third quarter of 2002 to exit substantially all of our remainingcommercial businesses, as discussed in “Discontinued Operations” below, andbecause most of our remaining operations are our government businesses, wemerged our Titan Systems Corporation subsidiary, which encompassed our primarygovernment businesses, into The Titan Corporation on September 25, 2002(see Note 14 to our consolidated financial statements).  Inaccordance with SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information”, substantially all of our operations are aggregated intoone reportable segment given the similarities of economic characteristicsbetween the operations and the common nature of the products, services, andcustomers.  Prior to these developments,we grouped our businesses into five business segments — Titan Systems, TitanWireless, Software Systems (including Cayenta), Titan Technologies and theSureBeam business.  As discussed below,we are no longer reporting the results of operations by these segments,however, reference may be made to these segments in discussions of other historicalinformation.

 

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The followingtables set forth the results of operations expressed in dollars (in thousands)and as a percentage of revenues for the years below:

 

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|                                                     |   | **Consolidated Financial Data****Year Ended December 31,** |      |
|----------------------------------------------------------|--------|-----------------------------------------------------------------|-----------|
|                                                     |   | **2003**                                                        |      | **2002** |   | **2001** |   |
| Revenues                                                 |   | $                                                               | 1,775,007 |   | $ | 1,392,160 |   | $ | 974,497 |   |
| Cost of revenues                                         |   | 1,478,631                                                       |      | 1,129,061 |   | 755,115 |   |
| Selling, general and administrative                      |   | 163,919                                                         |      | 179,559 |   | 154,514 |   |
| Research and development                                 |   | 11,324                                                          |      | 9,555 |   | 9,310 |   |
| Impairment charge related to SureBeam                    |   | 15,757                                                          |      | — |   | — |   |
| Exit and restructuring charges and other                 |   | —                                                          |      | 53,317 |   | — |   |
| Acquisition and integration related charges and other    |   | —                                                          |      | — |   | 27,847 |   |
| Merger related costs                                     |   | 2,247                                                           |      | — |   | — |   |
| Operating profit                                         |   | 103,129                                                         |      | 20,668 |   | 27,711 |   |
| Interest expense, net                                    |   | (32,248                                                         | )         | (30,956 | ) | (34,890 | ) |
| Debt extinguishment costs                                |   | (12,423                                                         | )         | (9,435 | ) | — |   |
| Loss on investments                                      |   | (6,154                                                          | )         | — |   | — |   |
| Income tax provision (benefit)                           |   | 22,353                                                          |      | (6,479 | ) | 1,007 |   |
| Minority interests                                       |   | —                                                          |      | — |   | 4,729 |   |
| Loss from discontinued operations, net                   |   | (854                                                            | )         | (218,106 | ) | (95,157 | ) |
| Cumulative effect of change in accounting principle, net |   | —                                                          |      | (40,111 | ) | — |   |
| Net income (loss)                                        |   | $                                                               | 29,097    |   | $ | (271,461 | ) | $ | (98,614 | ) |

 

**As aPercentage of Revenues**

 
|                                                     |   | **Year Ended December 31,** |   |
|----------------------------------------------------------|--------|----------------------------------|--------|
|                                                     |   | **2003**                         |   | **2002** |   | **2001** |   |
| Revenues                                                 |   | 100.0                            | %      | 100.0 | % | 100.0 | % |
| Cost of revenues                                         |   | 83.3                             |   | 81.1 |   | 77.4 |   |
| Selling, general and administrative                      |   | 9.2                              |   | 12.9 |   | 15.9 |   |
| Research and development                                 |   | 0.7                              |   | 0.7 |   | 1.0 |   |
| Impairment charge related to SureBeam                    |   | 0.9                              |   | — |   | — |   |
| Exit and restructuring charges and other                 |   | —                           |   | 3.8 |   | — |   |
| Acquisition and integration related charges and other    |   | —                           |   | — |   | 2.9 |   |
| Merger related costs                                     |   | 0.1                              |   | — |   | — |   |
| Operating profit                                         |   | 5.8                              |   | 1.5 |   | 2.8 |   |
| Interest expense, net                                    |   | (1.8                             | )      | (2.2 | ) | (3.6 | ) |
| Debt extinguishment costs                                |   | (0.7                             | )      | (0.7 | ) | — |   |
| Loss on investments                                      |   | (0.3                             | )      | — |   | — |   |
| Income tax provision (benefit)                           |   | 1.3                              |   | (0.5 | ) | 0.1 |   |
| Minority interests                                       |   | —                           |   | — |   | 0.5 |   |
| Loss from discontinued operations, net                   |   | (0.1                             | )      | (15.7 | ) | (9.7 | ) |
| Cumulative effect of change in accounting principle, net |   | —                           |   | (2.9 | ) | — |   |
| Net income (loss)                                        |   | 1.6                              | %      | (19.5 | )% | (10.1 | )% |

 

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**Results ofOperations**

 

***Fiscal Years Ended December 31, 2001, 2002, and 2003***

 

*Revenues*

 

Our consolidated revenuesincreased from $974.5 million in 2001 to $1.4 billion in 2002 and from$1.4 billion in 2002 to $1.8 billion in 2003.  Revenues in 2003 increased in part due to the increased work onthe linguists contract with the U.S. Army’s Intelligence and Security Command,which contributed increased revenues of approximately $112.1 million, andincreased work on the contract to provide enterprise information technologysupport for the U.S. Special Operations Command which contributed increased revenuesof approximately $37.5 million. Revenues from the U.S. Navy also grew $42.2 million over 2002 due toincreased work on development contracts for the X-Craft and affordable weaponsfor the Office of Naval Research. Revenues from enterprise information technology work for the Navy on aworldwide intelligence network contributed increased revenues of approximately$31.7 million, and enterprise architecture and decision support for theNational Security Agency contributed revenues of approximately $20.5 million tothe increase.  Aside from the linguistand enterprise information technology contracts mentioned above, whichrepresent 7.0% and 3.5% of total revenue, respectively, no single contractaccounted for more than 2.0% of total revenue in 2003.  The acquisitions of Wave Science, Inc., inthe third quarter of 2002 and Jaycor, Inc., in March of 2002, contributed anaggregate of approximately $20.2 million to the total revenue increase. Revenuegrowth in 2002 was primarily attributable to organic revenue growth and theimpact of the acquisition of Jaycor, Inc., and a full year of operationsgenerated by Datron Systems (Datron) and BTG, Inc. (BTG), companies acquired inthe latter half of 2001, which contributed an aggregate of approximately $361 million  to the increase in 2002.  The organic revenue growth in 2002 reflectsincreased demand from the intelligence community and Homeland Securityagencies, including systems integration services and cryptological equipmentfor U.S. and Allied intelligence agencies, vulnerability assessments and firstresponder operations training on Homeland Security contracts, and ArmedServices technical services such as linguist support, specifically related tothe war on terrorism.  Increasedrevenues in 2002 were also driven by the ramp up of work on Titan’s enterpriseinformation technology contract with the U.S. Special Operations Command, andwork for the Air Force’s Electronic Systems Center on a variety of technical,engineering and acquisition support contracts.

 

*Selling,General and Administrative*

 

Our SG&A expensesincreased from $154.5 million in 2001 to $179.6 million in 2002 anddecreased from $179.6 million in 2002 to $163.9 million in 2003.  SG&A, as a percentage of revenues, decreasedfrom 15.9% in 2001 to 12.9% in 2002 and from 12.9% in 2002 to 9.2% in2003.  The 2003 SG&A includedamortization of purchased intangibles of $4.4 million and deferred compensationamortization of $7.2 million.  The 2002SG&A was impacted by amortization of purchased intangibles of$5.7 million compared to amortization of goodwill of $10.0 million in2001, and an increase in the amortization of deferred compensation from$4.3 million in 2001 to $27.8 million in 2002.  The amortization of deferred compensation in2002 includes approximately $23.3 million resulting from the merger ofTitan’s national security subsidiary, Titan Systems, into Titan, which occurredon September 25, 2002, and resulted in the exchange of all outstanding TitanSystems stock options for Titan Corporation stock options.  For further details regarding deferredcompensation, please refer to Note 14 to our consolidated financialstatements.  The decrease in SG&Afrom 2003 and 2002 was attributable to the decrease in amortization noted aboveas well as cost reduction and consolidation activities initiated in early 2002that reduced our SG&A expenses necessary to operate our business andsupport our revenue growth.  Thedecreases as a percentage of revenues in 2003 and 2002 were attributable tothese cost savings as well as overall increased economies of scale with higherrevenues.

 

*Researchand Development*

 

Our R&D expensesincreased from $9.3 million in 2001 to $9.6 million in 2002 and from$9.6 million in 2002 to $11.3 million in 2003.  R&D expenses in 2003 were incurredprimarily on the development of a low cost phased

 

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array radar system, securecommunications devices, satellite communications modems and the HF manpack andportable radios.  The increased R&Dexpenditures in 2002 compared to 2001 were primarily attributable to increaseddevelopment expenses incurred to develop software reprogrammable modems anddigital radios for military and homeland security applications.  As a percentage of revenues, R&D remainedat 1% or less in all periods.

 

*ImpairmentCharge Related to SureBeam*

 

Prior to andin connection with the spin-off of SureBeam Corporation, Titan and SureBeamentered into a number of agreements. Titan extended a $50 million secured senior credit facility ofwhich $25 million in principal was advanced and is outstanding as ofDecember 31, 2003.  The senior creditfacility is secured by a lien on substantially all of SureBeam’s assets.  In addition, Titan guaranteed certain leaseobligations of SureBeam and subleased facilities to SureBeam.  Titan is SureBeam's only securedlender.  The aggregate amount of thelease obligations Titan has guaranteed as of December 31, 2003, isapproximately $18.6 million.  Theleases extend through periods ending in 2023. The aggregate amount due to Titan as of December 31, 2003 for futureobligations under the sublease agreements for approximately 63,800 square feetfor periods through 2010 is approximately $4.9 million.  SureBeam’s obligation to reimburse Titan forany amounts paid under the guarantees is secured under the senior creditfacility*.*

 

On January 19,2004, SureBeam voluntarily filed for bankruptcy relief to be liquidated underChapter 7 of the United States Bankruptcy Code.  As a result of this filing, we recorded an estimated pre-taximpairment charge of $15.8 million (and an associated tax benefit of $6.3million) in the fourth quarter of 2003 related to the senior credit facilitywith SureBeam as well as SureBeam’s other indebtedness and obligations to us.  The ultimate amount of impairment to berecognized is contingent upon the amount of actual proceeds recovered by Titanfrom the liquidation of collateral securing the senior credit facility.  The current estimate of such proceeds, whichincludes estimated sales of equipment and inventory, primarily electron beamsystems and other related components, is approximately $9.0 million.  The ultimate impairment is also dependentupon Titan’s ability to mitigate its obligations under the facilities leaseguarantees through subleases, and loan repayments from Hawaii Pride (asdiscussed below).  The current estimateof such mitigation of obligations under leases and lease guarantees isapproximately $16.8 million.  Theimpairment charge was offset by an $8.1 million liability previously accrued byTitan to SureBeam under a Tax Allocation Agreement.  The actual amount of Titan’s losses could be lower or higher thancurrently estimated depending on the amount of SureBeam liquidation proceedsreceived and the amount of net payments made under its lease guarantees issuedon behalf of SureBeam and bank debt guarantee related to Hawaii Pride.  Refer to Note 5 to our consolidatedfinancial statements for further discussion of Titan’s agreements withSureBeam.

 

On March 4,2004, we entered in a settlement agreement with the bankruptcy trustee forSureBeam and its subsidiary.  Thesettlement agreement requires bankrutpcy court approval to becomeeffective.   Under the settlementagreement, we will have an allowed secured claim in the amount of a minimum ofapproximately $47.9 million and a first priority perfected lien on all assetsof SureBeam other than certain identified assets of SureBeam.  Upon effectiveness of the settlementagreement, the automatic stays in the bankruptcy will be modified to permit usto exercise our rights and remedies as a secured creditor and sublessor,including the right to dispose of collateral. As part of the settlement, we also agreed to undertake commerciallyreasonable efforts to collect two receivables of SureBeam that by agreement areexcluded from our collateral and to deliver the proceeds to the bankruptcytrustee.

 

In relation toSureBeam’s strategic alliance with Hawaii Pride, Titan has guaranteed repaymentof Hawaii Pride’s bank debt up to the greater of SureBeam’s equity interest inHawaii Pride (which is zero), or 19.9% of Hawaii Pride’s $6.8 million,15-year loan from its lender, WebBank. As of December 31, 2003, Titan has guaranteed approximately$1.2 million, or 19.9% of the current loan balance of$5.9 million.  In the event thatHawaii Pride defaults on the loan, Titan currently expects to be obligated tocover any defaults on the entire outstanding balance of the loan if the defaultis not cured within 90 days.  In lateOctober 2003, Titan was notified by Hawaii Pride that Hawaii Pride had stoppedreceiving financial support from SureBeam and did not have sufficient cashresources to make its monthly principal and interest payments to WebBank.  Through March 8, 2004, Titan has loaned approximately$0.2 million to Hawaii Pride under a new credit facility for a maximum amountof $0.45 million to be advanced to Hawaii Pride to cover shortfalls in debtservice payments.  All amountsoutstanding under this facility are required to be repaid by May 2005.  In the impairment charge discussed above,Titan has assumed that Hawaii Pride will repay amounts advanced on the newcredit facility.

 

*Exit andRestructuring Charges and Other*

 

Included in the year endedDecember 31, 2002, is $53.3 million of restructuring costs related to themerger of Titan Systems into Titan on September 25, 2002, and exit chargesrelated to the shutdown of Cayenta’s headquarters office.  Approximately $11.7 million of theseexit charges are related to the shutdown of the Cayenta headquarters office andnetwork operations center, which includes employee termination costs and otherliabilities of

 

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approximately$4.5 million, lease commitment costs of approximately $4.8 million,and non-cash asset impairment charges of approximately $2.4 millionrelating primarily to the unamortized leasehold improvements and other fixedassets at the Cayenta headquarters.  Theremaining lease commitment costs are expected to be paid through future periodsending in January 2007.  Includedin the employee termination costs are 33 personnel reductions.

 

Approximately$39.9 million of the restructuring charges were related to the merger ofTitan Systems into Titan and other associated reorganization and consolidationcosts.  The costs included approximately$32.2 million for the consolidation of various Titan Systems facilitiesinto centralized locations in Virginia and California.  This charge reflects the estimated losses,net of estimated sublease income, on future lease commitments of facilitieswith terms extending through year 2009. Titan has subleased certain of these facilities and continues toactively pursue additional  subleaseopportunities for the remaining facilities. However, the remaining available space is in markets adversely affectedby the economy and may not be subleased at attractive rates or at all.  The actual amount of estimated losses onthese lease commitments could change based upon Titan’s ability to obtainsublease arrangements for these facilities. Included in the employee termination costs are 19 personnel reductions.

 

Approximately$7.7 million of the Titan Systems restructuring costs are primarilyrelated to employee termination costs, employee retention costs, duplicatetransition costs and professional fees related to acquisitions and certainreorganization and consolidation activities within Titan Systems.

 

The remaining $1.7 millionis related to direct transaction costs incurred by Titan in connection with acquisitionsthat did not close,  primarily theproposed acquisition with Science and Engineering Associates, Inc.

 

At December31, 2003, accruals for all exit and restructuring charges totaled$27.9 million, comprised primarily of restructuring charges related to themerger of Titan Systems into Titan on September 25, 2002 and exit chargesrelated to the shutdown of Cayenta’s headquarters office.  These exit and restructuring activities wereaccounted for under EITF Issue No. 94-3, which allowed accrual of restructuringcosts upon commitment to a plan and certain other criteria.  Effective January 1, 2003, Titan wasrequired to adopt SFAS No. 146 “Accounting for Costs Associated with Exit orDisposal Activities”.  SFAS No. 146requires companies to defer recognition of a liability for a cost associatedwith an exit or disposal activity until that liability is incurred and can bemeasured at fair value.  As theserestructuring activities were entered into prior to our adoption of SFAS No.146, Titan has accounted for these activities under EITF 94-3.  A summary of exit and restructuringcharges and other recorded and the utilization of those accruals during theyears ended December 31, 2002 and 2003 is as follows:

 

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|                                           |   | **Charges  recorded  in 2002** |   | **Asset  Disposals** |   | **Cash paid  2002** |   | **Balance  December 31,  2002** |   | **Cash paid  2003** |   | **Balance****December 31,2003** |   |
|------------------------------------------------|--------|--------------------------------|--------|----------------------|--------|---------------------|--------|---------------------------------|--------|---------------------|--------|---------------------------------|--------|
| Titan Systems restructuring:                   |   |                           |   |                 |   |                |   |                            |   |                |   |                            |   |
| Estimated facilities consolidation costs       |   | $                              | 32,226 |                 | $      | —              |   | $                               | 155    |                | $      | 32,071                          |   | $ | 4,775 |   | $ | 27,296 |   |
| Employee termination/retention costs and other |   | 7,703                          |   | —               |   | 5,965               |   | 1,738                           |   | 1,738               |   | —                          |   |
|                                           |   | 39,929                         |   | —               |   | 6,120               |   | 33,809                          |   | 6,513               |   | 27,296                          |   |
| Transaction costs for unsuccessful deals       |   | 1,726                          |   | —               |   | 1,129               |   | 597                             |   | 597                 |   | —                          |   |
|                                           |   | 41,655                         |   | —               |   | 7,249               |   | 34,406                          |   | 7,110               |   | 27,296                          |   |
| Cayenta headquarters exit costs:               |   |                           |   |                 |   |                |   |                            |   |                |   |                            |   |
| Lease commitment costs                         |   | 4,816                          |   | —               |   | 1,680               |   | 3,136                           |   | 2,511               |   | 625                             |   |
| Asset impairment costs                         |   | 2,444                          |   | 2,444                |   | —              |   | —                          |   | —              |   | —                          |   |
| Employee termination costs and other           |   | 4,402                          |   | —               |   | 4,183               |   | 219                             |   | 212                 |   | 7                               |   |
|                                           |   | 11,662                         |   | 2,444                |   | 5,863               |   | 3,355                           |   | 2,723               |   | 632                             |   |
|                                           |   | $                              | 53,317 |                 | $      | 2,444               |   | $                               | 13,112 |                | $      | 37,761                          |   | $ | 9,833 |   | $ | 27,928 |   |

 

At December31, 2003, $16.4 million of the exit and restructuring accruals areincluded in Other Accrued Liabilities on the consolidated balance sheet and$11.5 million are included in Other Non-current Liabilities.  The remaining accrual balance is primarilycomprised of amounts due under the facilities consolidation, which requirespayments in 2004 for certain lease cancellation fees and other lease costs, netof assumed sublease income, with the remainder expected to be paid over theremaining lease terms, which expire in 2009.

 

*Acquisitionand Integration Related Charges and Other*

 

Acquisition and integrationrelated charges and other of $27.9 million in 2001 included$12.2 million related to the integration of ACS and AverStar and otherrestructuring and realignment activities in our government business, a$5.5 million impairment charge for fixed assets associated with Cayenta’snetwork operations center and $10.0 million related to other assetimpairments and restructuring activities associated with Cayenta’s headquartersoffice, and $0.2 million related to personnel reductions in Cayenta’s federalgovernment business, which is now a part of Titan’s government business.  Liabilities of $1.3 million related to thecharges remained at December 31, 2001, which were paid in 2002.

 

*MergerRelated Costs*

 

Merger related costs in 2003of $2.2 million are comprised of transaction costs related to the proposedmerger between Titan and Lockheed Martin.

 

*OperatingProfit*

 

*Consolidated.  *Our operating profit decreased from$27.7 million in 2001 to $20.7 million in 2002 and increased from$20.7 million in 2002 to $103.1 million in 2003.  Our operating profits have beensignificantly impacted by a number of factors in each of 2001, 2002 and2003.  The 2001 operating resultsinclude the acquisition and integration related charges and other of$27.9 million noted above, and the 2002 operating results include the exitand restructuring charges and other of $53.3 million noted above.  The 2003 operating results include animpairment charge related to SureBeam of $15.8 million and $2.2 million ofmerger related costs, as noted above. Also impacting the results in each yearwas amortization of goodwill and purchased intangibles of $10.0 million in2001, $5.7 million in 2002, and $4.4 million in 2003 and deferredcompensation amortization of $4.3 million in 2001,

 

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$27.8 million in 2002 and$7.2 million in 2003.  Operatingincome in 2002 and 2003 increased primarily due to the increased revenue volumediscussed previously, as well as an increase in operating margins primarily resultingfrom economies of scale and specific cost containment initiatives.

 

*InterestExpense, Net*

 

Our net interest expensedecreased from $34.9 million in 2001 to $31.0 million in 2002 andincreased from $31.0 million in 2002 to $32.2 million in 2003.  Borrowings from our primary bank creditfacility, excluding working capital lines from acquired companies, averaged$337.3 million at a weighted average interest rate of 7.5% during 2001,$350.2 million at a weighted average interest rate of 5.14% during 2002,and $360.6 million at a weighted average interest rate of 4.7% during2003.  Interest expense in 2003 comparedto 2002 reflects reduced interest expense on our credit facility resulting fromthe reduced interest rates, offset by increased interest expense on $200million in 8% senior subordinated notes issued in May 2003, the proceeds ofwhich were used to redeem $250 million in 5 3/4% HIGH TIDES.  The reduction in interest expense in 2002 ascompared to 2001 reflects lower average interest rates on our primary bankcredit facility.  Also included ininterest expense is interest on our deferred compensation plan and retireemedical obligations.  Interest expenserelated to these items was $0.7 million for 2001, $0.8 million for2002, and $0.6 million for 2003.

 

*Loss onInvestments*

 

The loss on investments of$6.2 million in 2003 relates to an unrealized loss on the carrying value of ourinvestment in Etenna Corporation based upon recent indications of fair value,and includes an unrealized loss on our investment in DOAR Communications thatwas subsequently sold at a loss in January 2004.

 

*IncomeTaxes*

 

Consolidated income taxesreflect effective rates of a provision of 14% in 2001 reflecting a$1.0 million provision on a pre-tax loss of $7.2 million, a benefitof 33% in 2002, and a provision of 43% in 2003.  The provision in 2001 on a pre-tax loss was due to the impact ofthe relationship of significant permanent non-deductible items compared to thebook loss for the period.  The reducedbenefit rate in 2002 as compared to the statutory tax rate reflects the effectof additional state taxes due to separate state filings.  Due to Titan’s return to profitability in2003, the consolidated income taxes now reflect a tax provision compared to thetax benefit in 2002.  The increasedprovision rate in 2003 reflects the non-deductibility of certain losses andcosts incurred in 2003.

 

*Loss FromDiscontinued Operations*

 

Our loss from discontinuedoperations includes the results of operations for our Titan Wireless business,certain components of our Cayenta business, our AverCom business, our LinComWireless business and SureBeam (which was spun-off in August 2002).  Excluded from the loss from discontinuedoperations is a charge of $50.1 million for the impairment of goodwill whichwas recorded on January 1, 2002 when Titan adopted SFAS No. 142, which has beenreflected as the cumulative effect of a change in accounting principle.  Following is a summary of the operatingresults for the discontinued operations.

 
|                                             |   | **Year Ended December 31,** |   |
|--------------------------------------------------|--------|-----------------------------|--------|
|                                             |   | **2003**                    |   | **2002** |   | **2001** |   |
| Gain on sale of  business                        |   | $                           | 12,195 |   | $ | — |   | $ | — |   |
| Impairment of  goodwill                          |   | —                      |   | (96,961 | ) | — |   |
| Impairment of fixed assets and other             |   | (13,469                     | )      | (162,449 | ) | (3,679 | ) |
| Exit charges                                     |   | (5,000                      | )      | (24,403 | ) | (4,575 | ) |
|                                             |   | (6,274                      | )      | (283,813 | ) | (8,254 | ) |
| Losses from  operations                          |   | (10,189                     | )      | (43,543 | ) | (94,695 | ) |
|                                             |   | (16,463                     | )      | (327,356 | ) | (102,949 | ) |
| Tax benefit                                      |   | (15,609                     | )      | (109,250 | ) | (7,792 | ) |
| Loss from discontinued operations, net of  taxes |   | $                           | (854   | ) | $ | (218,106 | ) | $ | (95,157 | ) |

 

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The 2003 tax benefit wasimpacted by the GlobalNet sale for which a tax provision was not provided dueto prior losses, as well as a tax benefit to adjust the carrying value ofcertain assets which are currently held for sale in Titan’s remainingcommercial information technology business that was previously part of TitanTechnologies.

 

***Titan Wireless (Discontinued July 11,2002) ***In July 2002, our board of directors madethe decision to exit all of our international telecommunications businessthrough a combination of selling or winding down the operations within ourTitan Wireless segment.  Titanimmediately began implementing these actions, which were substantiallycompleted during 2003.  Titan hasreported this exit of the Titan Wireless segment as a discontinued operation inaccordance with SFAS No. 144.   Revenues for Titan Wireless were $71.5 million and net income was$1.0 million for the year ended December 31, 2003.  The revenues were primarily generated by theGlobalNet business prior to the sale of this business in the third quarter of2003.  The net income was primarily aresult of the gain of $12.2 million from the disposition of the GlobalNetbusiness, resulting from a previous write-down of the carrying value of the netassets, for which a tax provision was not provided due to prior losses.  The gain was offset by impairment charges of$10.8 million resulting from the terms of the settlement agreements withTitan’s customers in Nigeria and Benin, and by approximately $5.0 million ofcharges accrued for the exit activities in Benin.

 

On December 10, 1999, ourwholly owned subsidiary, Titan Africa, Inc. (Titan Africa), in connection withits contract to build a satellite-based telephone system for its customer, thenational telephone company of Benin, Africa (the OPT), entered into a LoanFacility agreement for up to 30.0 billion Francs CFA (the currency of theAfrican Financial Community), equivalent to approximately $45.0 millionU.S. dollars, with a syndicate of five banks, with Africa Merchant Bank as thearranger.  This financing wassubsequently increased by 6.0 billion francs CFA to approximately $54.0million.  This medium term financing isa non-recourse loan to Titan Africa which is guaranteed by the nationaltelephone company of Benin, Africa and secured by the national telephonecompany’s equipment and revenues related to the project.  The facility has a fixed interest rate of9.5% per year and was originally to be repaid in seven equal semi-annual paymentsfrom the net receipts of this project, or by the OPT in the event that suchreceipts are not adequate to make these payments, which commenced on December31, 2000 and were scheduled to end on December 31, 2003.  The payment terms were subsequently amendedcalling for quarterly payments through mid-2006.  The borrowings on this facility have been utilized to fundvarious equipment and subcontractor costs incurred most notably by Alcatel ofFrance, a major subcontractor to this project.

 

Related to Titan’s contract with the OPT, Titan has a$46.2 million gross receivable due from the OPT, which is reflected inCurrent Assets of Discontinued Operations as of December 31, 2003.  Of this amount, approximately $32.3 millionis recorded as a receivable on the project, reflecting the outstanding balanceon the non-recourse loan, drawn to cover subcontract costs.  The remaining $14 million net receivablerepresents amounts due from the OPT under the Titan settlement agreemententered into with the OPT.  Titanentered into the settlement agreement with the OPT in October 2003 pursuant towhich Titan was to be paid $29.5 million in full satisfaction of Titan’sperformance on the OPT contract, of which $14 million remains outstanding as ofDecember 31, 2003.

 

In the secondquarter of 2003, Titan sold its interest in Ivoire Telecom S.A. forapproximately $0.5 million cash consideration. In the third quarter of 2003, Titan completed the sale of its GlobalNetbusiness.  Payments received for thesale of GlobalNet consisted of approximately $2 million in cash, notesreceivable of approximately $1.5 million, and the buyer’s assumption of all ofthe outstanding liabilities of GlobalNet, which aggregated to approximately$21 million at the time of the consummation of the sale.  Titan has collected approximately $0.5million

 

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of the amounts due under thenotes receivable, and expects to collect the remaining $1 million in the firstquarter of 2004.  Also during the thirdquarter of 2003, Titan settled and accelerated the collection of its receivabledue from its customer in Nigeria, resulting in an aggregate cash collection ofapproximately $11.7 million in 2003.

 

***Cayenta (Discontinued March 2002 -previously included in our Software Systems segment)***  In July 2002, the twoinformation technology businesses of Cayenta were sold, for cash received todate of $0.2 million.

 

***SureBeam (Discontinued October 2001)***  Titan discontinued the SureBeamsegment in the third quarter of 2001, and in the third quarter of 2002, Titancompleted a tax free spin-off transaction in which all of Titan’s shares ofSureBeam Corporation were distributed to Titan stockholders.  In 2003, we recorded an estimated pre-taximpairment charge of $15.8 million related to SureBeam’s indebtedness toTitan.  See the discussion in“Impairment Charge Related to SureBeam” above for further details.

 

***Titan Technologies***  In August 2002, ourboard of directors made the decision to sell or otherwise divest our LinComWireless business and to sell our remaining commercial information technologybusiness, both of which were previously reported in our Titan Technologiessegment.  Accordingly, Titan hasreflected both operations as discontinued in accordance with SFAS No. 144. In October 2002, the LinCom Wirelessbusiness was shut down.  The AverCombusiness, discontinued in the first quarter of 2002, was sold in July 2002. Theremaining commercial information technology business is currently held forsale.

 

In accordancewith SFAS No. 144, all commercial operations that have been sold or thatare held for sale have been reflected as discontinued operations for allperiods presented in Titan’s consolidated financial statements.  SFAS No. 144 contains criteria that must bemet for businesses to be classified as held-for-sale and recorded asdiscontinued operations.  Managementperiodically re-evaluates those criteria for businesses held-for-sale, and ifsuch criteria are no longer met, we would be required to reclassify the operationsand assets and liabilities of non-qualifying businesses into continuingoperations.  Management believes thatall businesses currently held-for-sale meet this criteria and, therefore, havebeen reported as discontinued operations in accordance with SFAS No. 144.

 

Refer to Note 8 to ourconsolidated financial statements for further discussion of discontinuedoperations.

 

*Net Income(Loss)*

 

We reported net loss of$98.6 million in 2001, net loss of $271.5 million in 2002, and netincome of $29.1 million in 2003. Included in the net results for 2001, 2002 and 2003 are net losses fromdiscontinued operations of $95.2 million, $218.1 million and$0.9 million, respectively.  Thediscontinued operations in these years include SureBeam (through spin-off datein 2002), certain components of our Cayenta business, our AverCom business, ourTitan Wireless business, and our LinCom Wireless business.  The 2003 net income includes an estimatedimpairment charge of $15.8 million related to our former subsidiary, SureBeamCorporation, and a loss on investments of $6.2 million.  Debt extinguishment costs of $12.4 millionand $9.4 million are included in the net results for 2003 and 2002,respectively.  Included in the net lossfor 2002 is a charge of $40.1 million, net of tax, for Titan’s adoption ofSFAS No. 142, which is reported as a cumulative effect of a change inaccounting principle.  Also included inthe 2001, 2002 and 2003 results are goodwill and/or purchased intangibles amortizationof $10.0 million, $5.7 million and $4.4 million,respectively,  deferred compensationcharges and amortization of $4.3 million, $27.8 million and$7.2 million, respectively, and exit and restructuring and other charges,integration, acquisition related charges and other, and merger related costs of$27.9 million, $53.3 million and $2.2 million, respectively.

 

**Liquidityand Capital Resources**

 

We generatedcash of approximately $78.5 million from our continuing operations duringthe year ended December 31, 2003, primarily resulting from our core governmentbusiness, net of an increase in receivable balances of approximately$75.7 million.  The increase inaccounts receivable balances primarily reflects the growth in revenues over thepast year.  Our investing activitiesused net cash of approximately $29.2 million, primarily for theacquisition of Advent for a net cash outlay of approximately $12.1 million,capital expenditures of

 

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approximately $14.1 million andinvestments of $1.6 million.  Financingactivities used $52.7 million, primarily due to the redemption of the $250million HIGH TIDES, offset by the issuance of $200 million 8% subordinatednotes.  At the time of the redemption,we borrowed $50 million on our revolving credit facility to fund theredemption, which we repaid from cash flows from operations prior to December31, 2003.  In addition, deferred debtissuance costs related to the senior subordinated notes and extinguishmentcosts of the HIGH TIDES, were $13.3 million in total.  Offsetting these uses were the proceeds from stock issuances,primarily the exercise of stock options, which provided$15.5 million.  The proceeds fromoption exercises is an increase of 81% over the previous year, which managementbelieves was attributable to option holders’ anticipation of the proposedmerger with Lockheed Martin.

 

At December31, 2003, total borrowings under our senior credit facility were $344.8 millionat a weighted average interest rate of 4.4%. Commitments under letters of credit were $10.2 million at December 31,2003, which reduces availability of our senior credit facility, resulting in$124.8 million of borrowing availability on the senior revolving creditfacility at December 31, 2003.  Of thetotal borrowings, $3.5 million was short-term.  At December 31, 2003, we were in compliance with all financialcovenants.

 

On May 15,2003, we sold $200 million of 8% senior subordinated notes due May 15,2011 in a private placement (the Notes).  We used the net proceeds fromthe issuance of the Notes, plus borrowings of $50 million under ourrevolving credit facility and additional cash on hand, to redeem all of the$250 million of the then-outstanding 5 3/4% HIGH TIDES convertible preferredsecurities.  The redemption of HIGHTIDES occurred on June 4, 2003.  In whatit considered favorable corporate bond market conditions, management made thedecision to refinance the HIGH TIDES to eliminate the interest rate risk andpotential dilution to stockholders associated with the mandatory remarketingfeature of the HIGH TIDES.

 

We incurredapproximately $12.4 million in charges in 2003 related to theextinguishment of the HIGH TIDES, comprised of the write-off of$8.1 million of remaining deferred debt issuance costs of HIGH TIDES, acall premium of $3.6 million to redeem the HIGH TIDES, and approximately$0.7 million of interest during the call period.  All extinguishment charges were recorded in the second quarter of2003 as a charge to income from continuing operations.  Following the redemption of the HIGH TIDES,availability on the working capital line was reduced by $50 million forthe borrowings on our revolving line of credit for the borrowings required tocomplete the redemption.

 

We arerequired to make interest payments on the Notes semi-annually in arrears onMay 15 and November 15 at the rate of 8% per annum.  The first scheduled interest payment for theoutstanding Notes was made on November 15, 2003.  We may redeem the Notes, in whole or in part, on or afterMay 15, 2007 at the following redemption prices, plus accrued and unpaidinterest and liquidated damages, if any:

 

| **Year**            |   | **Percentage** |   |
|---------------------|--------|----------------|--------|
| 2007                |   | 104.0          | %      |
| 2008                |   | 102.0          | %      |
| 2009 and thereafter |   | 100.0          | %      |

 

The Notes areunsecured and rank or will rank equally with our current or future seniorsubordinated indebtedness.  Each ofTitan’s domestic subsidiaries other than Cayenta guarantees the Notes.  The guarantees are unsecured and rankequally with each guarantor’s senior subordinated indebtedness.  The Notes and the guarantees are junior toall of Titan’s and each guarantor’s senior indebtedness and senior to all ofTitan’s and each guarantor’s subordinated indebtedness.

 

In connectionwith its proposed merger with Lockheed Martin, on February 11, 2004, Titancommenced an offer to exchange the existing Notes for a new series ofsubstantially identical 8% senior subordinated notes registered under theSecurities Act of 1933 and a consent solicitation relating to proposedamendments to the indenture governing the Notes (described in Note 11 to theconsolidated financial statements) and the termination of the registrationrights agreement Titan delivered in May 2003 for the benefit of the holders ofthe Notes. Titan announced on February 25, 2004 that it had received therequisite consents from the holders of more than a majority in aggregateprincipal amount of the Notes to effect the proposed amendments to theindenture and the termination

 

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of the registration rightsagreement.  Accordingly, Titan hasentered into a supplemental indenture with the indenture trustee to effect theamendments to the indenture and has entered into an amendment to theregistration rights agreement providing for its termination; however, theamendments and the termination of the registration rights agreement will notbecome operative until immediately prior to the completion of the proposedmerger with Lockheed Martin.  If themerger is completed, Lockheed Martin will guarantee the surviving entity’sobligations as the obligor of the Notes. If the merger is not completed, the amendments will not becomeoperative.  Until that point, theindenture and the registration rights agreement, without giving effect to theproposed amendments or the termination of the registration rights agreement,will remain in effect.  The receipt ofthe requisite consents and the execution of the supplemental indenture satisfyone of the conditions to the closing of the proposed merger with LockheedMartin.

 

In the thirdquarter of 2003, Titan completed the sale of its GlobalNet business.  Payments received for the sale of GlobalNetconsisted of approximately $2 million in cash, notes receivable ofapproximately $1.5 million, and the buyer’s assumption of all of theoutstanding liabilities of GlobalNet, which aggregated to approximately$21 million at the time of the consummation of the sale.  Titan has collected approximately $0.5million of the amounts due under the notes receivable, and expects to collectthe remaining $1.0 million in the first quarter of 2004.  Also during the third quarter of 2003, Titansettled and accelerated the collection of its receivable due from its customerin Nigeria, resulting in an aggregate cash collection of approximately$11.7 million.

 

We used $3.6million for discontinued operations in 2003 due primarily to payments forvendor and lease obligations, infusion of working capital, exit costs, and foroperating losses, net of proceeds from the sale of GlobalNet and otherdiscontinued operations of approximately $2.7 million and collections ofapproximately $26.5 million on our receivables from customers in Nigeria andBenin, Africa.  In addition, we incurred$2.0 million for a deferred payment related to a prior year acquisition(see Note 9 to our consolidated financial statements.).

 

Deferred costsand expenses of $8.2 million related to the senior credit facility are includedin Other Assets at December 31, 2003 and will be amortized over the remainingterm of the senior credit facility. Deferred costs and expenses of $5.7 million related to the issuance ofthe Notes are also included in Other Assets at December 31, 2003, and will beamortized over the term of the Notes.

 

Except asdiscussed related to SureBeam above in “Impairment Charge Related to SureBeam”,there are no Titan guarantees of debt, either directly or indirectly, otherthan approximately $1.4 million of equipment financing associated withIvoire Telecom.

 

On February 9,2004, Titan announced that all outstanding shares of its cumulative convertiblepreferred stock will be redeemed at 5:00 p.m., New York City time, on March 15,2004.  The redemption is beingundertaken in anticipation of and as a condition to the close of the proposedmerger with Lockheed Martin but is not contingent on the merger closing.  The convertible preferred shares areredeemable at Titan’s option at a redemption price of $20 per share, pluscumulative dividends in arrears, for an aggregate redemption price of $20.03per share.  Titan will redeem the sharesusing available cash balances.  Thepreferred stock is listed on the New York Stock Exchange under the symbol“TTN_Pr” and closed at $19.85 per share on March 8, 2004.  Holders of Titan’s convertible preferredstock also have an existing right to convert each of their shares into 0.781shares of Titan’s common stock.  Theright to convert the convertible preferred stock will terminate at 5:00 p.m.,New York City Time, on March 15, 2004, the date of redemption.  As of February 9, 2004, there were 686,724shares of convertible preferred stock outstanding.  To the extent that all of these shares are converted, thenapproximately 536,331 shares of Titan common stock would be issued.  Any shares of convertible preferred stockthat are not converted will be redeemed. Approximately $13.7 million of cash will be required to redeem alloutstanding shares.

 

In relation toour acquisition of International Systems in 2002, additional consideration maybe payable in 2004 through 2011 based upon earnings levels achieved.  As of December 31, 2003, approximately $0.8million additional consideration was accrued for earnings in 2003, which isexpected to be paid in the first quarter of 2004.  In addition, in relation to our acquisition of Wave Science,additional consideration of $1.8 million was accrued as of December 31, 2003,and has been paid in the first quarter of 2004.  Refer to Note 4 to our consolidated financial statements.

 

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In relation tothe current investigation by the SEC and Department of Justice into whetherpayments involving foreign consultants were made in violation of applicablelaw, we may be required to pay certain liabilities in the future related tothis matter. The Company has recorded a $3 million provision as of December 31,2003, representing our estimate of potential liabilities related to thismatter.  The ultimate resolution of thismatter is dependent upon the final results of such inquiries and investigationsand associated liabilities if any, could be different from the amount currentlyestimated.

 

We plan tofinance our operations and working capital from a combination of sources, whichinclude cash generation from our core businesses, our credit facility andpotential cash generated from the disposal of discontinued businesses.  Management believes that the combination ofour existing cash, amounts available under our credit facility and cash flowexpected to be generated from our operations will be sufficient to fund plannedinvestments, the planned redemption of the preferred stock, the payment ofadditional consideration on acquisitions, potential liabilities related to thecurrent government investigation and working capital requirements for at leastthe next twelve months if the proposed merger with Lockheed Martin is notconsummated.  Under the mergeragreement, we are prohibited from raising additional capital.  Should the merger be delayed or terminated,we could elect, or we could be required, to raise additional funds during thatperiod and we may need to raise additional capital in the future.  Additional capital may not be available atall, or may not be available on terms favorable to us.  Any additional issuance of equity orequity-linked securities may result in substantial dilution to ourstockholders.  Management is continuallymonitoring and reevaluating its level of investment in all of its operationsand the financing sources available to achieve our goals. 

 

**ContractualObligations and Other Commitments**

 

Our contractual cashobligations as of December 31, 2003, including principal maturities oflong-term debt and other commitments, were as follows, excluding non-recoursedebt and interest:

 
|                                        |   | **Payments Due By Period**                      |       |
|---------------------------------------------|--------|-------------------------------------------------|------------|
|                                        |   | **2004**                                        |       | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   |
| Contractual obligations:                    |   |                                            | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Long-term debt:                             |   |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior credit facility                      |   | $                                               | 3,500      |   | $ | 3,500 |   | $ | 3,500 |   | $ | 3,500 |   | $ | 166,250 |   | $ | 164,500 |   | $ | 344,750 |   |
| Other                                       |   | 863                                             |       | 497 |   | 38 |   | 41 |   | 45 |   | 367 |   | 1,851 |   |
| Senior subordinated notes                   |   | —                                          |       | — |   | — |   | — |   | — |   | 200,000 |   | 200,000 |   |
| Other contractual obligations:              |   |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases                            |   | 43,492                                          |       | 36,923 |   | 32,558 |   | 26,556 |   | 18,075 |   | 54,058 |   | 211,662 |   |
| Capital leases                              |   | 225                                             |       | 534 |   | 45 |   | 37 |   | — |   | — |   | 841 |   |
| Unconditional purchase obligations (1)      |   | 102,736                                         |       | 10,245 |   | 644 |   | 1,239 |   | 39 |   | — |   | 114,903 |   |
| Total contractual cash obligations          |   | $                                               | 150,816    |   | $ | 51,699 |   | $ | 36,785 |   | $ | 31,373 |   | $ | 184,409 |   | $ | 418,925 |   | $ | 874,007 |   |
|                                        |   |                                            | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                        |   | **Amount of  Commitment Expiration Per Period** | ** ** |
|                                        |   | **2004**                                        |       | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Other commitments:                          |   |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Guarantees (2):                             |   |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Facilities guarantees on behalf of SureBeam |   | $                                               | 976        |   | $ | 1,089 |   | $ | 1,114 |   | $ | 1,141 |   | $ | 1,168 |   | $ | 13,195 |   | $ | 18,683 |   |
| Titan facilities subleased to SureBeam      |   | 1,103                                           |       | 717 |   | 737 |   | 746 |   | 756 |   | 829 |   | 4,888 |   |
| Bank guarantee related to Hawaii Pride      |   | 513                                             |       | 513 |   | 513 |   | 513 |   | 513 |   | 3,335 |   | 5,900 |   |
| Standby letters of credit                   |   | 9,488                                           |       | 701 |   | — |   | — |   | — |   | — |   | 10,189 |   |
| Total commitments                           |   | $                                               | 12,080     |   | $ | 3,020 |   | $ | 2,364 |   | $ | 2,400 |   | $ | 2,437 |   | $ | 17,359 |   | $ | 39,660 |   |

 

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(1) Purchaseobligations include agreements to purchase goods or services that are enforceableand legally binding and that specify all significant terms, including; fixed orminimum quantities to be purchased; fixed, minimum or variable priceprovisions; and the approximate timing of the transaction.  Subcontractor commitments related to customercontracts are included to the extent that we have received funding from thecustomer for the related tasks that the subcontractor is to perform.

 

(2) Theamounts in this table represent total potential contingent liabilities underthe guarantees.  As discussed above in“Impairment Charge Related to SureBeam”, the ultimate amount of net cashoutlays will be contingent upon the amount of actual proceeds recovered byTitan from the liquidation of collateral securing the senior credit facilitywith Titan, Titan’s ability to mitigate its obligations under the facilitieslease guarantees through subleases*,*and loan repayments from Hawaii Pride.

 

**CriticalAccounting Policies**

 

*Use ofEstimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Specifically, managementmust make estimates in the following areas:

 

*Revenue adjustments and**allowancefor doubtful accounts.*  We provide a reserve against ourreceivables for estimated losses that may result from our customers’ inabilityto pay.  These reserves are recorded asan allowance for doubtful accounts and included in bad debt expense.  These reserves are based on potentialuncollectible accounts, aged receivables, historical losses, and our customers’credit-worthiness.  We also recordreserves against receivables for estimated adjustments to revenue that mayresult from changes in expected government funding on certain of our contractsand adjustments that may arise from audits by the Defense Contract Audit Agency(DCAA) of certain of our government contracts. Should a customer’s accountbecome past due, we generally will place a hold on the account and discontinuefurther shipments and/or services provided to that customer, minimizing furtherrisk of loss.  The likelihood of amaterial loss to Titan on an uncollectible account in our discontinuedoperations would be principally dependent on a deterioration in economic and/orpolitical conditions in a particular country, such as Benin, Africa, in whichour receivables due from the government controlled phone company of Benin maybe impacted by such an event, or in the Middle East, in which our receivablesdue from a government agency in the Middle East may be impacted by politicalconditions.  

 

Our accounts receivablebalances include unbilled receivables which are comprised of work-in-processwhich will be billed in accordance with contract terms and delivery schedules,as well as amounts billable upon final execution of contracts, contractcompletion, milestones or completion of rate negotiations.  Payments to us for performance on certain ofour U.S. Government contracts are subject to audit by the DCAA, and are subjectto government funding.  We provide areserve against our receivables for estimated losses that may result from ratenegotiations, audit adjustments, and/or government funding availability.  To the extent that actual adjustments due torate negotiations, audit adjustments, or government funding availability differfrom our estimates, our revenue may be impacted.  Due to a high degree of diversification in our governmentbusiness, the likelihood of a material loss to Titan on an uncollectible accountfrom this activity is not probable.

 

*Inventory.*  Inventories are stated at lower of cost or market.  We review the components of our inventory ona regular basis for excess, obsolete and impaired inventory based on estimatedfuture usage and sales.  The likelihoodof any material inventory write-downs is dependent on changes in competitiveconditions, new product introductions by us or our competitors, or rapidchanges in customer demand.

 

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*Determiningimpairment losses on non-marketable securities. *We evaluate our investment in non-marketablesecurities taking into consideration the financial condition of the investee,the near-term prospects of the investee, including the opportunities in theregion and industry of the investee, changes in technology, the progress of theinvestee in achieving operational milestones according to its operating plan,and indications of implied fair value as a result of recent financingtransactions.  We also evaluate variousalternatives relative to realizing the value of our investment.  Factors that would influence the likelihoodof a material change in our evaluation of whether there is a decline other thantemporary include significant changes in the investee’s ability to generatepositive cash flow, a significant change in technology, loss of legal ownershipor title to the asset or a significant decline in the economic and competitiveenvironment on which the investee depends.

 

*Impairment charge related to SureBeam.*  We estimated the impairmentcharge related to SureBeam based upon assumptions we made regarding estimatedproceeds we expect to recover from the liquidation of collateral, securingSureBeam’s indebtedness and other obligations to us under the senior securedcredit facility.  We estimated theseproceeds based upon discounted sales values we believe the SureBeam equipmentand inventory, primarily electron beam systems and other related components,can be sold for to third parties.  Webased these discounted sales values on recent sales prices as well aspreliminary indications of interest from third parties.  We evaluated the obligations due under theguarantee and lease agreements by taking into consideration the estimatedsublease income and cash flows anticipated from all sources.  We estimated the net amounts owed under thefacilities lease agreements and lease guarantees issued on behalf of SureBeamby taking into consideration the estimated sublease income based on currentmarket lease property values.  Relatedto the bank guarantee we issued on behalf of Hawaii Pride, we evaluated theestimated cash flow to be generated from the operations of Hawaii Pride todetermine the estimated amount that we may be required to loan to Hawaii Prideto enable it to make its debt payments. We did not take into consideration thepotential proceeds resulting from a sale of the intellectual property ofSureBeam or any risks regarding potential attempts to set aside our liens onthe collateral.

 

*Valuation of goodwill, intangible and other long-livedassets.*  Weuse assumptions in establishing the carrying value, fair value and estimatedlives of our long-lived assets and goodwill. The criteria used for these evaluations include management’s estimate ofthe asset’s continuing ability to generate positive income from operations andpositive cash flow in future periods compared to the carrying value of theasset, as well as the strategic significance of any identifiable intangibleasset in our business objectives.  Ifassets are considered to be impaired, the impairment recognized is the amountby which the carrying value of the assets exceeds the fair value of theassets.  Useful lives and relatedamortization or depreciation expense are based on our estimate of the period thatthe assets will generate revenues or otherwise be used by us.  Factors that would influence the likelihoodof a material change in our reported results include significant changes in theasset’s ability to generate positive cash flow, loss of legal ownership ortitle to the asset, a significant decline in the economic and competitiveenvironment on which the asset depends, significant changes in our strategicbusiness objectives, utilization of the asset, and a significant change in theeconomic and/or political conditions, particularly in which we haveinvestments.

 

*Benefit plans.*  We provide for limited postretirement medical benefitobligations of operations discontinued in prior years for former employees andfor certain current senior executive officers. Accounting and reporting for the pension plans requires the use ofassumptions for discount rates, expected mortality rates and estimated growthrates in medical and healthcare costs - all assumptions our actuaries rely uponin preparing their estimates for us. Any materially different valuations for actuarial assumptions that aredifferent from our current expectations could impact our accruals for thesepostretirement benefit obligations.  Asthe population that participates in these plans is limited, we do not believechanges in valuations would have a material impact on our provisions for thesepostretirement obligations.

 

*Valuation of deferred income taxes.*  Valuation allowances areestablished, when necessary, to reduce deferred tax assets to the amountexpected to be realized.  The amount ofthe net deferred tax asset considered realizable, however, could be reduced inthe near term if estimates of future taxable income during the carryforwardperiod are reduced.  Also, under Federaltax law, certain potential changes in ownership of Titan may limit annualfuture utilization of these carryforwards. As such, the valuation allowance recorded is provided against certaincarryforwards which may not be utilized. The likelihood of a material change in our expected realization of theseassets is dependent on future taxable income, our ability to deduct tax losscarryforwards against future taxable income, the

 

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effectiveness of our taxplanning and strategies among the various tax jurisdictions that we operate in,and any significant changes in the tax treatment received on our businesscombinations and/or divestitures.

 

*Revenue recognition.*  We recognize a portion of ourrevenue using the percentage-of-completion method, which includes revenuesrecognized as costs are incurred or as output measures are identified, inaccordance with Statement of Position (SOP) 81-1 “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.”  Total estimated costs are based onmanagement’s assessment of costs to complete the project based upon evaluationof the level of work achieved and costs expended to date.  To the extent that our estimated costsmaterially change, our revenues recorded under such contracts could materiallybe affected and could have a material adverse effect on our operations in thefuture periods.  In 2003, approximately20% of our total revenues were generated by fixed-price contracts, which aregenerally recognized using the percentage-of-completion method.  The remaining 80% of our revenues in 2003were generated by cost reimbursable contracts and time and materials contracts,for which percentage-of-completion is not used, and revenues are generallyrecognized as work is performed and billed to the customer.

 

Titan contracts with itsgovernment customers using various cost-type contracts.  They include cost-plus fixed fee, cost-plusaward fee, cost-plus incentive fee with incentives based upon both cost and/orperformance, and cost sharing contracts. Revenues and profits are recognized in accordance with AccountingResearch Bulletin No. 45 and SOP 81-1. For award and incentive fee type contracts, we recognize the expectedfee to be awarded by the customer at the time such fee can be reasonablyestimated, based on factors such as our prior award experience andcommunications with the customer regarding our performance, including anyinterim performance evaluations rendered by the customer.  Revenues are recognized under fixed pricecontracts based on the percentage-of-completion basis, using the cost-to-costor units-of-delivery methods.  Onoccasion we receive unpriced and priced change orders from our customers,whereby we are requested to make modifications to the contract, which mayinclude changes in specifications or design, method or manner of performance,equipment, materials, and period for completion of work.  Some change orders are unpriced; that is,the work to be performed is defined, but the adjustment to the contract priceis to be negotiated later.  We evaluatethese change orders according to their characteristics and the circumstances inwhich they occur after taking all factors into consideration such as probabilityof recovery, our experience in negotiating change orders, and separatedocumentation for change order costs that are identifiable and reasonable.  We record the costs and associated revenueas appropriate, in accordance with SOP 81-1.

 

*Accounting for business combinations.*  In relation to our allocation ofpurchase price to the fair value of assets acquired and contingencies assumedin acquisitions accounted for as purchase transactions, management makesestimates of such amounts as the fair value of assets and contingenciesassumed.  To the extent that the actualvalues or contingencies may differ from the estimates used, our allocation ofpurchase price may differ, which may result in a change to the amount ofgoodwill and/or purchased intangibles. Management also obtains an independent purchase valuation****to assist in its purchase priceallocation.

 

*Principles of consolidation.*  Management evaluates itsinvestment in each joint venture and investment on an individual basis forpurposes of determining whether consolidation or the cost or equity method isappropriate, based upon management’s evaluation of the level of our ability toretain and exercise control through decision-making ability and exercisesignificant influence, as well as our equity ownership interest.  In the event that our ability to obtaincontrol and exercise significant influence changes materially from management’sevaluation in determining whether consolidation should occur, or whether or notthe cost or equity method is appropriate, then our operating results could bematerially impacted, either positively or negatively.

 

**NewAccounting Standards**

 

In December 2003, the SECissued Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB No. 104),which codifies, revises and rescinds certain sections of SAB No. 101, “RevenueRecognition”, in order to make this interpretive guidance consistent withcurrent authoritative accounting and auditing guidance and SEC rules andregulations.  The changes noted in SABNo. 104 did not have a material effect on our consolidated financial positionor results of operations.

 

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In May 2003,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financial instruments, whichunder previous guidance were accounted for as equity, must now be accounted foras liabilities.  The financialinstruments affected include mandatory redeemable stock, certain financialinstruments that require or may require the issuer to buy back some of itsshares in exchange for cash or other assets and certain obligations that can besettled with shares of stock.  SFAS No.150 is effective for all financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. Titan adopted SFAS No. 150 effective July 1, 2003, and the adoptiondid not have a material impact on our consolidated financial position orresults of operations.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.” SFAS No. 149 amends SFAS No. 133 by requiring thatcontracts with comparable characteristics be accounted for similarly andclarifies when a derivative contains a financing component that warrantsspecial reporting in the statement of cash flows.  SFAS No. 149 is effective for contracts entered into or modifiedafter June 30, 2003 and for hedging relationships designated after June 30,2003, and must be applied prospectively. The adoption of SFAS No. 149 had no effect on our consolidated financialcondition or results of operations.

 

In January2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities” (FIN 46), which addresses the consolidation of certainentities (variable interest entities, or VIE’s) in which an enterprise has acontrolling financial interest through other than voting interests. FIN No. 46requires that a variable interest entity be consolidated by the holder of themajority of the expected risks and rewards associated with the activities ofthe variable interest entity. FIN 46 was effective for VIE’s entered into priorto February 1, 2003 in periods beginning after June 15, 2003.  The adoption of FIN 46 did not have amaterial impact on our consolidated financial condition or results of operations.   In January 2004, the FASB issued a revisionto FIN 46 (FIN 46R), to clarify some requirements and add new scopeexceptions.  The revised guidance iseffective for the first reporting period beginning after December 15, 2003.  The adoption of the provisions of FIN 46R isnot expected to have a material impact on our consolidated financial conditionor results of operations.

 

In November 2002, the FASBissued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers, an interpretation of FASB Statements No. 5, 57 and 107 and a rescissionof FASB Interpretation No. 34.”  This Interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees issued.  TheInterpretation also clarifies that a guarantor is required to recognize, atinception of a guarantee, a liability for the fair value of the obligationundertaken. The initial recognition and measurement provisions of theInterpretation are applicable to guarantees issued or modified after December31, 2002 and has not had a material effect on Titan’s financialcondition.  The disclosure requirements are effective for financialstatements of interim or annual periods ending after December 15, 2002. 

 

InNovember 2002, the FASB’s Emerging Issues Task Force (EITF) issued EITFIssue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” EITF Issue No. 00-21 addresses how to determine whether arevenue arrangement involving multiple deliverables contains more than one unitof accounting for the purposes of revenue recognition and how the revenuearrangement consideration should be measured and allocated to the separateunits of accounting. EITF Issue No. 00-21 applies to revenue arrangementsentered into after June 15, 2003. The adoption of this statement did nothave a material impact on our consolidated financial condition or results ofoperations. 

 

In July 2002,the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit orDisposal Activities” (SFAS 146).  SFAS146 is effective for exit or disposal activities initiated after December 31,2002.  This standard requires companiesto recognize costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposal plan.The standard replaces the existing guidance provided by the FASB’s EmergingIssues Task Force (EITF) Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a

 

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Restructuring).”  Titan did not initiate any activities in2003 that would be included within the scope of this standard.

 

In April 2002,the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Correctionsas of April 2002”, which was effective for fiscal years beginning afterMay 15, 2002. SFAS No. 145 rescinded SFAS No. 4 and SFASNo. 64, which required that all gains and losses from extinguishment ofdebt be aggregated, and if material, classified as an extraordinary item. As aresult of changes in the criteria, gains and losses from debt extinguishmentare to be classified as extraordinary only if they meet the criteria set forthin Accounting Principles Board (APB) Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions.”  In accordance with SFAS145 and APB 30, the deferred debt issuance costs and other extinguishment costsrelated to the HIGH TIDES were expensed upon extinguishment of that debt in2003.  The charge is reflected in theresults of continuing operations as Debt Extinguishment Costs in theaccompanying consolidated statement of operations.  Also in accordance with SFAS No. 145, 2002 debt extinguishmentcosts associated with the termination of a senior credit facility have beenreclassified from an extraordinary item to results from continuingoperations.  See Note  11 to our consolidated financial statementsfor further discussion of the charges.

 

***Cautionary Statements***

 

*In connection with the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995, we are hereby filingcautionary statements identifying important risk factors that could cause ouractual results to differ materially from those projected in our “forward lookingstatements” in this report or otherwise within the meaning of Section 21E ofthe Securities Exchange Act of 1934, and Section 27A of the Securities Act of1933, as amended.  These forward lookingstatements are all statements other than historical facts and relate to futureevents or our future financial and/or operating performance and can begenerally identified as such because the context of the statement will includewords such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,”“expects,” “estimates,” “predicts,” “potential,” “possible,” “continue,” or“opportunity,” the negative of these words or words of similar import.  Similarly, statements that describe ourreserves, our estimates, and our future plans, strategies, intentions, expectations,objectives, goals or prospects are also forward looking statements.  These forward looking statements are basedlargely on our expectations and projections about future events and futuretrends affecting our business and so are subject to risks and uncertainties,including those risks and uncertainties described below, that could cause ouractual results to differ materially from those anticipated as of the date ofthis report.  In addition, pastfinancial or operating performance is not necessarily a reliable indicator offuture performance.  Except as requiredby law, we undertake no obligation to publicly revise these forward lookingstatements to reflect events or circumstances that arise after the date of thisreport.*

* *

***Risks Relating to Our Business***

 

***We may not completethe proposed merger with Lockheed Martin as scheduled or at all.***

 

The completion of the proposed merger withLockheed Martin requires the approval of our stockholders and the satisfactionor waiver of several other closing conditions. Among these is that there not have occurred a material adverse change,circumstance, fact, event or effect that, individually or in the aggregate withall other adverse changes, circumstances, facts, events and effects, is or isreasonably likely to be materially adverse to the business, condition(financial or otherwise), assets or results of operations of Titan and itsconsolidated subsidiaries, taken as a whole. 

 

Lockheed Martin has stated that, if theinternal reviews being conducted by it and Titan, the SEC’s investigation andthe criminal inquiry being undertaken by the Department of Justice are notcompleted by the date of the special meeting of Titan stockholders forconsideration of the proposed merger, Lockheed Martin will have to considerwhether all of the conditions to the closing of the merger are met.  Lockheed Martin has not given any assurancesas to whether it will be satisfied that the preliminary results of the internalreviews and the ongoing nature of the SEC investigation and Department ofJustice criminal inquiry do not constitute a material adverse change inTitan.  Accordingly, pending favorableresolution of these matters on or prior to March 16, 2004, the date scheduledfor the special meeting of

 

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Titan stockholders for consideration of theproposed merger, Titan cannot provide any assurances that the merger will becompleted as scheduled on that date.  If the merger is not completed by March 31,2004, either Lockheed Martin or Titan may terminate the merger agreement,provided that the party seeking to terminate the agreement is not then inmaterial breach of its obligations under the merger agreement.  

 

If the proposed merger is not completed, ourstock price, which has traded since the announcement of the merger in September2003 close to the announced price that Lockheed Martin agreed to pay per share,would likely decline.  The inability tocomplete the merger would also likely result in litigation, which could be costlyand could divert the attention of management. In addition, our results of operations for the first quarter of 2004would likely be adversely affected by costs related to the government andinternal investigations and merger-related activities.

 

***As a result of the government’sinvestigation into whether payments involving foreign consultants were made inviolation of applicable law and related issues, the government could takeaction against us and/or some of our employees.***

 

As aresult of the current investigation by the SEC and the Department of Justice,if the government determines that unlawful payments were made, the governmentcould take action against us and/or some of our employees.  These actions could include criminal andcivil fines, penalties, criminal sanctions and limitations on our or ouraffected businesses' abilities to export products or enter into future U.S.government contracts.  As of December31, 2003, we have recorded a $3 million provision related to thesematters.  We may be required to recordan additional provision or reduce this provision if the actual settlementamount of these matters differs from the current provision.    

 

***Titandepends on government contracts for most of its revenues and the loss ofgovernment contracts or a decline in funding of existing or future governmentcontracts could adversely affect Titan’s revenues and cash flows and Titan’sability to fund its growth.***

 

Titan’srevenues from U.S. government business represented approximately 96% of Titan’stotal revenues in 2003. Titan’s U.S. government contracts are only funded on anannual basis, and the U.S. government may cancel these contracts at any timewithout penalty or may change its requirements, programs or contract budget ordecline to exercise option periods, any of which could reduce Titan’s revenuesand cash flows from U.S. government contracts. Titan’s revenues and cash flowfrom U.S. government contracts could also be reduced by declines in U.S.defense, homeland security and other federal agency budgets. 

 

Approximately57% of Titan’s revenue in 2003 was for products and services under contractswith various parts of the U.S. Navy, U.S. Air Force or U.S. Army or with primecontractors to the U.S. Navy, U.S. Air Force or U.S. Army. Although these variousparts of the U.S. Navy, U.S. Air Force or U.S. Army are subject to commonbudgetary pressures and other factors, Titan’s various U.S. Navy, U.S. AirForce or U.S. Army customers exercise independent purchasing decisions.However, because of such concentration of Titan’s contracts, Titan isvulnerable to adverse changes in its revenues and cash flows if a significantnumber of Titan’s U.S. Navy, U.S. Air Force or U.S. Army contracts andsubcontracts are simultaneously delayed or canceled for budgetary or otherreasons. 

 

Inaddition to contract cancellations and declines in agency budgets, Titan may beadversely affected by: 

 

•                                          curtailment of the U.S government’s use oftechnology services and products providers; and

 

•                                          technological developments that impactpurchasing decisions or Titan’s competive position.

 

These or other factors could cause U.S. defense andother federal agencies to reduce their purchases under contracts, to exercisetheir right to terminate contracts or not to exercise options to renewcontracts or limit Titan’s ability to obtain new contract awards. Any of theseactions or any of the other actions described above could reduce Titan’srevenues and cash flows. 

 

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***Government audits of Titan’s government contracts could result in amaterial charge to Titan’s earnings and have a negative effect on Titan’s cashposition following an audit adjustment.***

 

Titan’s government contractsare subject to cost audits by the government. These audits may occur severalyears after the period to which the audits relate. If a cost audit were toidentify significant unallowable costs, Titan could have a material charge toits earnings or reduction in its cash position as a result of an audit,including an audit of one of the companies Titan has acquired. Some of Titan’sacquired companies did not historically impose internal controls as rigorous asthose Titan imposes on the government contracts Titan performs, which mayincrease the likelihood that an audit of their government contracts could causea charge to Titan’s earnings or reduction in Titan’s cash position. 

 

***Titan’s operating margins may decline under its fixed-pricecontracts if Titan fails to estimate accurately the time and resourcesnecessary to satisfy Titan’s obligations.***

 

Some of Titan’s contractsare fixed-price contracts under which Titan bears the risk of any costoverruns. Titan’s profits are adversely affected if its costs under thesecontracts exceed the assumptions Titan used in bidding for the contract. In2003, approximately 20% of Titan’s revenues were derived from fixed-pricecontracts for both defense and non-defense related government contracts.  Often, Titan is required to fix the pricefor a contract before Titan finalizes the project specifications, whichincreases the risk that Titan will mis-price these contracts. The complexity ofmany of Titan’s engagements makes accurately estimating Titan’s time andresources more difficult. 

 

***If Titan is not able to retain its contracts with the U.S. governmentand subcontracts under U.S. government prime contracts in the competitiverebidding process, Titan’s revenues may suffer.***

 

Upon expiration of a U.S.government contract or subcontract under a U.S. government prime contract, ifthe government customer requires further services of the type provided in thecontract, there is frequently a competitive rebidding process. Titan cannotguarantee that Titan, or if Titan is a subcontractor that the prime contractor,will win any particular bid, or that Titan will be able to replace businesslost upon expiration or completion of a contract. Further, all U.S. governmentcontracts are subject to protest by competitors. The termination of several ofTitan’s significant contracts or nonrenewal of several of Titan’s significantcontracts could result in significant revenue reductions. 

 

***Titan may be liable for penalties under a variety of procurement rulesand regulations, and changes in government regulations could adversely impactTitan’s revenues, operating expenses and profitability.***

 

Titan’s defense andcommercial businesses must comply with and are affected by various governmentregulations that impact Titan’s operating costs, profit margins and itsinternal organization and operation of its businesses. These regulations affecthow Titan’s customers and Titan do business and, in some instances, imposeadded costs on Titan’s businesses. Any changes in applicable laws couldadversely affect the financial performance of the business affected by the changedregulations. With respect to U.S. government contracts, any failure to complywith applicable laws could result in contract termination, price or feereductions or suspension or debarment from contracting with the U.S.government. Among the most significant regulations are the following: 

 

•                                          the U.S. Federal Acquisition Regulations,which comprehensively regulate the formation, administration and performance ofgovernment contracts;

 

•                                          the U.S. Truth in Negotiations Act, whichrequires certification and disclosure of all cost and pricing data inconnection with contract negotiations; and

 

•                                          the U.S. Cost Accounting Standards, whichimpose accounting requirements that govern Titan’s right to reimbursement undercertain cost-based government contracts.

 

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***Titan hastaken an impairment charge in connection with SureBeam Corporation’sindebtedness to Titan, and Titan may not be able to recover the estimatedamounts from SureBeam’s bankruptcy and Titan may be required to make netpayments on lease and bank debt guarantees in excess of estimated amounts.***

 

Asa result of SureBeam Corporation’s voluntary filing on January 19, 2004 forliquidation under Chapter 7 of the United States Bankruptcy Code, Titan recordedan estimated pre-tax impairment charge of $15.8 million in 2003 related to the$25 million in principal owed to Titan by SureBeam under a senior securedcredit facility, as well as obligations to reimburse Titan under Titanguarantees and subleases related to SureBeam facilities.  The ultimate amount of impairment to berecognized is contingent upon the amount of actual proceeds recovered by Titanfrom the liquidation of collateral securing the SureBeam senior credit facilitywith Titan, and Titan’s ability to mitigate its obligations under thefacilities lease guarantees, through subleases, and loan repayments from HawaiiPride.  The actual amount of Titan’srecovery from SureBeam could be lower or higher than currently estimated.  Titan is SureBeam’s only senior securedlender, however, other creditors of SureBeam may seek to challenge Titan’s lienon some or all assets of SureBeam in order to attempt to recover some of theirclaims.  Titan also may be required topay third parties more than it currently expects to pay under variousguarantees and leases.  As of December31, 2003, Titan had guaranteed approximately $18.6 million in future leasepayments and had subleased SureBeam facilities with estimated future leasepayments of approximately $4.9 million. Titan also had extended a partial guarantee of a bank loan to HawaiiPride that had a balance of $5.9 million as of December 31, 2003. 

 

***Titan maynot be able to recoup the net book value of its discontinued commercialbusinesses, including Titan Wireless and Titan Technologies, throughdivestitures and may incur exit costs in excess of its accruals in connectionwith the divestiture or shut down of some or all of these businesses.***

 

During2002, Titan made the decision to exit substantially all of its remainingcommercial businesses, including Titan Wireless and Cayenta, and to focus inthe foreseeable future on its national security and civil governmentbusinesses. At December 31, 2003, the total net book value of its discontinuedbusinesses is $1.6 million, including $1.7 million in Titan Wirelessnet assets, primarily relating to receivables on its contract with the OPT ofBenin of $14 million and a receivable from a customer in Nigeria for$0.3 million, and remaining accrued exit costs and other liabilities ofapproximately $12.5 million, and remaining net assets of $0.5 million in TitanTechnologies.  If Titan is unable tocollect the remaining amounts due from the OPT, it may incur additionalimpairment charges.

 

Inrelation to the remaining commercial information technology business of TitanTechnologies currently held for sale. If Titan is unable to sell this business, it may be required to incuradditional impairment charges to reduce the carrying value of this business andmay incur additional operating losses.  

 

***Titan’sfailure to identify, attract and retain qualified technical and managementpersonnel could adversely affect its existing businesses.***

 

Titancannot guarantee that it will be able to attract and retain the highlyqualified technical personnel, including engineers, computer programmers andpersonnel with security clearances required for classified work, or managementpersonnel to supervise such activities that are necessary for maintaining andgrowing Titan’s existing businesses.  

 

***Titancompetes primarily for government contracts against many companies that arelarger, better financed and better known than Titan. If Titan is unable tocompete effectively, Titan’s business and prospects will be adversely affected.***

 

Titan’sbusinesses operate in highly competitive markets. Many of its competitors arelarger, better financed and better known companies who may compete moreeffectively than Titan can. In order to remain competitive, Titan must investto keep its products and services capabilities technically advanced and competeon price and on value added to Titan’s customers. Titan’s ability to competemay be adversely affected by limits on Titan’s capital resources and Titan’sability to invest in maintaining and expanding its market share. 

 

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***Titan hascompleted numerous strategic acquisitions which could increase Titan’s costs orliabilities or be disruptive.***

 

SinceJanuary 1, 1998, Titan has acquired 19 government information technologybusinesses as part of Titan’s strategy of consolidating government informationtechnology businesses. Several of the businesses that Titan acquired hadthemselves acquired other businesses prior to their acquisition by Titan. Titanmay not be able to integrate successfully any acquired businesses withoutsubstantial expense, delay or other operational or financial problems. Theacquisition and integration of new businesses involves risk. The integration ofacquired businesses may be costly and may result in a decrease in the value ofTitan’s common stock for the following reasons, among others: 

 

•                                          Titan may need todivert more management resources to integration than Titan planned, which mayadversely affect Titan’s ability to pursue other more profitable activities;

 

•                                          the difficulties of integration may beincreased by the necessity of coordinating geographically separatedorganizations, integrating personnel with disparate business backgrounds andcombining different corporate cultures;

 

•                                          Titan may not eliminate as many redundantcosts as Titan anticipated in selecting its acquisition candidates; and

 

•                                          one or more of Titan’s acquisition candidatesalso may have liabilities or adverse operating issues that Titan failed todiscover through its due diligence prior to the acquisition.

 

***Titan mayincur significant costs in protecting Titan’s intellectual property which couldadversely affect Titan’s profit margins. Titan’s inability to protect itspatents and proprietary rights in the U.S. and foreign countries couldadversely affect Titan’s businesses’ prospects and competitive positions.***

 

Aspart of Titan’s strategy, Titan seeks to protect its proprietary technology andinventions through patents and other proprietary-right protection in theU.S. and other countries. The laws of some foreign countries do not protectproprietary rights to the same extent as the laws of the U.S. If Titan isunable to obtain or maintain these protections, Titan may not be able toprevent third parties from using its proprietary rights. In addition, Titan mayincur significant expense both in protecting its intellectual property and indefending or assessing claims with respect to intellectual property owned byothers. 

 

Titanassesses the strength of its patent and intellectual property protection forits technologies and products. Despite Titan’s assessments and Titan’s beliefin the strength of its patent protection for particular technologies orproducts, Titan’s patents may not provide effective barriers to entry against competitorsin the markets targeted by particular technologies and products because Titan’scompetitors may develop competing technologies and products that do notinfringe upon Titan’s patents. Titan also could choose to modify or abandon oneor more planned or current products because of these assessments or actual orthreatened claims by other companies. Titan is not certain that its pendingpatent applications will be issued. 

 

Titanalso relies on trade secrets, proprietary know-how and continuing technologicalinnovation to remain competitive. Titan has taken measures to protect its tradesecrets and know-how, including the use of confidentiality agreements withTitan’s employees, consultants and advisors. It is possible that theseagreements may be breached and that any remedies for a breach will not besufficient to compensate Titan for damages incurred. Titan generally controlsand limits access to, and the distribution of, its product documentation andother proprietary information. Titan also cannot guarantee that other partieswill not independently develop Titan’s know-how or otherwise obtain access toTitan’s technology. 

 

***Thecovenants in Titan’s credit facility restrict Titan’s financial and operationalflexibility, including its ability to complete additional acquisitions, investin new business opportunities, or pay down certain indebtedness.***

 

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Titan’scredit facility contains covenants that restrict, among other things, Titan’sability to borrow money, make particular types of investments, includinginvestments in Titan’s subsidiaries, make other restricted payments, limits theability to pay down the senior subordinated debt, swap or sell assets, merge orconsolidate, or make acquisitions. An event of default under Titan’s creditfacility could allow the lenders to declare all amounts outstanding to beimmediately due and payable. Titan has pledged substantially all of itsconsolidated assets and the stock of Titan’s subsidiaries to secure the debtunder Titan’s credit facility, excluding Titan’s foreign affiliates. If theamounts outstanding under the credit facility were accelerated, the lenderscould proceed against those consolidated assets and the stock of Titan’ssubsidiaries.  Any event of default,therefore, could have a material adverse effect on Titan’s business. Titan’scredit facility also requires Titan to maintain specified financial ratios.Titan’s ability to meet these financial ratios can be affected by events beyondTitan’s control, and Titan cannot assure you that Titan will meet those ratios.Titan also may incur future debt obligations that might subject Titan torestrictive covenants that could affect Titan’s financial and operationalflexibility or subject Titan to other events of default.   In addition, if the proposed merger withLockheed Martin is not completed, we will remain subject to restrictivecovenants in our 8% senior subordinated notes. These covenants may limit our flexibility to pursue all of our strategicobjectives and could adversely affect our future operations.

 

***Titan’srevenues could be less than expected if Titan is not able to deliver componentsof systems or products as scheduled due to disruptions in its supply ofproducts and components or services.***

 

BecauseTitan’s internal manufacturing capacity is limited, Titan uses contractmanufacturers. While Titan uses care in selecting its manufacturers, thisarrangement gives Titan less control over the reliability of supply, qualityand price of products or components than if Titan manufactured them itself. Insome cases, Titan obtains products from a sole supplier or a limited group ofsuppliers. Consequently, Titan risks disruptions in its supply of key productsand components if Titan’s suppliers fail or are unable to perform because ofstrikes, natural disasters, financial condition or other factors. Any materialsupply disruptions could adversely affect Titan’s ability to perform itsobligations under its contracts and could result in cancellation of contractsor purchase orders, delays in realizing revenues, and payment delays as well asadversely affect Titan’s ongoing product cost structure. 

 

***Titan’sbusiness is subject to significant environmental regulation. Compliance costs,or any future violations or liability under environmental laws, could harmTitan’s business.***

 

Titanis subject to environmental and safety laws and regulations governing the use,storage and disposal of hazardous substances or wastes and imposing liabilityfor the cleanup of contamination from these substances. Titan cannot completelyeliminate the risk of contamination or injury from these substances or wastes,and, in the event of such an incident, Titan could be held liable for anydamages that result. From time to time, Titan has been notified of violationsof government and environmental regulations. Titan attempts to correct theseviolations promptly without any material impact on Titan’s operations. Inaddition, Titan may be required to incur significant additional costs to complywith environmental laws and regulations in the future. These costs, and anyfuture violations or liability under environmental laws or regulations, couldhave a material adverse effect on Titan’s business. 

 

***Titan’sresults of operations have historically fluctuated and may continue tofluctuate significantly in the future, which could adversely affect the marketprice of its common stock.***

 

Titan’srevenues are affected by factors such as the unpredictability of sales andcontracts awards due to the long procurement process for most of its productsand services, the potential fluctuation of defense, intelligence and civilagency budgets, the time it takes for the new markets Titan targets to developand for Titan to develop and provide products and services for those markets,competition and general economic conditions. Titan’s contract type/product mixand unit volume, its ability to keep expenses within budgets, and its pricingaffect its gross margins. These factors and other risk factors described hereinmay adversely affect Titan’s results of operations within a period and causeTitan’s financial results to fluctuate significantly on a quarterly or annualbasis. Consequently, Titan does not believe that comparison of its results ofoperations from period to period is necessarily meaningful or predictive of itslikely future results of operations. It is possible that in some future quarteror quarters Titan’s operating results will be below the expectations of publicmarket analysts or investors. If so, the market price of Titan’s common stockmay decline significantly. 

 

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***Anti-takeoverprovisions in Titan’s certificate of incorporation, bylaws and Delaware law, aswell as Titan’s shareholder rights plan, could discourage, delay or prevent achange of control that Titan’s stockholders may favor.***

 

Provisionsin Titan’s certificate of incorporation, Titan’s bylaws and Delaware law couldmake it difficult and expensive for a third party to pursue a takeover attemptthat Titan opposes even if a change in control of Titan would be beneficial tothe interests of its stockholders. These provisions could discourage potentialtakeover attempts and could adversely affect the market price of Titan’s commonstock. These provisions: 

 

•                                          permit Titan’s stockholders to take action bywritten consent instead of at a meeting and to nominate directors or bringother business before stockholder meetings only if they comply with advancenotice and other procedural requirements in Titan’s bylaws;

 

•                                          authorize Titan’s board of directors, withoutstockholder approval, to issue up to 2,931,898 shares of blank check preferredstock that could be issued by Titan’s board of directors to increase the numberof outstanding shares and prevent a takeover attempt; and

 

•                                          prohibit Titan from engaging in mergers andother business combinations with stockholders that beneficially own 15% or moreof Titan’s voting stock, or with their affiliates, unless Titan’s directors orstockholders approve the business combination in the prescribed manner.

 

In addition to theprovisions described above, in 1995 Titan’s board of directors adopted a poisonpill shareholder rights plan, which may further discourage a third party frommaking a proposal to acquire Titan which Titan has not solicited or does notapprove, even if the acquisition would be beneficial to Titan’s stockholders.As a result, Titan’s stockholders who wish to participate in such a transactionmay not have an opportunity to do so. Under Titan’s rights plan, preferredshare purchase rights, which are attached to Titan’s common stock, generallywill be triggered upon the acquisition, or actions that would result in theacquisition, of 15% or more of Titan’s common stock by any person or group. Iftriggered, these rights would entitle Titan’s stockholders other than theacquiror to purchase, for the exercise price, shares of Titan’s common stockhaving a market value of two times the exercise price. In addition, if acompany acquires Titan in a merger or other business combination not approvedby the board of directors, these rights will entitle Titan’s stockholders otherthan the acquiror to purchase, for the exercise price, shares of the commonstock of the acquiring company having a market value of two times the exerciseprice. 

 

***There may be volatility in the priceof Titan’s common stock that impacts the price a stockholder may realize upon asale of the common stock.***

 

Stock prices of manycompanies have experienced wide fluctuations that have often been unrelated tothe operating performance of these companies. The market price of Titan’scommon stock may vary widely as a result of several factors, including: 

 

•                                          status of the pending merger with LockheedMartin;

 

•                                          United States government’s informationtechnology, defense and civil budgets and strategic priorities;

 

•                                          budgetary constraints affecting U.S.government spending generally, changes in fiscal policy, and governmentregulatory initiatives;

 

•                                          announcements of technological innovations ornew products by Titan or its competitors;

 

•                                          patent or proprietary rights developments;and

 

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•                                          general market conditions.

 

These factors could lead toa significant decrease in the market price of Titan’s common stock. In 2003,the market price of Titan’s common stock has ranged from a high of $21.89  per share to a low of $6.80 per share. 

 

**Item7A.  Quantitative and Qualitative Disclosures About Market Risk**

 

*MarketRisk*

 

The principal objectives ofour asset/liability management activities are to minimize debt and maximize netinvestment income, while maintaining acceptable levels of interest rate riskand facilitating our funding needs.  Ournet investment income and interest expense are subject to the risk of interestrate fluctuations.  To mitigate theimpact of fluctuations in interest rates, we manage the structure of thematurity of debt and investments.  As ofDecember 31, 2003, we did not hold any material amounts of marketable securities.  The amount of marketable securities we holdfluctuates based upon our cash needs, including the use of our available cashresources to fund acquisitions.  As apolicy matter, we invest cash in excess of our cash needs for limited periodsin cash equivalents and available-for-sale investments.

 

The following table providesinformation about our financial instruments that are sensitive to changes ininterest rates as of December 31, 2003. For debt obligations, the table presents principal cash flows andrelated weighted average interest rates by expected maturity dates.  For terms relating to our long-term debt,see Note 11 to our  consolidatedfinancial statements.

 
|                                               |   | **2004**                               |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Beyond** |   | **Total** |    | **Fair  Value** |   |
|----------------------------------------------------|--------|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|------------|--------|-----------|---------|-----------------|--------|
|                                               |   | **(in thousands, except percentages)** |   |
| Assets: None                                  |   |                                   |   |     |   |     |   |     |   |     |   |       |   |      |    |            |   |
| Liabilities:                                       |   |                                   |   |     |   |     |   |     |   |     |   |       |   |      |    |            |   |
| Long-term debt including debt due within one year: |   |                                   |   |     |   |     |   |     |   |     |   |       |   |      |    |            |   |
| Fixed rate                                         |   | $                                      | 863    |     | $      | 497      |   | $        | 38     |     | $      | 41         |   | $         | 45      |            | $      | 200,367 |   | $ | 201,851 |   | $ | 201,851 |   |
| Average interest rate                              |   | 8.58                                   | %      | 8.95     | %      | 8.58     | %      | 8.58     | %      | 8.58     | %      | 8.00       | %      | 8.01      | %       | 8.01            | %      |
| Variable rate (1)                                  |   | $                                      | 3,500  |     | $      | 3,500    |   | $        | 3,500  |     | $      | 3,500      |   | $         | 166,250 |            | $      | 164,500 |   | $ | 344,750 |   | $ | 344,750 |   |
| Average interest rate                              |   | 4.41                                   | %      | 4.41     | %      | 4.41     | %      | 4.41     | %      | 4.41     | %      | 4.41       | %      | 4.41      | %       | 4.41            | %      |

 

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(1)  Maturities assume extension ofthe revolving portion of Titan’s senior credit agreement to the end of the termloan maturities.  See Note 11 to ourconsolidated financial statements for detailed information on the terms of thisagreement.

 

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**Item8.  Financial Statements and Supplementary Data**

 

**Index toFinancial Statements and Financial Statement Schedule**

 

| Report of Independent  Auditors                                                                          |   |
|----------------------------------------------------------------------------------------------------------|--------|
| Financial Statements:                                                                                    |   |
| Consolidated  Statements of Operations                                                                   |   |
| Consolidated  Balance Sheets                                                                             |   |
| Consolidated  Statements of Cash Flows                                                                   |   |
| Consolidated  Statements of Stockholders’ Equity                                                    |   |
| Notes to  Consolidated Financial Statements                                                              |   |
| Supporting  Financial Statement Schedule Covered by the Foregoing  Report of  Independent Auditors: |   |
| Schedule  II — Valuation and Qualifying Accounts                                               |   |

 

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**Report ofIndependent Auditors**

 

TheBoard of Directors and StockholdersThe Titan Corporation:

 

Wehave audited the accompanying consolidated balance sheets of The TitanCorporation and subsidiaries as of December 31, 2003 and 2002, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years in the three-year period ended December 31, 2003.  In connection with our audits of the consolidatedfinancial statements, we also have audited the financial statement schedule aslisted in the accompanying index.  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits.  We did not audit the financial statements ofSureBeam Corporation, which financial statements reflect total assets constituting8 percent of the Company’s total assets as of December 31, 2001, and net income(loss) from discontinued operations constituting 80 percent for the year endedDecember 31, 2001, of the related consolidated totals.  Those financial statements were audited byother auditors who have ceased operations. Those auditors expressed anunqualified opinion on those financial statements in their report datedFebruary 11, 2002. Our opinion, insofar as it relates to the amounts includedfor SureBeam Corporation, is based solely on the report of the other auditors.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits and the report of the other auditors provide a reasonable basis for ouropinion.

 

Inour opinion, based on our audits and the report of the other auditors, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of The Titan Corporation andsubsidiaries as of December 31, 2003 and 2002, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2003, in conformity with accounting principles generallyaccepted in the United States of America. Also in our opinion, based on our audits and the report of otherauditors, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

Asdiscussed in Note 3 to the consolidated financial statements, the Companyadopted the provisions of SFAS No. 142 “Accounting for Goodwill and OtherIntangible Assets” on January 1, 2002 and, accordingly, has changed its methodof accounting for goodwill.

 
| /s/  KPMG LLP |   |   |   |
|---------------|--------|--------|--------|

 

SanDiego, CaliforniaMarch 9, 2004

 

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**THE TITAN CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

 
|                                                                                                                                      |   | **For the Years Ended December 31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                                                                      |   | **2003**                                  |       | **2002** |   | **2001** |   |
| Revenues                                                                                                                                  |   | $                                         | 1,775,007  |   | $ | 1,392,160 |   | $ | 974,497 |   |
| Costs and expenses:                                                                                                                       |   |                                      |       |   |   |   |   |
| Cost of revenues                                                                                                                          |   | 1,478,631                                 |       | 1,129,061 |   | 755,115 |   |
| Selling, general and administrative                                                                                                       |   | 163,919                                   |       | 179,559 |   | 154,514 |   |
| Research and development                                                                                                                  |   | 11,324                                    |       | 9,555 |   | 9,310 |   |
| Impairment charge related to SureBeam (Note 5)                                                                                            |   | 15,757                                    |       | — |   | — |   |
| Exit and restructuring charges and other (Note 6)                                                                                         |   | —                                    |       | 53,317 |   | — |   |
| Acquisition and integration related charges and other (Note 7)                                                                            |   | —                                    |       | 27,847 |   |   |   |
| Merger related costs                                                                                                                      |   | 2,247                                     |       | — |   | — |   |
| Total costs and expenses                                                                                                                  |   | 1,671,878                                 |       | 1,371,492 |   | 946,786 |   |
| Operating profit                                                                                                                          |   | 103,129                                   |       | 20,668 |   | 27,711 |   |
| Interest expense                                                                                                                          |   | (34,574                                   | )          | (32,664 | ) | (36,669 | ) |
| Interest income                                                                                                                           |   | 2,326                                     |       | 1,708 |   | 1,779 |   |
|                                                                                                                                      |   |                                      | ** ** |   | ** ** |   | ** ** |
| Debt extinguishment costs                                                                                                                 |   | (12,423                                   | )          | (9,435 | ) | — |   |
| Loss on investments                                                                                                                       |   | (6,154                                    | )          | — |   | — |   |
| Income (loss) from continuing operations before income taxes,  minority interests and cumulative effect of change in accounting principle |   | 52,304                                    |       | (19,723 | ) | (7,179 | ) |
| Income tax provision (benefit)                                                                                                            |   | 22,353                                    |       | (6,479 | ) | 1,007 |   |
| Income (loss) from continuing operations before minority interests  and cumulative effect of change in accounting principle               |   | 29,951                                    |       | (13,244 | ) | (8,186 | ) |
| Minority interests                                                                                                                        |   | —                                    |       | — |   | 4,729 |   |
| Income (loss) from continuing operations before cumulative effect of  change in accounting principle                                      |   | 29,951                                    |       | (13,244 | ) | (3,457 | ) |
| Loss from discontinued operations, net of tax benefit of $(15,609),  $(109,250), and $(7,792) (Note 8)                                    |   | (854                                      | )          | (218,106 | ) | (95,157 | ) |
| Income (loss) before cumulative effect of change in accounting  principle                                                                 |   | 29,097                                    |       | (231,350 | ) | (98,614 | ) |
| Cumulative effect of change in accounting  principle, net of tax benefit (Notes 3 and 8)                                                  |   | —                                    |       | (40,111 | ) | — |   |
| Net income (loss)                                                                                                                         |   | 29,097                                    |       | (271,461 | ) | (98,614 | ) |
| Dividend requirements on preferred stock                                                                                                  |   | (688                                      | )          | (689 | ) | (690 | ) |
| Net income (loss) applicable to common stock                                                                                              |   | $                                         | 28,409     |   | $ | (272,150 | ) | $ | (99,304 | ) |
|                                                                                                                                      |   |                                      | ** ** |   | ** ** |   | ** ** |
| Basic earnings (loss) per share:                                                                                                          |   |                                      |       |   |   |   |   |
| Income (loss) from continuing operations before cumulative effect of  change in accounting principle                                      |   | $                                         | 0.37       |   | $ | (0.18 | ) | $ | (0.13 | ) |
| Loss from discontinued operations, net of taxes                                                                                           |   | (0.01                                     | )          | (2.87 | ) | (1.63 | ) |
| Cumulative effect of change in accounting principle, net of taxes                                                                         |   | —                                    |       | (0.53 | ) | — |   |
| Net income (loss)                                                                                                                         |   | $                                         | 0.36       |   | $ | (3.58 | ) | $ | (1.76 | ) |
|                                                                                                                                      |   |                                      |       |   |   |   |   |
| Weighted average shares                                                                                                                   |   | 79,957                                    |       | 75,988 |   | 58,793 |   |
|                                                                                                                                      |   |                                      |       |   |   |   |   |
| Diluted earnings (loss) per share:                                                                                                        |   |                                      |       |   |   |   |   |
| Income (loss) from continuing operations before cumulative effect of  change in accounting principle                                      |   | $                                         | 0.35       |   | $ | (0.18 | ) | $ | (0.13 | ) |
| Loss from discontinued operations, net of taxes                                                                                           |   | (0.01                                     | )          | (2.87 | ) | (1.63 | ) |
| Cumulative effect of change in accounting principle, net of taxes                                                                         |   | —                                    |       | (0.53 | ) | — |   |
| Net income (loss)                                                                                                                         |   | $                                         | 0.34       |   | $ | (3.58 | ) | $ | (1.76 | ) |
|                                                                                                                                      |   |                                      | ** ** |   | ** ** |   | ** ** |
| Weighted average shares                                                                                                                   |   | 83,398                                    |       | 75,988 |   | 58,793 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements. 

 

44

----

 

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

 
|                                                                                                                                                                             |   | **As of December 31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                                                                                             |   | **2003**                    |       | **2002** |   |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| **Assets**                                                                                                                                                                       |   |                        |       |   |   |
| Current Assets:                                                                                                                                                                  |   |                        |       |   |   |
| Cash and cash equivalents                                                                                                                                                        |   | $                           | 26,974     |   | $ | 34,123 |   |
| Restricted cash                                                                                                                                                                  |   | —                      |       | 394 |   |
| Accounts receivable — net                                                                                                                                              |   | 387,963                     |       | 314,363 |   |
| Inventories                                                                                                                                                                      |   | 29,405                      |       | 31,280 |   |
| Prepaid expenses and other                                                                                                                                                       |   | 24,044                      |       | 19,441 |   |
| Deferred income taxes                                                                                                                                                            |   | 91,272                      |       | 108,046 |   |
| Current assets of discontinued operations (Note 8)                                                                                                                               |   | 54,769                      |       | 103,871 |   |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| Total current assets                                                                                                                                                             |   | 614,427                     |       | 611,518 |   |
|                                                                                                                                                                             |   |                        |       |   |   |
| Property and equipment — net                                                                                                                                           |   | 65,791                      |       | 63,705 |   |
| Goodwill                                                                                                                                                                         |   | 479,623                     |       | 462,719 |   |
| Intangible assets                                                                                                                                                                |   | 31,751                      |       | 37,218 |   |
| Other assets — net                                                                                                                                                     |   | 36,262                      |       | 62,685 |   |
| Deferred income taxes                                                                                                                                                            |   | 62,781                      |       | 53,015 |   |
| Non-current assets of discontinued operations (Note 8)                                                                                                                           |   | —                      |       | 6,582 |   |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| Total assets                                                                                                                                                                     |   | $                           | 1,290,635  |   | $ | 1,297,442 |   |
|                                                                                                                                                                             |   |                        |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                   |   |                        |       |   |   |
| Current Liabilities:                                                                                                                                                             |   |                        |       |   |   |
| Current portion of amounts outstanding under line of credit                                                                                                                      |   | $                           | 3,500      |   | $ | 3,500 |   |
| Accounts payable                                                                                                                                                                 |   | 91,283                      |       | 81,376 |   |
| Current portion of long-term debt                                                                                                                                                |   | 863                         |       | 847 |   |
| Accrued compensation and benefits                                                                                                                                                |   | 81,823                      |       | 66,639 |   |
| Other accrued liabilities                                                                                                                                                        |   | 95,339                      |       | 87,602 |   |
| Current liabilities of discontinued operations (Note 8)                                                                                                                          |   | 18,783                      |       | 49,143 |   |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| Total current liabilities                                                                                                                                                        |   | 291,591                     |       | 289,107 |   |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| Long-term portion of amounts outstanding under line of credit                                                                                                                    |   | 341,250                     |       | 344,750 |   |
| Senior subordinated notes                                                                                                                                                        |   | 200,000                     |       | — |   |
| Other long-term debt                                                                                                                                                             |   | 988                         |       | 2,045 |   |
| Other non-current liabilities                                                                                                                                                    |   | 51,051                      |       | 54,401 |   |
| Non-current liabilities of discontinued operations (Note 8)                                                                                                                      |   | 34,346                      |       | 44,826 |   |
| Commitments and contingencies (Notes 4, 5, 6 and 12)                                                                                                                             |   |                        |       |   |   |
| Company obligated mandatory redeemable convertible preferred  securities of a subsidiary trust   whose sole assets are senior subordinated convertible debentures of  Titan |   | —                      |       | 250,000 |   |
|                                                                                                                                                                             |   |                        |       |   |   |
| Stockholders’ Equity:                                                                                                                                                       |   |                        |       |   |   |
| Preferred stock: $1 par value, authorized 5,000,000 shares:                                                                                                                      |   |                        |       |   |   |
| Cumulative convertible, $13,700 liquidation preference, designated  1,068,102 shares:                                                                                            |   |                        |       |   |   |
| 686,829 and 688,129 shares issued and outstanding                                                                                                                                |   | 687                         |       | 688 |   |
| Series A junior participating, designated 1,000,000 authorized  shares:  None issued                                                                              |   | —                      |       |   |   |
| Common stock: $.01 par value, authorized 200,000,000 shares:  82,182,250 and 78,344,550 shares issued and outstanding                                                            |   | 822                         |       | 783 |   |
| Capital in excess of par value                                                                                                                                                   |   | 670,733                     |       | 647,752 |   |
| Deferred compensation                                                                                                                                                            |   | (1,584                      | )          | (8,791 | ) |
| Retained earnings (deficit)                                                                                                                                                      |   | (298,221                    | )          | (327,318 | ) |
| Accumulated other comprehensive income (loss)                                                                                                                                    |   | (215                        | )          | (132 | ) |
| Treasury stock (265,124 and 245,750 shares), at cost                                                                                                                             |   | (813                        | )          | (669 | ) |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| Total stockholders’ equity                                                                                                                                                  |   | 371,409                     |       | 312,313 |   |
|                                                                                                                                                                             |   |                        | ** ** |   | ** ** |
| Total liabilities and stockholders’ equity                                                                                                                                  |   | $                           | 1,290,635  |   | $ | 1,297,442 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements. 

 

45

----

 

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

 
|                                                                                                                                                                          |   | **For the Years Ended December 31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                                                                                                          |   | **2003**                                  |       | **2002** |   | **2001** |   |
| **Cash Flows from Operating Activities:**                                                                                                                                     |   |                                      |       |   |   |   |   |
| Income (loss) from continuing operations                                                                                                                                      |   | $                                         | 29,951     |   | $ | (13,244 | ) | $ | (3,457 | ) |
| Adjustments to reconcile income (loss) from continuing operations to  net cash provided by continuing operations, net of effects of  businesses  acquired and sold: |   |                                      |       |   |   |   |   |
| Impairment charge related to SureBeam                                                                                                                                         |   | 15,757                                    |       | — |   | — |   |
| Debt extinguishment costs                                                                                                                                                     |   | 12,423                                    |       | 9,435 |   | — |   |
| Loss on investments                                                                                                                                                           |   | 6,154                                     |       | — |   | — |   |
| Depreciation and amortization                                                                                                                                                 |   | 20,845                                    |       | 21,705 |   | 21,971 |   |
| Write-offs due to asset impairments                                                                                                                                           |   | —                                    |       | — |   | 14,640 |   |
| Deferred income taxes and other                                                                                                                                               |   | 24,780                                    |       | 20,295 |   | 1,314 |   |
| Minority interests                                                                                                                                                            |   | —                                    |       | — |   | (5,119 | ) |
| Deferred compensation charges                                                                                                                                                 |   | 7,207                                     |       | 27,835 |   | 4,282 |   |
| Changes in operating assets and liabilities, net of effects of  businesses acquired  and sold:                                                                           |   |                                      |       |   |   |   |   |
| Accounts receivable                                                                                                                                                           |   | (75,660                                   | )          | 63,480 |   | (23,216 | ) |
| Inventories                                                                                                                                                                   |   | 4,006                                     |       | (6,913 | ) | (5,276 | ) |
| Prepaid expenses and other assets                                                                                                                                             |   | (9,189                                    | )          | (6,980 | ) | 3,191 |   |
| Accounts payable                                                                                                                                                              |   | 4,550                                     |       | 9,166 |   | 8,333 |   |
| Accrued compensation and benefits                                                                                                                                             |   | 21,172                                    |       | (5,005 | ) | 6,133 |   |
| Income taxes payable/refundable                                                                                                                                               |   | (153                                      | )          | (1,187 | ) | (37 | ) |
| Other liabilities                                                                                                                                                             |   | 16,634                                    |       | 37,130 |   | (12,417 | ) |
|                                                                                                                                                                          |   |                                      | ** ** |   | ** ** |   | ** ** |
| Net cash provided by continuing operations                                                                                                                                    |   | 78,477                                    |       | 155,717 |   | 10,342 |   |
|                                                                                                                                                                          |   |                                      | ** ** |   | ** ** |   | ** ** |
| Loss from discontinued operations                                                                                                                                             |   | (854                                      | )          | (218,106 | ) | (95,157 | ) |
| Holdback payment related to prior year acquisition (Note 9)                                                                                                                   |   | (2,000                                    | )          | — |   | — |   |
| Proceeds from divesture of businesses (Note 8)                                                                                                                                |   | 2,700                                     |       | — |   | — |   |
| Deferred compensation charge attributable to discontinued operations                                                                                                          |   | —                                    |       | 7,780 |   | 54,270 |   |
| Issuance of stock in subsidiaries                                                                                                                                             |   | —                                    |       | 172 |   | 61,327 |   |
| Minority interest attributable to discontinued operations                                                                                                                     |   | —                                    |       | (130 | ) | (11,872 | ) |
| Changes in net assets and liabilities of discontinued operations                                                                                                              |   | (3,465                                    | )          | 75,892 |   | (122,917 | ) |
| Net cash used for discontinued operations                                                                                                                                     |   | (3,619                                    | )          | (134,392 | ) | (114,349 | ) |
| Net cash provided by (used for) operating activities                                                                                                                          |   | 74,858                                    |       | 21,325 |   | (104,007 | ) |
|                                                                                                                                                                          |   |                                      | ** ** |   | ** ** |   | ** ** |
| **Cash Flows from Investing Activities:**                                                                                                                                     |   |                                      |       |   |   |   |   |
| Capital expenditures                                                                                                                                                          |   | (14,104                                   | )          | (26,002 | ) | (14,237 | ) |
| Acquisition of businesses, net of cash acquired                                                                                                                               |   | (14,089                                   | )          | 27,409 |   | (34,171 | ) |
| Capitalized software development costs                                                                                                                                        |   | —                                    |       | (1,586 | ) | (4 | ) |
| Proceeds from sales of investments and business                                                                                                                               |   | —                                    |       | 6,917 |   | 3,217 |   |
| Advances to SureBeam on line of credit                                                                                                                                        |   | —                                    |       | (25,000 | ) | — |   |
| Other investments                                                                                                                                                             |   | (1,615                                    | )          | (6,851 | ) | (12,546 | ) |
| Other                                                                                                                                                                         |   | 594                                       |       | 7,594 |   | (206 | ) |
| Net cash used for investing activities                                                                                                                                        |   | (29,214                                   | )          | (17,519 | ) | (57,947 | ) |
|                                                                                                                                                                          |   |                                      | ** ** |   | ** ** |   | ** ** |
| **Cash Flows from Financing Activities:**                                                                                                                                     |   |                                      |       |   |   |   |   |
| Extinguishment of HIGH TIDES and other debt reductions                                                                                                                        |   | (254,541                                  | )          | (4,647 | ) | (38,100 | ) |
| Issuance of senior subordinated notes and other debt additions                                                                                                                |   | 200,000                                   |       | 18,250 |   | 66,875 |   |
| Deferred debt issuance costs                                                                                                                                                  |   | (8,924                                    | )          | (8,908 | ) | (1,600 | ) |
| Debt extinguishment costs                                                                                                                                                     |   | (4,352                                    | )          | — |   | — |   |
| Proceeds from stock issuances                                                                                                                                                 |   | 15,491                                    |       | 8,566 |   | 147,579 |   |
| Issuance of stock by subsidiaries                                                                                                                                             |   | —                                    |       | 19 |   | 42 |   |
| Dividends paid                                                                                                                                                                |   | (688                                      | )          | (689 | ) | (690 | ) |
| Decrease (increase) in restricted cash                                                                                                                                        |   | 394                                       |       | (394 | ) | — |   |
| Other                                                                                                                                                                         |   | (90                                       | )          | (241 | ) | 2 |   |
| Net cash provided by (used for) financing activities                                                                                                                          |   | (52,710                                   | )          | 11,956 |   | 174,108 |   |
| Effect of exchange rate changes on cash                                                                                                                                       |   | (83                                       | )          | (260 | ) | 20 |   |
| Net increase (decrease) in cash and cash equivalents                                                                                                                          |   | (7,149                                    | )          | 15,502 |   | 12,174 |   |
| Cash and cash equivalents at beginning of year                                                                                                                                |   | 34,123                                    |       | 18,621 |   | 6,447 |   |
| Cash and cash equivalents at end of year                                                                                                                                      |   | $                                         | 26,974     |   | $ | 34,123 |   | $ | 18,621 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements. 

 

46

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**THE TITAN CORPORATIONCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001(In thousands of dollars, except per share data)**

 
|                                                                         |   | **Cumulative   Convertible   Preferred  Stock** |   | **Common  Stock** |   | **Capital in  Excess of  Par Value** |   | **Deferred  Compen-  sation** |    | **Retained  Earnings  (Deficit)** |   | **Accumulated   Other  Comprehensive  Income (Loss)** |   | **Treasury  Stock** |     | **Total** |   |
|------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|-------------------|--------|--------------------------------------|--------|-------------------------------|---------|-----------------------------------|--------|-------------------------------------------------------|--------|---------------------|----------|-----------|--------|
|                                                                         |   |                                            |   |              |   |                                 |   |                          |    |                              |   |                                                  |   |                |     |      |   |
| Balances at December 31, 2000                                                |   | $                                               | 690    |              | $      | 541                                  |   | $                             | 190,666 |                              | $      | (13,882                                               | )      | $                   | (9,268   | )         | $      | 108 |   | $ | (1,439 | ) | $ | 167,416 |   |
| Proceeds from issuance of stock                                              |   |                                            |   | 80                |   | 136,102                              |   |                          |    |                              |   |                                                  |   |                |     | 136,182   |   |
| Issuance of stock for acquisitions                                           |   |                                            |   | 40                |   | 144,724                              |   |                          |    |                              |   |                                                  |   |                |     | 144,764   |   |
| Exercise of stock options and other                                          |   |                                            |   | 40                |   | 11,749                               |   |                          |    |                              |   |                                                  |   | (392                | )        | 11,397    |   |
| Deferred compensation, related to the issuance of stock options              |   |                                            |   |              |   | 78,725                               |   | (78,725                       | )       |                              |   |                                                  |   |                |     | —    |   |
| Amortization of deferred compensation                                        |   |                                            |   |              |   |                                 |   | 58,552                        |    |                              |   |                                                  |   |                |     | 58,552    |   |
| Foreign currency translation adjustment                                      |   |                                            |   |              |   |                                 |   |                          |    |                              |   | 20                                                    |   |                |     | 20        |   |
| Valuation of options assumed in acquisitions                                 |   |                                            |   |              |   | 16,272                               |   | (464                          | )       |                              |   |                                                  |   |                |     | 15,808    |   |
| Income tax benefit from employee stock transactions                          |   |                                            |   |              |   | 5,157                                |   |                          |    |                              |   |                                                  |   |                |     | 5,157     |   |
| Gain related to issuance of stock in subsidiary                              |   |                                            |   |              |   |                                 |   |                          |    | 52,025                            |   |                                                  |   |                |     | 52,025    |   |
| Shares contributed to employee benefit plans                                 |   |                                            |   |              |   | 4,097                                |   |                          |    |                              |   |                                                  |   | 844                 |     | 4,941     |   |
| Dividends on preferred stock — Cumulative Convertible, $1.00 per share  |   |                                            |   |              |   | (690                                 | )      |                          |    |                              |   |                                                  |   |                |     | (690      | )      |
| Net loss                                                                     |   |                                            |   |              |   |                                 |   |                          |    | (98,614                           | )      |                                                  |   |                |     | (98,614   | )      |
|                                                                         |   |                                            |   |              |   |                                 |   |                          |    |                              |   |                                                  |   |                |     |      |   |
| Balances at December 31, 2001                                                |   | 690                                             |   | 701               |   | 586,802                              |   | (34,519                       | )       | (55,857                           | )      | 128                                                   |   | (987                | )        | 496,958   |   |
| Spin—off of SureBeam                                                    |   |                                            |   |              |   | (124,722                             | )      | 19,318                        |    |                              |   |                                                  |   |                |     | (105,404  | )      |
| Stock issued for acquisitions                                                |   |                                            |   | 68                |   | 137,431                              |   |                          |    |                              |   |                                                  |   | 312                 |     | 137,811   |   |
| Exercise of stock options and other                                          |   |                                            |   | 10                |   | 8,556                                |   |                          |    |                              |   |                                                  |   |                |     | 8,566     |   |
| Shares contributed to employee benefit plans                                 |   |                                            |   | 4                 |   | 7,519                                |   |                          |    |                              |   |                                                  |   | 6                   |     | 7,529     |   |
| Conversion of preferred stock                                                |   | (2                                              | )      |              |   | 2                                    |   |                          |    |                              |   |                                                  |   |                |     | —    |   |
| Deferred compensation, related to the issuance of stock options         |   |                                            |   |              |   | 29,834                               |   | (29,834                       | )       |                              |   |                                                  |   |                |     | —    |   |
| Write—off of deferred compensation related to discontinued operations   |   |                                            |   |              |   | (629                                 | )      | 629                           |    |                              |   |                                                  |   |                |     | —    |   |
| Amortization of deferred compensation                                        |   |                                            |   |              |   |                                 |   | 35,615                        |    |                              |   |                                                  |   |                |     | 35,615    |   |
| Income tax benefit from employee stock transactions                          |   |                                            |   |              |   | 3,648                                |   |                          |    |                              |   |                                                  |   |                |     | 3,648     |   |
| Dividends on preferred stock — Cumulative Convertible, $1.00 per  share |   |                                            |   |              |   | (689                                 | )      |                          |    |                              |   |                                                  |   |                |     | (689      | )      |
| Foreign currency translation adjustment                                      |   |                                            |   |              |   |                                 |   |                          |    |                              |   | (260                                                  | )      |                |     | (260      | )      |
| Net loss                                                                     |   |                                            |   |              |   |                                 |   |                          |    | (271,461                          | )      |                                                  |   |                |     | (271,461  | )      |
|                                                                         |   |                                            |   |              |   |                                 |   |                          |    |                              |   |                                                  |   |                |     |      |   |
| Balances at December 31, 2002                                                |   | 688                                             |   | 783               |   | 647,752                              |   | (8,791                        | )       | (327,318                          | )      | (132                                                  | )      | (669                | )        | 312,313   |   |
| Exercise of stock options and other                                          |   |                                            |   | 27                |   | 15,608                               |   |                          |    |                              |   |                                                  |   | (144                | )        | 15,491    |   |
| Issuance of stock for acquisition (Note 4)                                   |   |                                            |   | 3                 |   | 3,256                                |   |                          |    |                              |   |                                                  |   |                |     | 3,259     |   |
| Return of shares related to acquisition (Note 9)                             |   |                                            |   |              |   | (2,000                               | )      |                          |    |                              |   |                                                  |   |                |     | (2,000    | )      |
| Amortization of deferred compensation                                        |   |                                            |   |              |   |                                 |   | 7,207                         |    |                              |   |                                                  |   |                |     | 7,207     |   |
| Shares contributed to employee benefit plans                                 |   |                                            |   | 9                 |   | 6,518                                |   |                          |    |                              |   |                                                  |   |                |     | 6,527     |   |
| Foreign currency translation adjustment                                      |   |                                            |   |              |   |                                 |   |                          |    |                              |   | (83                                                   | )      |                |     | (83       | )      |
| Conversion of preferred stock                                                |   | (1                                              | )      |              |   | 1                                    |   |                          |    |                              |   |                                                  |   |                |     | —    |   |
| Income tax benefit from employee stock transactions                          |   |                                            |   |              |   | 286                                  |   |                          |    |                              |   |                                                  |   |                |     | 286       |   |
| Dividends on preferred stock — Cumulative Convertible, $1.00 per share  |   |                                            |   |              |   | (688                                 | )      |                          |    |                              |   |                                                  |   |                |     | (688      | )      |
| Net income                                                                   |   |                                            |   |              |   |                                 |   |                          |    | 29,097                            |   |                                                  |   |                |     | 29,097    |   |
|                                                                         |   |                                            |   |              |   |                                 |   |                          |    |                              |   |                                                  |   |                |     |      |   |
| Balances at December 31, 2003                                                |   | $                                               | 687    |              | $      | 822                                  |   | $                             | 670,733 |                              | $      | (1,584                                                | )      | $                   | (298,221 | )         | $      | (215 | ) | $ | (813 | ) | $ | 371,409 |   |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

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**THE TITAN CORPORATIONNOTES TO CONSOLIDATED FINANCIALSTATEMENTS(in thousands, except share and per share data, or as otherwise noted)**

 

**Note1.  Nature of Operations**

 

The Titan Corporation is aleading technology developer and systems integrator for the Department ofDefense, the Department of Homeland Security, and intelligence and other keygovernment agencies.  We provide a rangeof services and systems solutions. These solutions and services include research and development, design,installation, integration, test, logistics support, maintenance andtraining.  We also provide services andsolutions to government agencies with sophisticated information systems.  These include information processing,information fusion, data management, and communication systems.  In addition, we also develop and producedigital imaging products, sensors, lasers, electro-optical systems, threatsimulation/training systems, intelligence electronic hardware, signal interceptsystems, and complex military specific systems.

 

We focus on the followingfour markets:  C4ISR (Command, Control, Communications, Computers,Intelligence, Surveillance and Reconnaissance), Transformational Programs,Enterprise Information Technology, and the War on Terrorism/Homeland Security.

 

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

 

**Note 2. Proposed Merger with Lockheed Martin Corporation**

** **

Lockheed Martin Corporation(Lockheed Martin) and Titan have entered into a definitive agreement for LockheedMartin to acquire Titan.  Under themerger agreement, stockholders of Titan may elect to receive $22 per share incash, an equivalent amount of Lockheed Martin common stock, or a 50/50combination of cash and Lockheed Martin common stock.  Among other terms, the merger agreement provides that theexchange rate for stockholders who receive Lockheed Martin common stock will bedetermined by dividing $22 per share by the average of the daily high and lowsales prices per share of Lockheed Martin common stock on the New York StockExchange (NYSE) composite transaction tape for the 10 trading days precedingthe third trading day prior to the effective date of the merger, subject tospecified collars. If the average price exceeds $58 per share (the Upper Collar),then the exchange rate will be calculated using the Upper Collar instead of theaverage price. If the average price is less than $46 per share (the LowerCollar), then the exchange rate will be calculated using the Lower Collarinstead of the average price.

 

On February 9,2004, Titan announced that all outstanding shares of its cumulative convertiblepreferred stock will be redeemed on March 15, 2004. The redemption is beingundertaken in anticipation of and as a condition to the close of the proposed mergerwith Lockheed Martin but is not contingent on the merger closing.  The convertible preferred shares areredeemable at Titan’s option at a redemption price of $20 per share, pluscumulative dividends in arrears, for an aggregate redemption price of $20.03per share.  Titan will redeem the sharesusing available cash balances.  Holdersof Titan’s convertible preferred stock also have an existing right to converteach of their shares into 0.781 shares of Titan’s common stock.  The right to convert the convertiblepreferred stock will terminate on March 15, 2004, the date of redemption.  As of February 9, 2004, there were 686,724shares of convertible preferred stock outstanding.  To the extent that all of these shares are converted, thenapproximately 536,331 shares of Titan common stock would be issued.  Any shares of convertible preferred stockthat are not converted will be redeemed. 

 

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In response toconcerns raised by the U.S. government concerning organizational conflicts ofinterest certain of Titan’s contracts might create with Lockheed Martin’sexisting businesses, in the first quarter of 2004, Titan has divested certaincontracts with organizational conflict of interest provisions and the relatedbusiness unit where these conflicts could not be mitigated to the satisfactionof the customer.  Neither the revenuesassociated with the divested contracts, nor the divestiture transaction itself,were material to Titan.

 

Refer to Note12 for a discussion of contingencies related to recently announced internal andgovernmental investigations into whether payments involving Titan’s foreignconsultants were made in violation of applicable law.

 

Refer to Note11 for a discussion of the impact of the proposed merger on Titan’s outstandingdebt.

 

In the yearended December 31, 2003, Titan incurred $2.2 million in transaction costsrelated to the proposed merger, which are reflected as merger related costs inthe accompanying consolidated statements of operations.

 

**Note3.  Significant Accounting Policies**

 

***Principles of Consolidation.***  The consolidated financialstatements include the accounts of Titan and its subsidiaries.  All significant intercompany transactionsand balances have been eliminated.  Fromtime to time, we make investments in joint ventures which may involveinternational locations and operations. Management evaluates its investment in each joint venture on anindividual basis for purposes of determining whether or not consolidation isappropriate.  Investments in suchventures are generally consolidated in instances where Titan retains controlthrough decision-making ability and generally a greater than 50% ownershipinterest.  In the absence of suchfactors, we generally account for these investments under the cost or equitymethod, depending upon management’s evaluation of Titan’s ability to exercisesignificant influence or control.

 

***Reclassifications***.  Certain reclassifications havebeen made to prior year presentations to conform to the 2003 presentation.

 

***Stock-Based Compensation.***  Titan has elected to adopt thedisclosure only provisions of Statement of Financial Accounting Standards(SFAS) No. 123, “Accounting for Stock-Based Compensation”.  Accordingly, Titan accounts for its stock-basedcompensation plans under the provisions of Accounting Principles Board (APB)No. 25.  Titan also follows thedisclosure requirements of SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure,” which amends SFAS No. 123. 

 

As allowed by SFAS No. 123,Titan has elected to continue to apply the intrinsic value method of accountingfor stock options and has adopted the disclosure only provisions of the fairvalue method contained in SFAS No. 123. Compensation cost, if any, is measured as the excess of the quotedmarket price of Titan stock on the date of grant over the exercise price of thegrant.  Had compensation cost for Titanstock-based compensation plans been determined based on the fair value methodat the grant dates for awards under those plans, our results of operationswould have been reduced to the pro forma amounts indicated below:

 
|                                                                                                                                                  |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income (loss), as reported                                                                                                                        |   | $        | 29,097 |     | $      | (271,461 | )      | $ | (98,614 | ) |
| Less:  Additional stock-based  employee compensation expense determined under fair value method for all  awards, net of related tax effects |   | (4,488   | )      | (5,575   | )      | (9,123   | )      |
| Net income (loss), pro forma                                                                                                                          |   | $        | 24,609 |     | $      | (277,036 | )      | $ | (107,737 | ) |
| Earnings per share:                                                                                                                                   |   |     |   |     |   |     |   |
| Basic as reported                                                                                                                                     |   | $        | 0.36   |     | $      | (3.58    | )      | $ | (1.76 | ) |
| Basic pro forma                                                                                                                                       |   | $        | 0.30   |     | $      | (3.66    | )      | $ | (1.92 | ) |
|                                                                                                                                                  |   |     |   |     |   |     |   |
| Diluted as reported                                                                                                                                   |   | $        | 0.34   |     | $      | (3.58    | )      | $ | (1.76 | ) |
| Diluted pro forma                                                                                                                                     |   | $        | 0.29   |     | $      | (3.66    | )      | $ | (1.92 | ) |
|                                                                                                                                                  |   |     |   |     |   |     |   |
| Stock-based compensation expense included in income (loss) as  reported                                                                               |   | $        | 7,207  |     | $      | 35,615   |   | $ | 58,552 |   |

 

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Stock-based compensation expense included inincome (loss) as reported results primarily from deferred compensationamortization (see Note 14).

 

***Minority Interest in Subsidiaries.***  Minority interest in subsidiariesconsists primarily of equity securities issued in 2000 by Titan’s subsidiary,Cayenta, Inc., which was the operations of the Software Systems business, whichprimarily included certain components which were discontinued in March 2002,and equity securities issued in 2000 and 2001 by Titan’s SureBeamsubsidiary.  Titan owned substantiallyall of the voting equity of Cayenta and SureBeam both before and after thetransactions.  Titan records minorityinterest to reflect the portion of the earnings or losses of majority-ownedoperations which are applicable to the minority interest partners.  The minority interest percentages of Cayentaand SureBeam were approximately 24.3% and 19.9%, respectively, as of December31, 2001, 23% and 0% as of December 31, 2002, respectively, and 23% and 0% asof December 31, 2003, respectively.  Theminority interest portion of SureBeam’s and Cayenta’s losses from thediscontinued components are reflected in the loss from discontinued operations.  In addition, the minority interest portionof the continuing components of Cayenta are reflected in continuing operations.

 

***FinancialInstruments.*** The fair values of cash and cash equivalents, accounts receivable,accounts payable, accrued liabilities, line of credit and other long-term debtapproximate the carrying amounts due to their short maturities or variableinterest rates.  The estimated fairvalue Titan’s senior subordinated notes at December 31, 2003, approximate$205.7 million compared with the carrying value of $200 million.

 

***Foreign Currency Translation.***  The financial statements ofcertain of our foreign subsidiaries are measured using the local functionalcurrency.  Assets and liabilities ofthese subsidiaries are translated at exchange rates in effect as of the balancesheet date.  Revenues and expenses aretranslated at average rates of exchange in effect during the year.  The resulting cumulative translationadjustments have been recorded in other comprehensive income within stockholders’equity.  Foreign currency transactiongains and losses are included in consolidated net income. 

 

***Use of Estimates.***  The preparation of financialstatements in conformity with generally accepted accounting principles in theU.S. requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  

 

***Revenue Recognition.***  A majority of Titan’s revenue isderived from products manufactured and services performed undercost-reimbursable, time-and-materials, and fixed-price contracts.  Cost reimbursable contracts for thegovernment provide for reimbursement of costs plus the payment of a fee.  Under fixed-price contracts, the Companyagrees to perform certain work for a fixed price.  Under time and materials contracts, the Company is reimbursed forlabor hours at negotiated hourly billing rates and are reimbursed for traveland other direct expenses at actual costs plus applied general andadministrative expense.  Titan’scontracts with government customers may use various cost-type contracts.  They include cost-plus fixed fee, cost-plusaward fee, cost-plus incentive fee with incentives based upon both cost and/orperformance, and cost sharing contracts. Under fixed-price contracts, revenues are generally recognized asservices are performed, using the percentage-of-completion method, applying thecost-to-cost or units of delivery method, in accordance with AccountingResearch Bulletin No. 45 and American Institute of Certified Public Accountants(AICPA) Statement of Position 81-1 “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts (SOP 81-1).  Total estimated costs are based onmanagement’s assessment of costs to complete the project based upon evaluationof the level of work achieved and costs expended to date.  Estimated contract losses are fully chargedto operations when identified.  Billingsin excess of cost incurred are recorded as reductions in accounts receivable inthe accompanying consolidated balance sheet. For award and incentive fee type contracts, the Company recognizes theexpected fee to be awarded by the customer at the time such fee can bereasonably estimated, based on factors such as prior award experience and

 

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communications with the customerregarding performance, including any interim performance evaluations renderedby the customer.  

 

As most of Titan’s revenuerecognition practices are in accordance with SOP 81-1 and AICPA Statementof Position 97-2 “Software Revenue Recognition” (SOP 97-2), the adoption ofSecurities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB)No. 101, “Revenue Recognition in Financial Statements” in 2000 had nomaterial impact on our consolidated financial statements. 

 

***Deferred Revenues.***  Included in other accruedliabilities are deferred revenues which consist principally of customerdeposits whereby Titan receives payment in advance of performing the service.

 

***Cash Equivalents.***  All highly liquid investmentspurchased with an original maturity of three months or less are classified ascash equivalents. 

 

***Unbilled Accounts Receivable.***  Unbilled accounts receivable areincluded in accounts receivable and include work-in-process which will bebilled in accordance with contract terms and delivery schedules, as well asamounts billable upon final execution of contracts, contract completion,milestones or completion of rate negotiations. Generally, unbilled accounts receivable are expected to be billed andcollected within one year.  Payments toTitan for performance on certain U.S. government contracts are subject to auditby the Defense Contract Audit Agency. Revenues have been recorded at amounts expected to be realized uponfinal settlement. 

 

***Concentration of Risk.***  As Titan expanded its businessinto international markets and developing countries during 2000 and 2001,certain accounts receivable may have been exposed to credit risk due topolitical and/or economic instability in these areas.  To mitigate credit risk in foreign countries, we have generallydenominated our foreign contracts in U.S. dollars and required paymentprimarily in the form of stand-by letters of credit, advance deposits, or wiretransfer, prior to shipment.  Sales tothe U.S. government, including both defense and non-defense agencies, and salesas a subcontractor as well as direct sales, aggregated approximately$1,702.0 million in 2003, $1,320.0 million in 2002, and$905.3 million in 2001.  With theexception of Titan’s linguist contract with the U.S. Army’s Intelligence and SecurityCommand and the contract to provide enterprise information technology supportfor the U.S. Special Operations Command which contributed 7.0% and 3.5% oftotal revenues for 2003, respectively, no other signle contract accounted formore than 2.0% of total revenue for 2003. Substantially all of Titan’s operations are located in the UnitedStates.  Export and foreign revenuesamounted to approximately $36.6 million, $29.6 million, and$21.4 million in 2003, 2002, and 2001, respectively, related primarily tocustomers in Europe, the Middle East, Africa and Asia.  Substantially all international sales aredenominated in U.S. dollars.  Theincrease from 2002 to 2003 is primarily due to increased revenues ofapproximately $10.4 million to Titan’s customers in the United Kingdom.

 

A majority of Titan’s totalrevenues are from U.S. government contracts. Any cancellations or modifications of our significant contracts orsubcontracts, or failure by the U.S. government to exercise an option periodrelating to those contracts or subcontracts, could adversely affect ourfinancial condition and results of operations in the short- and long-term.  A significant and continuing decline in U.S.defense and other federal agency budgets also may negatively impact our business.  Although we bid for and are awardedlong-term U.S. government contracts and subcontracts, the U.S. government onlyfunds these contracts on an annual basis, and many of our contracts andsubcontracts include option years.  TheU.S. government may cancel these contracts at any time without penalty or maychange its requirements, programs or contract budget, and generally has theright not to exercise option periods. The U.S. Congress may decline to appropriate funds needed to completethe contracts awarded to us or the prime contractor.  On our subcontracts, we generally do not control the primecontractor’s allocation of resources. We also depend upon the prime contractor to perform its obligations onthe primary government contract.  Inaddition to contract cancellations and declines in agency budgets, ourfinancial condition and results of operations may be adversely affected by: 

 

•                                          budgetaryconstraints affecting U.S. government spending generally, and changes in fiscalpolicy or available funding;

 

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•                                          curtailmentof the U.S. government’s use of technology services providers;

 

•                                          the adoption of new laws or regulations;

 

•                                          U.S. government facilities closures or agency realignments;

 

•                                          competition and consolidation in our business areas; and

 

•                                          general economic conditions.

 

These or other factors couldcause government agencies to reduce their purchases under contracts, toexercise their right to terminate contracts or not to exercise options to renewcontracts.  Any of these actions couldhave a material adverse effect on our business, financial condition and resultsof operations. 

 

***Inventories.***  Inventories include the cost ofmaterial, labor and overhead, and are stated at the lower of cost, determinedon the first-in, first-out (FIFO) and weighted average methods, or market.  We periodically evaluate our on-hand stockand make appropriate disposition of any stock deemed excess or obsolete.  

 

***Property and Equipment.***  Property and equipment are statedat cost.  Depreciation is provided usingthe straight-line method, with estimated useful lives of 5 to 30 years forbuildings, 2 to 15 years for leasehold improvements, representing the lesser ofthe useful life of the improvement or the lease term, and 3 to 15 years formachinery and equipment and furniture and fixtures.  Certain machinery and equipment in our medical sterilizationbusiness is depreciated based on units of production.  

 

***Goodwill and OtherIntangible Assets.***  Goodwill representsthe excess of costs over fair value of assets of businesses acquired. EffectiveJanuary 1, 2002, Titan adopted SFAS No. 142, “Goodwill and OtherIntangible Assets,” which establishes financial accounting and reporting foracquired goodwill and other intangible assets and supersedes APB Opinion No.17, “Intangible Assets”.  Goodwill andintangible assets acquired in a purchase business combination and determined tohave an indefinite useful life are not amortized, but instead tested forimpairment at least annually in accordance with the provisions of SFASNo. 142. SFAS No. 142 also requires that intangible assets withestimable useful lives be amortized over their respective estimated usefullives to their estimated residual values, and reviewed for impairment inaccordance with SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets.”   

 

SFAS No. 142 requiresthat goodwill be tested for impairment at the reporting unit level at adoptionand at least annually thereafter, utilizing a two step methodology.  The initial step requires Titan to assesswhether indications of impairment exist. If indications of impairment are determined to exist, the second step ofmeasuring impairment is performed, wherein the fair value of the relevantreporting unit is compared to the carrying value, including goodwill, of suchunit.  If the fair value exceeds thecarrying value, no impairment loss is recognized.  However, if the carrying value of the reporting unitexceeds its fair value, the goodwill of the reporting unit is impaired.  

 

Titan performsits annual testing for impairment of goodwill and other intangible assets inthe first quarter of each year, prior to the release of the annual financialstatements for the previous year.  Basedon management’s assessments at December 31, 2003, there were no indicators ofimpairment.

 

*Initial Adoption*

* *

In connection with theinitial adoption of this standard as of January 1, 2002, during the first quarter of 2002, Titan’sindependent valuation consultant, Bearing Point, completed step one of the testfor impairment, which indicated that the carrying values of certain reportingunits exceeded their estimated fair values, as determined utilizing variousevaluation techniques including discounted cash flow and comparative marketanalysis.  Thereafter, given theindication of a potential impairment, Titan completed step two of thetest.  Based on that analysis, atransitional impairment loss of $40.1 million, which was net of a$10.0 million tax benefit, was recognized in the

 

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first quarter of 2002 as the cumulativeeffect of an accounting change.  Theimpairment charge resulted from a change in the criteria for themeasurement of the impairment loss from an undiscounted cash flow method, asrequired by SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of,” to an estimated fair valueanalysis as required by SFAS No. 142.  The gross $50.1 millionimpairment charge recorded in the first quarter of 2002 was comprised ofapproximately $27.5 million in certain components of our Cayenta business,approximately $14.9 million in our AverCom business, which was previouslyreported in our Titan Technologies segment, both attributable to lowervaluations and weakened outlook in commercial IT services, and approximately$7.7 million in our Titan Wireless business.  The entire $50.1 million charge was related to discontinuedbusinesses; approximately $42.4 million of this charge pertained tobusinesses that were discontinued by Titan on March 1, 2002 with theremaining charge of $7.7 million related to Titan’s long distancetelecommunications business that was discontinued in the third quarter of 2002.

 

Prior to the adoption of SFAS No. 142, goodwillwas amortized on a straight-line basis over the expected periods to bebenefited, generally 1 to 40 years, and assessed for recoverability bydetermining whether the amortization of the goodwill balance over its remaininglife could be recovered through undiscounted future operating cash flows of theacquired operation. All other intangible assets were amortized on a straight-linebasis from 1 to 10 years.  Theamount of goodwill and other intangible asset impairment, if any, was measuredbased on projected discounted future operating cash flows using a discount ratereflecting our average cost of funds.

 

*ImpairmentSubsequent to Initial Adoption*

* *

As a result of Titan’s boardof directors’ decision in July 2002 to exit its long distance telecommunicationsbusiness, and the deterioration in pricing and valuations in thetelecommunications industry, Titan recorded an additional impairment charge in2002 of $74.8 million of goodwill in its international telecommunicationsbusiness, Titan Wireless, based upon indications of fair value as determined byrecent sales offers from potential buyers.

 

In connection with Titan’sboard of directors’ decision in the third quarter of 2002 to divest its LinComWireless business, Titan recorded a $2.7 million impairment of goodwill inthe third quarter of 2002 based upon indications of fair value as determined byoffers from potential buyers.  InOctober 2002, Titan shut down the operations of LinCom Wireless.

 

In addition, approximately$19.4 million of additional goodwill was determined to be impaired in 2002related to previously discontinued components of Cayenta, AverCom and othercommercial information technology businesses, which impairment was recordedbased upon estimates of fair value.

 

All impairment chargesrecognized subsequent to our initial adoption of SFAS No. 142 have beenreported in the loss from discontinued operations, as all impairments wereincurred in businesses held for sale or disposed of during 2002 (see Note 8).

 

The adjustment of previouslyreported net income (loss) and earnings (loss) per share below represents theelimination of recorded amortization of goodwill.  The impact on net income (loss), and basic and diluted netearnings (loss) per share for the years ended December 31, 2003, 2002 and2001 is set forth below:

 

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Reconciliation of Net Income(Loss) and Earnings (Loss) Per Share:

 
|                                                                                                          |   | **Years Ended December 31,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                          |   | **2003**                          |   | **2002** |   | **2001** |   |
| Income (loss) from continuing operations  before cumulative effect of change in accounting principle          |   | $                                 | 29,951 |   | $ | (13,244 | ) | $ | (3,457 | ) |
| Add back amortization of goodwill, net of tax                                                                 |   | —                            |   | — |   | 11,424 |   |
| Adjusted income (loss) from continuing operations before  cumulative effect of change in accounting principle |   | 29,951                            |   | (13,244 | ) | 7,967 |   |
|                                                                                                          |   |                              |   |   |   |   |   |
| Loss from discontinued operations, net of tax                                                                 |   | (854                              | )      | (218,106 | ) | (95,157 | ) |
| Add back amortization of goodwill, net of tax                                                                 |   | —                            |   | — |   | 16,641 |   |
| Adjusted loss from discontinued operations                                                                    |   | (854                              | )      | (218,106 | ) | (78,516 | ) |
| Cumulative effect of change in accounting principle                                                           |   | —                            |   | (40,111 | ) | — |   |
| Net income (loss)                                                                                             |   | 29,097                            |   | (271,461 | ) | (70,549 | ) |
| Dividend requirements on preferred stock                                                                      |   | (688                              | )      | (689 | ) | (690 | ) |
| Net income (loss) applicable to common stock                                                                  |   | $                                 | 28,409 |   | $ | (272,150 | ) | $ | (71,239 | ) |
| Basic earnings (loss) per share:                                                                              |   |                              |   |   |   |   |   |
| Income (loss) from continuing operations before cumulative effect of  change in accounting principle          |   | $                                 | 0.37   |   | $ | (0.18 | ) | $ | (0.13 | ) |
| Add back amortization of goodwill, net of tax                                                                 |   | —                            |   | — |   | 0.19 |   |
| Adjusted income (loss) from continuing operations                                                             |   | 0.37                              |   | (0.18 | ) | 0.06 |   |
| Loss from discontinued operations, net of tax                                                                 |   | (0.01                             | )      | (2.87 | ) | (1.63 | ) |
| Add back amortization of goodwill, net of tax                                                                 |   | —                            |   | — |   | 0.28 |   |
| Adjusted loss from discontinued operations                                                                    |   | (0.01                             | )      | (2.87 | ) | (1.35 | ) |
| Cumulative effect of change in accounting  principle                                                          |   | —                            |   | (0.53 | ) | — |   |
| Net income (loss)                                                                                             |   | $                                 | 0.36   |   | $ | (3.58 | ) | $ | (1.29 | ) |
| Weighted average shares                                                                                       |   | 79,957                            |   | 75,988 |   | 58,793 |   |
| Diluted earnings (loss) per share:                                                                            |   |                              |   |   |   |   |   |
| Income (loss) from continuing operations before cumulative  effect of change in accounting principle          |   | $                                 | 0.35   |   | $ | (0.18 | ) | $ | (0.13 | ) |
| Add back amortization of goodwill, net of  tax                                                                |   | —                            |   | — |   | 0.19 |   |
| Adjusted income (loss) from continuing  operations before extraordinary item                                  |   | 0.35                              |   | (0.18 | ) | 0.06 |   |
| Loss from discontinued operations, net of tax                                                                 |   | (0.01                             | )      | (2.87 | ) | (1.63 | ) |
| Add back amortization of goodwill, net of  tax                                                                |   | —                            |   | — |   | 0.28 |   |
| Adjusted loss from discontinued operations                                                                    |   | (0.01                             | )      | (2.87 | ) | (1.35 | ) |
| Cumulative effect of change in accounting  principle                                                          |   | —                            |   | (0.53 | ) | — |   |
| Net income (loss)                                                                                             |   | $                                 | 0.34   |   | $ | (3.58 | ) | $ | (1.29 | ) |
| Weighted average shares                                                                                       |   | 83,398                            |   | 75,988 |   | 58,793 |   |

 

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***Impairment of Investments in Non-marketableSecurities.***  Periodically,Titan reviews for possible impairments its non-marketable securities, whichinclude our investments in emerging businesses, which are accounted for underthe cost method.  Whenever events orchanges in circumstances indicate that the carrying amount of an asset is otherthan temporarily impaired, asset values are adjusted accordingly based on awrite down of cost to estimated fair value. In evaluating whether a loss in the carrying value of an investment isother than temporary, Titan evaluates the financial condition and near-termprospects of the investee and the region and industry of the investee,including any specific events which may influence the operations of theinvestee such as changes in technology, and its overall investment intent.  Titan will generally deem an impairment tobe other than temporary if its cost basis has exceeded its fair value for aperiod of six to nine months.  If a lossin the carrying value of an investment is deemed to be other than temporary, werecognize such loss based on a write down of cost to realizable value.

 

***Impairment of Long-LivedAssets.***  SFAS No. 144 provides asingle accounting model for long-lived assets to be disposed of. SFASNo. 144 also changes the criteria for classifying an asset as held forsale, broadens the scope of businesses to be disposed of that qualify forreporting as discontinued operations and changes the timing of recognizinglosses on such operations. Titan adopted SFAS No. 144 on January 1,2002.  Refer to Note 8 for discussion ofoperations discontinued since Titan’s adoption of SFAS No. 144.

 

In accordance with SFAS No. 144, long-livedassets, such as property, plant, and equipment, and purchased intangiblessubject to amortization, are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset. Assets to be disposed of would be separately presentedin the balance sheet and reported at the lower of the carrying amount or fairvalue less costs to sell, and are no longer depreciated.  The assets and liabilities of a disposed groupclassified as held for sale would be presented separately in the appropriateasset and liability sections of the balance sheet.

 

Goodwill and intangible assets not subject toamortization are tested annually for impairment, and are tested for impairmentmore frequently if events and circumstances indicate that the asset might beimpaired.  An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.

 

Prior to the adoption of SFAS No. 144, Titanaccounted for long-lived assets in accordance with SFAS No. 121,“Accounting for Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of.” 

 

***Income Taxes.***  Titan accounts for income taxesunder SFAS No. 109, “Accounting for Income Taxes,” which requires the useof the liability method of accounting for deferred income taxes.  Under this method, deferred income taxes arerecorded to reflect the tax consequences on future years of differences betweenthe tax bases of assets and liabilities and their financial reporting amountsat each year-end.  If it is more likelythan not that some portion or all of a deferred tax asset will not be realized,a valuation allowance is recognized. 

 

***Per Share Information.***  Titan computes earnings per sharebased on the provisions of SFAS No. 128, “Earnings Per Share.” 

 

The following data summarizeinformation relating to the per share computations for continuing operationsbefore extraordinary loss and cumulative effect of change in accountingprinciple: 

 

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|                                                                                        |   | **For the Year Ended December 31, 2003**  |       |
|---------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                                                        |   | **Income (Loss) (Numerator)**                  |       | **Shares (000’s)  (Denominator)** |   | **Per-Share  Amounts** |   |
| Income from continuing operations                                                           |   | $                                              | 29,951     |   |   |   |   |   |
| Less preferred stock dividends                                                              |   | (688                                           | )          |   |   |   |   |
| Basic EPS:                                                                                  |   |                                           |       |   |   |   |   |
| Income from continuing operations available to common stockholders                          |   | 29,263                                         |       | 79,957 |   | $ | 0.37 |   |
| Effect of dilutive securities: Stock options and warrants                                   |   | —                                         |       | 3,441 |   | (0.02 | ) |
| Diluted EPS:                                                                                |   |                                           |       |   |   |   |   |
| Income from continuing operations available to common stockholders                          |   | $                                              | 29,263     |   | 83,398 |   | $ | 0.35 |   |
|                                                                                        |   |                                           |       |   |   |   |   |
|                                                                                        |   |                                           |       |   |   |   |   |
|                                                                                        |   | **For the  Year Ended December 31, 2002** | ** ** |
|                                                                                        |   | **Income  (Loss) (Numerator)**                 |       | **Shares  (000’s)  (Denominator)** |   | **Per-Share  Amounts** | ** ** |
| Loss from continuing operations before cumulative effect of change in  accounting principle |   | $                                              | (13,244    | ) |   |   |   |   |
| Less preferred stock dividends                                                              |   | (689                                           | )          |   |   |   |   |
| Basic and Diluted EPS:                                                                      |   |                                           |       |   |   |   |   |
| Loss from continuing operations available to common stockholders                            |   | $                                              | (13,933    | ) | 75,988 |   | $ | (0.18 | ) |
|                                                                                        |   |                                           |       |   |   |   |   |
|                                                                                        |   | **For the  Year Ended December 31, 2001** | ** ** |
|                                                                                        |   | **Income  (Loss) (Numerator)**                 |       | **Shares  (000’s)  (Denominator)** |   | **Per-Share  Amounts** | ** ** |
| Loss from continuing operations                                                             |   | $                                              | (3,457     | ) |   |   |   |   |
| Less preferred stock dividends                                                              |   | (690                                           | )          |   |   |   |   |
| Effect of minority interests                                                                |   | (3,228                                         | )          |   |   |   |   |
| Basic and Diluted EPS:                                                                      |   |                                           |       |   |   |   |   |
| Loss from continuing operations available to common stockholders                            |   | $                                              | (7,375     | ) | 58,793 |   | $ | (0.13 | ) |

 

In the year ended December2003, options and warrants to purchase approximately 2,531,700 shares of commonstock at prices ranging from $13.85 to $29.74 per share were not included inthe computation of diluted EPS as the effect would have been anti-dilutivebecause the options’ exercise price was greater than the average market priceof the common shares. 

 

In the year ended December31, 2002, options to purchase approximately 3,357,700 shares of common stock atexercise prices ranging from $1.04 to $13.09 per share were not included in thecomputation of diluted EPS, as the effect would have been anti-dilutive due tothe loss from continuing operations before cumulative effect of change inaccounting principle.  In the year endedDecember 31, 2001, options to purchase approximately 2,074,600 shares of commonstock at exercise prices ranging from $1.12 to $20.04 per share were notincluded in the computation of diluted EPS, as the effect would have beenanti-dilutive due to the loss from continuing operations.  In the year ended December 31, 2002, optionsto purchase approximately 3,963,900 shares of common stock at prices rangingfrom $13.18 to $29.74 were not included in the computation of diluted EPSbecause the options’ exercise price was

 

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greater than the average marketprice of the common shares.  In the yearended December 31, 2001, options to purchase approximately 1,206,800 shares ofcommon stock at exercise prices ranging from $20.70 to $47.50 per share werenot included in the computation of diluted EPS because the options’ exerciseprice was greater than the average market price of the common shares.

 

In 2003, 2002, and 2001,approximately 537,300, 538,400, and 459,900 shares of common stock,respectively, that could result from the conversion of cumulative convertiblepreferred stock were not included in the computation of dilutive EPS, as theeffect would have been anti-dilutive on the results of continuingoperations.  Similarly, in 2003, 2002and 2001, approximately 2,859,100, 6,776,500 and 5,038,000 shares,respectively, that could result from the conversion of the remarketable termincome deferrable equity securities (HIGH TIDES) were not included in thecomputation of diluted EPS.  The changein potential dilution from 2002 to 2003 for the HIGH TIDES is due to theirextinguishment on May 15, 2003.  Thechange in potential dilution from 2001 to 2002 for the HIGH TIDES and thepreferred stock is the change in conversion ratios due to the SureBeam spin-off(see Note 14).

 

***Comprehensive Income.***  Comprehensive income representsall changes in equity of an enterprise that result from transactions and othereconomic events of the period other than transactions with owners.  Comprehensive income is the total of netincome and all other nonowner changes in equity. 

 

During the years endedDecember 31, 2003, 2002, and 2001, Titan’s only element of other comprehensiveincome resulted from foreign currency translation adjustments, which arereflected in the consolidated statements of changes in stockholders’ equity asforeign currency translation adjustments within accumulated other comprehensiveincome. 

 

***Gain on Issuance of Stock in Subsidiary.***  In 2001, as a result of theSureBeam initial public offering and in accordance with the provisions of SECStaff Accounting Bulletin No. 51 (SAB 51) Titan recorded a gain of$52.0 million related to its equity interest in SureBeam.  In accordance with the provisions ofSAB 51, the transaction is reflected as an equity transaction, and the neteffect of the transaction is reflected in the accompanying ConsolidatedStatement of Stockholders’ Equity as “Gain related to issuance of stock insubsidiary”. 

 

**NewAccounting Standards**

 

In December 2002, the Financial AccountingStandards Board (FASB) issued SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”, which amends SFAS No. 123,“Accounting for Stock-Based Compensation” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement also amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements.  Certain of thedisclosure modifications are required for fiscal years ending after December15, 2002 and are included in the notes to these consolidated financial statements.

 

In December 2003, the SECissued Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB No. 104),which codifies, revises and rescinds certain sections of SAB No. 101, “RevenueRecognition”, in order to make this interpretive guidance consistent withcurrent authoritative accounting and auditing guidance and SEC rules andregulations.  The changes noted in SABNo. 104 did not have a material effect on our consolidated financial positionor results of operations.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  SFAS No. 149amends SFAS No. 133 by requiring that contracts with comparable characteristicsbe accounted for similarly and clarifies when a derivative contains a financingcomponent that warrants special reporting in the statement of cash flows.  SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003, and must be applied prospectively.  The adoption of SFAS No. 149 had no effecton our consolidated financial condition or results of operations.

 

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InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financialinstruments, which under previous guidance were accounted for as equity, mustnow be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock,certain financial instruments that require or may require the issuer to buyback some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock.  SFAS No. 150 is effective for all financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003.  Titan adopted SFAS No. 150 effectiveJuly 1, 2003, and the adoption did not have a material impact on ourconsolidated financial position or results of operations.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities” (FIN 46), which addresses the consolidation of certainentities (variable interest entities, or VIE’s) in which an enterprise has acontrolling financial interest through other than voting interests. FIN No. 46requires that a variable interest entity be consolidated by the holder of themajority of the expected risks and rewards associated with the activities ofthe variable interest entity. FIN 46 was effective for VIE’s entered into priorto February 1, 2003 in periods beginning after June 15, 2003.  The adoption of FIN 46 did not have amaterial impact on our consolidated financial condition or results ofoperations.   In January 2004, the FASBissued a revision to FIN 46 (FIN 46R), to clarify some requirements and add newscope exceptions.  The revised guidanceis effective for the first reporting period beginning after December 15,2003.  The adoption of the provisions ofFIN 46R is not expected to have a material impact on our consolidated financialcondition or results of operations.

 

InNovember 2002, the FASB’s Emerging Issues Task Force (EITF) issued EITFIssue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” EITF Issue No. 00-21 addresses how to determine whether arevenue arrangement involving multiple deliverables contains more than one unitof accounting for the purposes of revenue recognition and how the revenuearrangement consideration should be measured and allocated to the separateunits of accounting. EITF Issue No. 00-21 applies to revenue arrangementsentered into after June 15, 2003. The adoption of this statement did nothave a material impact on our consolidated financial condition or results ofoperations.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers, an interpretation of FASB Statements No. 5, 57 and 107 and a rescissionof FASB Interpretation No. 34.”  This Interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees issued.  TheInterpretation also clarifies that a guarantor is required to recognize, atinception of a guarantee, a liability for the fair value of the obligationundertaken. The initial recognition and measurement provisions of theInterpretation are applicable to guarantees issued or modified after December31, 2002 and has not had a material effect on Titan’s financial condition. The disclosure requirements are effective for financial statements of interimor annual periods ending after December 15, 2002.

 

InJuly 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated withExit or Disposal Activities” (SFAS 146). SFAS 146 is effective for exit or disposal activities initiated afterDecember 31, 2002.  This standardrequires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan. The standard replaces the existing guidance provided bythe FASB’s Emerging Issues Task Force (EITF) Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  Titan did not initiate any activities in2003 that would be included within the scope of this standard.

 

InApril 2002, the FASB issued SFAS No. 145, “Rescission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections as of April 2002”, which was effective for fiscal yearsbeginning after May 15, 2002. SFAS No. 145 rescinded SFAS No. 4and SFAS No. 64, which required that all gains and losses from extinguishmentof debt be aggregated, and if material, classified as an extraordinary item. Asa result of changes in the criteria, gains and losses from debt extinguishmentare to be classified as extraordinary only if they meet the criteria set forthin Accounting Principles Board (APB) Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and

 

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Infrequently OccurringEvents and Transactions.”  In accordancewith SFAS 145 and APB 30, the deferred debt issuance costs and otherextinguishment costs related to the HIGH TIDES were expensed uponextinguishment of that debt in 2003. The charge is reflected in the results of continuing operations as DebtExtinguishment Costs in the accompanying consolidated statement ofoperations.  Also in accordance withSFAS No. 145, 2002 debt extinguishment costs associated with the termination ofa senior credit facility have been reclassified from an extraordinary item toresults from continuing operations.  SeeNote 11 for further discussion of the charges.

 

**Note4.  Acquisitions**

 

On November 3, 2003,Titan acquired Advent Systems for total cash consideration, net of cashacquired, of approximately $12.1 million. Advent provides intelligence, surveillance, reconnaissance, support andmission planning services to the U.S. government.  The acquisition was to further Titan’s strategic goal ofacquiring government information technology companies that fit strategically withits government business.  Thetransaction was accounted for using the purchase method, and accordingly,results of operations of Advent Systems are included in our results ofoperations as of the date of purchase. The excess of the purchase price over the estimated fair market value ofthe net assets acquired was approximately $10.1 million, and has been reportedas goodwill.  Pro forma information related to the Advent Systemsacquisition has not been presented, as the effect on Titan’s results of operationsis not significant.

 

In January 2003, Titan announced thatthe agreement to acquire Science & Engineering Associates, Inc. (SEA), aprivately held provider of engineering and information technology services, hadexpired and that Titan and SEA mutually agreed not to extend the purchaseagreement at that time.  Direct costs of$1.2 million related to this transaction were included in exit andrestructuring charges and other in 2002 (see Note 6).

 

During 2002, we completedthree acquisitions within the U.S. Government business that were accounted forusing the purchase method and, accordingly, results of operations of theacquired companies are included in our operating results as of the date of thepurchase.  The following tablerepresents selected data regarding each acquisition.

 
| **Name**                   |   | **Date of  Acquisition** |   | **Consideration  Paid  and Accrued** |          | **Goodwill  and  Purchased Intangibles** |   |
|----------------------------|--------|--------------------------|--------|--------------------------------------|---------------|------------------------------------------|--------|
| Wave Science, Inc.         |   | September  12, 2002      |   | $                                    | 10.3 million  | *                                   | $      | 9.9  million |   |
| Jaycor, Inc.               |   | March 21,  2002          |   | $                                    | 103.5 million |                                     | $      | 49.9  million |   |
| International Systems, LLC |   | February 22,  2002       |   | $                                    | 7.3 million   | *                                   | $      | 7.8  million |   |

 

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*Consideration paid is subject to adjustment ifcertain earn-out conditions are achieved.

 

On September 12,2002, Titan completed the acquisition of 100% of the outstanding shares of WaveScience, Inc. (Wave Science), a privately held designer of radio components andcommunication systems, for a purchase price of approximately $8.5 millionin cash, subject to post-closing adjustments and indemnification obligations.  The acquisition was to further Titan’s goalof acquiring government information technology companies which fitstrategically with its government business, particularly the addition of WaveScience’s experienced engineering team. The purchase agreement provided for additional consideration of up to$3.0 million  based on achievingcertain revenue and profit margin targets for the two-year period beginningJanuary 1, 2002 through December 31, 2003, and additionalconsideration of up to $1.0 million based on the receipt of certaincontract awards through December 31, 2004.  Additional consideration of $1.8 million has been accrued atDecember 31, 2003, representing the total amount due based on the revenue andprofit margin targets through December 31, 2003, and was paid in February2004.  This additional purchase pricewas accounted for as an increase to goodwill. The additional consideration of up to $1 million for certain contractawards through December 31, 2004 may still be earned.  As the total consideration for the acquisition of Wave Sciencemay change based upon the receipt of contract awards through December 31, 2004,goodwill may change to reflect any such additional consideration.

 

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On March 21, 2002,Titan completed the acquisition of Jaycor, Inc. (Jaycor), a San Diego,California, based provider of information technology services and specializedcommunications and sensor products to further Titan’s goal of acquiringgovernment information technology companies which fit strategically with itsgovernment business.  At the closing,Titan issued approximately 4,919,500 shares of Titan common stock for all theoutstanding shares of common stock of Jaycor, based on an exchange ratio of0.50160 shares of Titan common stock for each share of Jaycor common stockat an aggregate value of $99.6 million, based on $20.24 per Titan share,the average trading price ending March 20, 2002, the date on which theformula for the purchase consideration became fixed.  The excess of the $99.6 million purchase price over theestimated fair market value of the net assets acquired ($57.6 million) wasapproximately $42.0 million.  InApril 2002, Titan obtained an independent valuation completed by BearingPoint to assist management in its purchase price allocation for the Jaycoracquisition.  The independent valuationwas used by Titan to allocate $38.1 million to goodwill and$3.9 million to intangible assets. The intangible assets consist of backlog, customer relationships andtrade name of $0.7 million, $1.3 million, and $1.9 million,respectively, which are being amortized over the estimated useful lives of 1year, 1 to 3 years and 5 years, respectively.  At December 31, 2003, the unamortized balance of purchased intangibleswas $1.8 million included in Other Assets in the consolidated balancesheet. The transaction value was increased by approximately $3.9 millionto an aggregate total of $103.5 million to reflect an additional 173,099shares issued in July to cover certain costs of the shareholders ofJaycor, and an additional 20,948 shares issued in July 2002 andAugust 2002 related to certain working capital adjustments.  The additional purchase price of $3.9 millionwas accounted for as an increase to goodwill resulting in goodwill of$45.9 million at December 31, 2003.

 

On February 22,2002, Titan completed the acquisition of International Systems, LLC(International Systems), which designs and builds low-cost combat systems forthe Department of Defense (DoD) and agencies of the DoD, to further Titan’sgoal of acquiring government information technology companies which fitstrategically with its government business. The purchase price, which aggregated approximately $1.8 million,was comprised of approximately 100,000 shares of Titan common stock, subject topost-closing adjustments and indemnification obligations.  In addition, additional consideration may bepaid based on the receipt of certain contract awards and the achievement ofdefined earnings level on all contracts by International Systems, whichconsideration may be satisfied with cash or our common stock.  The additional consideration for definedearnings levels will be equal to 20% of International Systems’ EBIT (earningsbefore income tax and benefit allowances) from certain specified defensetechnology programs for each year from 2002 to 2006 and 7.5% of InternationalSystems’ EBIT from those defense technology programs for each year from 2007 to2011.  In July 2002,100,000 shares of Titan stock valued at $1.2 million were issuedbased on the receipt of certain of these contract awards.  In July 2003, Titan issued 350,000 shares ofcommon stock valued at $3.3 million and paid $0.2 million in cash of additionalconsideration related to the receipt of these contract awards and thepercentage of EBIT earned in these contracts in 2002.  The value of the shares, in addition to the cash paid, wererecorded as an increase to goodwill. The additional consideration for contract awards was fully paid as of December31, 2003.  Additional consideration of$0.8 million has been accrued at December 31, 2003, representing the totalamount due based on EBIT achieved in 2003. In October 2002, under the provisions of the original purchaseagreement, Titan advanced $0.8 million to a former principal shareholderand current employee of International Systems. Such advance is evidenced by a promissory note which was secured by theshareholder’s purchase consideration of Titan shares and shares issuable uponachievement of certain milestones as provided under the original purchaseagreement.  This note is reflected as anOther Current Asset on the consolidated balance sheet at December 31, 2003, andwas paid in full by the former shareholder in January 2004.  As the total consideration for theacquisition of International Systems may change based upon the achievement ofdefined earnings levels, goodwill will change to reflect any such additionalconsideration.

 

During 2001, we completedthree acquisitions within the U.S. Government business that were accounted forusing the purchase method and, accordingly, results of operations of theacquired companies are included in our operating results as of the date of thepurchase.  The following tablerepresents selected data regarding each acquisition.  

 
| **Name**                                                        |   | **Date of  Acquisition** |       | **Consideration  Paid** |              | **Goodwill  and  Purchased Intangibles** |   |
|-----------------------------------------------------------------|--------|--------------------------|------------|-------------------------|-------------------|------------------------------------------|--------|
| **BTG, Inc.**                                                   |   | **November 27, 2001**    | ** ** | **$**                   | **135.5 million** | ** **                               | **$**  | **147.4 million** |   |
| **Datron Systems, Inc.**                                        |   | **September 28, 2001**   | ** ** | **$**                   | **48.9 million**  | ** **                               | **$**  | **28.5 million** |   |
| **Assets of Maxwell Technologies Systems  Division, Inc.** |   | **March 23, 2001**       | ** ** | **$**                   | **10.7 million**  | ** **                               | **$**  | **7.0 million** |   |

 

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On November 27, 2001, wecompleted the acquisition of BTG, Inc. (BTG), a provider of information technologysolutions and services primarily to the U.S. military and other governmentagencies, for $13.35 per BTG share.  Theacquisition was to further our goal of acquiring government informationtechnology companies which fit strategically with us.  We issued approximately 4,024,100 shares of Titan common stock atan aggregate value of $99.9 million, based on $24.814 per Titan share, theaverage trading price ending November 19, 2001, the date on which the formulafor consideration became fixed, and paid cash of $23.4 million for all theoutstanding shares of BTG common stock and assumed BTG stock optionsrepresenting approximately 734,200 shares of Titan common stock at an aggregatevalue of $12.2 million, based on an exchange ratio of approximately 0.5380shares of Titan stock for each share of BTG common stock.  We also paid off $37.1 million of BTG’soutstanding debt as of the closing date. The excess of purchase price over the estimated fair value of the netassets acquired was recorded as goodwill of $139.2 million, intangibleassets of $8.2 million and deferred compensation of $0.5 millionrelated to unvested options assumed. The intangible assets consist of backlog, customer relationships and astrategic relationship of $1.7 million, $5.5 million and$1.0 million, respectively, which are being amortized over the estimateduseful lives of 1 year, 2 to 5 years and 2 years, respectively.  At December 31, 2003, the unamortizedbalance of purchased intangibles was $3.3 million included in Other Assetsin the consolidated balance sheet.  Thedeferred compensation will be amortized over the remaining vesting period ofthe assumed options.

 

On September 28, 2001, wecompleted the acquisition of the remaining shares of Datron SystemsIncorporated (Datron), a provider of radio and satellite-based communicationsystems and broadband communication products for government and commercialmarkets, that were acquired through a stock for stock exchange tender offerthat closed in August 2001.  Theacquisition was to further our goal of acquiring government informationtechnology companies which fit strategically with us.  We issued approximately 2.3 million shares of Titan commonstock for all the outstanding shares of Datron common stock at an aggregatevalue of $44.9 million, based on $19.544 per Titan share, the averagetrading price ending July 27, 2001, the date on which the formula forconsideration became fixed, and assumed Datron stock options representingapproximately 437,000 shares of Titan common stock at an aggregate value of$4.0 million, based on an exchange ratio of approximately .81919 shares ofTitan common stock for each share of Datron common stock.  The transaction was accounted for as apurchase, and the excess of the purchase price over the estimated fair marketvalue of the net assets acquired was recorded as goodwill of $22.7 millionand intangible assets of $5.8 million. The intangible assets consist of backlog, customer relationships andtrademarks and patents of $1.0 million, $3.2 million and$1.6 million, respectively, which are being amortized over the estimateduseful lives of 1 to 2 years, 10 years and 5 years, respectively.  At December 31, 2003, the unamortizedbalance of purchased intangibles was $3.5 million included in Other Assetsin the consolidated balance sheet.

 

On March 23, 2001,our subsidiary, Titan Systems Corporation, consummated an agreement to purchasecertain assets from Maxwell Technologies Systems Division, Inc., asubsidiary of Maxwell Technologies, Inc., which specializes in research,development and technical services primarily for military applications.  The purchase price was approximately$11.5 million in cash, subject to post-closing adjustments andindemnification obligations, less a $1.7 million holdback, due 180 daysfrom the date of closing.  The initial$9.8 million of the purchase price was paid on April 2, 2001.  We received approximately $0.6 millionin July 2001 from Maxwell Technologies, Inc. resulting from the resolutionof post-closing working capital adjustments. Under the agreement, we had full recourse to the seller for all accountsreceivable not collected within 180 days of the closing date.  In October 2001, we paid approximately$1.5 million in full satisfaction of the $1.7 million holdback, as adjustedfor uncollected accounts receivable. The transaction was accounted for as a purchase, and the excess of thepurchase price over the estimated fair market value of the net assets acquired,was amortized on a straight line basis over 30 years until the adoption of SFASNo. 142 on January 1, 2002.  Theremaining unamortized balance of approximately $6.8 million at December31, 2003, was reflected as goodwill in the accompanying consolidated balancesheet.

 

During 2002,approximately $2.0 million was paid in satisfaction of purchase priceholdbacks for the SenCom Corporation acquisition made in 2000 and approximately$2.7 million was paid in satisfaction of purchase price

 

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holdbacks for the System Resources Corporationacquisition made in 1999.  Each of theseamounts had been recorded as liabilities in periods prior to January 1,2002.

 

In 1999, Titan’ssubsidiary, Titan Systems Corporation, acquired Atlantic AerospaceCorporation.  The terms of the acquisitionprovided for up to an additional $3 million in contingent considerationpayable based upon the award of future contracts.  During 2001, approximately $1.2 million of contingentconsideration was paid upon the award of certain contracts.    In the third quarter of 2003, Titan paid$1.8 million in full satisfaction of the contingent consideration payable.  All amounts paid in 2001 and 2003 had beenpreviously accrued.

 

In connection with thedetermination of the fair value of assets acquired in connection withacquisitions in 2001, 2000 and 1999, and pursuant to the provisions of SFAS No.141, we have valued acquired contracts in process at contract price, minus theestimated costs to complete and an allowance for the normal industry profit onits effort to complete such contracts. This adjustment has been reflected in the accompanying consolidatedbalance sheet as an increase to goodwill and a corresponding increase todeferred profit.  We recognizedapproximately $0.2 million, $2.3 million, and $2.8 million as areduction of costs against the deferred profit in 2003, 2002, and 2001,respectively.  The remaining amount of$0.6 million at December 31, 2003 is estimated to reduce costs through2007.

 

**Note5.  Impairment Charge Related toSureBeam**

 

Priorto and in connection with the spin-off of SureBeam Corporation, Titan andSureBeam entered into a number of agreements. Titan extended a $50 million senior secured revolving creditfacility of which $25 million in principal was advanced and is outstandingas of December 31, 2003.  The seniorcredit facility is secured by a lien on substantially all of SureBeamassets.  In addition, Titan guaranteedcertain lease obligations of SureBeam and subleased facilities toSureBeam.  Titan is SureBeam’s onlysenior secured lender.  The aggregateamount of the lease obligations Titan has guaranteed as of December 31, 2003 isapproximately $18.6 million.  Theleases extend through periods ending in 2023. The aggregate amount due to Titan as of December 31, 2003, for futureobligations under the sublease agreements for approximately 63,800 square feetfor periods through 2010 is approximately $4.9 million.  SureBeam’s obligation to reimburse Titan forany amounts paid under the guarantees is secured under the senior creditfacility*.*

 

OnJanuary 19, 2004, SureBeam voluntarily filed for bankruptcy relief to beliquidated under Chapter 7 of the United States Bankruptcy Code.  As a result of this filing, Titan recordedan estimated pre-tax impairment charge of $15.8 million (and an associated taxbenefit of $6.3 million) in the fourth quarter of 2003 related to the seniorcredit facility with SureBeam as well as SureBeam’s other indebtedness andobligations to us.  The ultimate amountof impairment to be recognized is contingent upon the amount of actual proceedsrecovered by Titan from the liquidation of collateral securing the seniorcredit facility.  The current estimateof such proceeds, which includes estimated sales of equipment and inventory,primarily electron beam systems and other related components, is approximately$9.0 million.  The ultimate impairmentis also dependent upon Titan’s ability to mitigate its obligations under thefacilities lease guarantees through subleases and loan repayments from HawaiiPride (as discussed below).  The currentestimate of such mitigation of obligations under leases and lease guarantees isapproximately $16.8 million.  Theimpairment charge was  offset by an $8.1million liability previously accrued by Titan to SureBeam under a TaxAllocation Agreement.  The actual amountof Titan’s losses could be lower or higher than currently estimated dependingon the amount of SureBeam liquidation proceeds received and the amount of netpayments made under its lease guarantees issued on behalf of SureBeam and bankdebt guarantee related to Hawaii Pride.

 

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On March 4,2004, Titan entered in a settlement agreement with the bankruptcy trustee forSureBeam and its subsidiary.  Thesettlement agreement requires bankruptcy court approval to becomeeffective.  Under the settlementagreement, Titan will have an allowed secured claim in the amount of a minimumof approximately $47.9 million and a first priority perfected lien on allassets of SureBeam other than certain identified assets of SureBeam.  Upon effectiveness of the settlementagreement, the automatic stays in the bankruptcy will be modified to permitTitan to exercise Titan rights and remedies as a secured creditor andsublessor, including the right to dispose of collateral.  As part of the settlement, Titan also agreedto undertake commercially reasonable efforts to collect two receivables ofSureBeam that by agreement are excluded from Titan collateral and to deliverthe proceeds to the bankruptcy trustee.

 

Inrelation to SureBeam’s strategic alliance with Hawaii Pride, Titan hasguaranteed repayment of Hawaii Pride’s bank debt up to the greater ofSureBeam’s equity interest in Hawaii Pride (which is zero), or 19.9% of HawaiiPride’s $6.8 million, 15-year loan from its lender, WebBank.  As of December 31, 2003, Titan hasguaranteed approximately $1.2 million, or 19.9% of the current loanbalance of $5.9 million.  In theevent that Hawaii Pride defaults on the loan, Titan currently expects to beobligated to cover any defaults on the entire outstanding balance of the loanif the default is not cured within 90 days. In late October 2003, Titan was notified by Hawaii Pride that HawaiiPride had stopped receiving financial support from SureBeam and did not havesufficient cash resources to make its monthly principal and interest paymentsto WebBank.  Through March 8, 2004,Titan has loaned approximately $0.2 million to Hawaii Pride under a new creditfacility for a maximum amount of $0.45 million to be advanced to Hawaii Prideto cover shortfalls in debt service payments. All amounts outstanding under this facility are required to be repaid byMay 2005.  In the impairment chargediscussed above, Titan has assumed that Hawaii Pride will repay amountsadvanced on the new credit facility.

 

OtherAgreements.  In connection with the license Titan purchased to useSureBeam’s intellectual property, the remaining unamortized balance of$7.0 million at December 31, 2003, is reflected as a non-current asset inOther Assets in the consolidated balance sheet.  The license is being amortized over a 15 year life, the averagelife of the related patents.  Thelicense was purchased in September 2001, and includes a world-wide perpetualand exclusive, non-royalty bearing license to use SureBeam’s intellectualproperty for all applications and fields other than the food, animal hide andflower markets.  Titan has utilized thistechnology for its contract with the U.S. Postal Service to provide mailsanitization systems.

 

**Note 6.  Exitand Restructuring Charges and Other**

 

Included in the yearended December 31, 2002, is $53.3 million of restructuring costs relatedto the merger of Titan Systems into Titan on September 25, 2002, and exitcharges related to the shutdown of Cayenta’s headquarters office.  Approximately $11.7 million of theseexit charges are related to the shutdown of the Cayenta headquarters office andnetwork operations center, which includes employee termination costs and otherliabilities of approximately $4.5 million, lease commitment costs ofapproximately $4.8 million, and non-cash asset impairment charges ofapproximately $2.4 million relating primarily to the unamortized leaseholdimprovements and other fixed assets at the Cayenta headquarters.  The remaining lease commitment costs areexpected to be paid through future periods ending in January 2007.  Included in the employee termination costswere 33 personnel reductions.

 

Approximately$39.9 million of the restructuring charges were related to the merger ofTitan Systems into Titan and other associated reorganization and consolidationcosts.  The costs included approximately$32.2 million for the consolidation of various Titan Systems facilitiesinto centralized locations in Virginia and California.  This charge reflects the estimated losses,net of estimated sublease income, on future lease commitments of facilitieswith terms extending through year 2009. Titan has subleased certain of these facilities and continues toactively pursue additional sublease opportunities for the remainingfacilities.  However, the remainingavailable space is in markets adversely affected by the economy and may not besubleased at attractive rates or at all. The actual amount of estimated losses on these lease commitments couldchange based upon Titan’s ability to obtain sublease arrangements for thesefacilities.  Included in the employeetermination costs are 19 personnel reductions.

 

Approximately$7.7 million of the Titan Systems restructuring costs were primarily relatedto employee termination costs, employee retention costs, duplicate transitioncosts and professional fees related to acquisitions and certain reorganizationand consolidation activities within Titan Systems.

 

The remaining $1.7million was related to direct transaction costs incurred by Titan onacquisitions that did not close, primarily the Science and EngineeringAssociates, Inc. proposed acquisition.

 

AtDecember 31, 2003, accruals for all exit and restructuring charges totaled$27.9 million, comprised primarily of restructuring charges related to themerger of Titan Systems into Titan on September 25, 2002 and exit chargesrelated to the shutdown of Cayenta’s headquarters office.  These exit and restructuring activities wereaccounted for under EITF Issue No. 94-3, which allowed accrual of restructuringcosts upon commitment to a plan and certain other criteria.  Effective January 1, 2003, Titan wasrequired to adopt SFAS No. 146 “Accounting for Costs Associated with Exit orDisposal Activities”.  SFAS No. 146requires companies to defer recognition of a liability for a cost associatedwith an exit or disposal activity until that liability is incurred and can bemeasured at fair value.  As theserestructuring activities were entered into prior to our adoption of SFAS No.146, Titan has accounted for these activities under EITF 94-3.  A summary of exit and restructuring charges and otherrecorded and the utilization of those accruals during the years ended December31, 2002 and 2003 is as follows:

 

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|                                                      |   | **Charges  recorded  in 2002** |   | **Asset  Disposals** |   | **Cash paid  2002** |   | **Balance  December  31,  2002** |   | **Cash paid  2003** |   | **Balance  December 31,  2003** |   |
|-----------------------------------------------------------|--------|--------------------------------|--------|----------------------|--------|---------------------|--------|---------------------------------------|--------|---------------------|--------|---------------------------------|--------|
| Titan Systems restructuring:                              |   |                           |   |                 |   |                |   |                                  |   |                |   |                            |   |
| Estimated facilities consolidation costs                  |   | $                              | 32,226 |                 | $      | —              |   | $                                     | 155    |                | $      | 32,071                          |   | $ | 4,775 |   | $ | 27,296 |   |
| Employee termination/retention costs  and other |   | 7,703                          |   | —               |   | 5,965               |   | 1,738                                 |   | 1,738               |   | —                          |   |
|                                                      |   | 39,929                         |   | —               |   | 6,120               |   | 33,809                                |   | 6,513               |   | 27,296                          |   |
| Transaction costs for unsuccessful deals                  |   | 1,726                          |   | —               |   | 1,129               |   | 597                                   |   | 597                 |   | —                          |   |
|                                                      |   | 41,655                         |   | —               |   | 7,249               |   | 34,406                                |   | 7,110               |   | 27,296                          |   |
| Cayenta headquarters exit costs:                          |   |                           |   |                 |   |                |   |                                  |   |                |   |                            |   |
| Lease commitment costs                                    |   | 4,816                          |   | —               |   | 1,680               |   | 3,136                                 |   | 2,511               |   | 625                             |   |
| Asset impairment costs                                    |   | 2,444                          |   | 2,444                |   | —              |   | —                                |   | —              |   | —                          |   |
| Employee termination costs and other                      |   | 4,402                          |   | —               |   | 4,183               |   | 219                                   |   | 212                 |   | 7                               |   |
|                                                      |   | 11,662                         |   | 2,444                |   | 5,863               |   | 3,355                                 |   | 2,723               |   | 632                             |   |
|                                                      |   | $                              | 53,317 |                 | $      | 2,444               |   | $                                     | 13,112 |                | $      | 37,761                          |   | $ | 9,833 |   | $ | 27,928 |   |

 

AtDecember 31, 2003, $16.4 million of the exit and restructuring accrualsare included in Other Accrued Liabilities on the consolidated balance sheet and$11.5 million are included in Other Non-current Liabilities.  The remaining accrual balance is primarilycomprised of amounts due under the facilities consolidation, which requirespayments in 2004 for certain lease cancellation fees and other lease costs, netof assumed sublease income, with the remainder expected to be paid over theremaining lease terms, which expire in 2009.

 

**Note7.  Acquisition and Integration Related Charges and Other**

 

 Acquisition andintegration related charges and other of $27.9 million in 2001 included$12.2 million related to the integration of ACS and AverStar and otherrestructuring and realignment activities in our government business, a$5.5 million impairment charge for fixed assets associated with Cayenta’snetwork operations center and $10.0 million related to other assetimpairments and restructuring activities associated with Cayenta’s headquartersoffice, and $0.2 million related to personnel reductions in Cayenta’sfederal government business, which is now a part of Titan’s core governmentbusiness.  Liabilities of $1.3 millionrelated to the charges remained at December 31, 2001, which were paid in 2002.

 

**Note8.  Discontinued Operations**

 

***2002 Discontinued Operations***

 

In August 2002,Titan’s board of directors made the decision to sell or otherwise divest itsLinCom Wireless business and to sell our remaining commercial informationtechnology business, both of which were previously reported in our TitanTechnologies segment.  Accordingly,Titan has reflected both operations as discontinued in accordance with SFASNo. 144.  In October 2002, theLinCom Wireless business was shut down. The remaining commercial information technology business is currentlyheld for sale.

 

In July 2002, Titan’sboard of directors made the decision to exit all of our internationaltelecommunications business through a combination of selling and winding downour operations within our Titan Wireless segment.  Titan immediately began implementing these actions, which weresubstantially completed during 2003*. *We reported this exit of theTitan Wireless segment as a discontinued operation in accordance with SFASNo. 144.

 

During the first quarterof 2002, Titan’s board of directors made the decision to sell certain of itscommercial information technology operations within the Cayenta segment and theAverCom business within the Titan Technologies segment.  These businesses were sold in 2002.

 

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Inthe third quarter of 2003, Titan completed the sale of its GlobalNetbusiness.  Payments received for thesale of GlobalNet consisted of approximately $2 million in cash, notesreceivable of approximately $1.5 million, and the buyer’s assumption of all ofthe outstanding liabilities of GlobalNet, which aggregated to approximately$21 million at the time of the consummation of the sale.  Titan has collected approximately $0.5million of the amounts due under the notes receivable, and expects to collectthe remaining $1 million in the first quarter of 2004.  The AverCom business was sold in July 2002. In accordance with SFAS No. 144,all commercial operations that have been sold or are held for sale have beenreflected as discontinued operations for all periods presented in Titan’sconsolidated financial statements.

 

*TitanWireless*

 

Overview

 

On July 11, 2002,Titan announced it would exit all of its international telecommunicationsbusiness, directly as a result of an increasingly deteriorating market,particularly in the wholesale long distance business.  Notably, the bankruptcies of Global Crossing, Ltd., WorldCom,Inc. and Phone1Globalwide Corporation (formerly Globaltron Corporation), andthe dire financial condition of other providers, such as ibasis, imposed arapid and sudden deterioration in wholesale prices in 2002.  As a direct result of decreasing wholesalemargins, and the difficulty of providers to obtain financing to invest in newprojects globally, Titan’s telecommunications business operating resultsdeclined substantially beginning in the second quarter of 2002.  The losses in the second quarter of 2002 andthe bleak outlook of the telecommunications market globally led to theJuly 2002 Titan board of directors decision to exit these markets.  Titan has substantially completed the saleand winding down of all of its operations within Titan Wireless, including allof the operations discussed below.

 

Acquisitions and Investments

 

*GlobalNet,Inc.*

 

On March 21, 2002,Titan completed the acquisition of GlobalNet, Inc. (GlobalNet), a provider ofinternational voice, data, and Internet services.  Titan issued approximately 1,452,800 shares of common stock forall the common stock of GlobalNet at an aggregate value of $28.6 million,based on $19.67 per Titan share, the average trading price endingMarch 15, 2002, the date on which the formula for consideration becamefixed, and assumed stock options and warrants representing approximately 77,900 sharesof Titan common stock at an aggregate value of $0.8 million, based on anexchange ratio of 0.3853 shares of Titan common stock for each share ofGlobalNet common stock.  GlobalNet’soperations from March 22, 2002 were reported in our Titan Wirelessbusiness, which was discontinued in the third quarter of 2002.  The transaction was accounted for as apurchase.  The excess of the purchaseprice of $29.4 million over the estimated fair market value of the netliabilities acquired of approximately $26.4 million was approximately$55.8 million.  In April 2002,Titan obtained an independent valuation completed by independent valuationspecialists Bearing Point to assist in its purchase price allocation of theGlobalNet acquisition.  The independentvaluation was used by Titan to allocate $55.8 million to goodwill and $0to intangible assets as of March 31, 2002.

 

As a result of Titan’sdecision on July 11, 2002, to exit its telecommunications business and tosell certain of these businesses, Titan determined in the third quarter of 2002that there was an impairment of the carrying value of GlobalNet’s goodwill ofapproximately $55.8 million in accordance with SFAS No. 142.  The measurement of this impairment wasevident based upon estimates of fair value, as determined by recent offers frompotential buyers, compared to the carrying value of the asset.  As discussed above, Titan completed the saleof its GlobalNet business in the third quarter of 2003.  The sale resulted in a gain of $12.2million, resulting from a previous write-down of the carrying value of the netassets, which ultimately was recovered at the time of the sale.

 

*Ivoire Telecom*

 

 On June 28, 2000, Titan WirelessAfripa Holding, Inc., a subsidiary of Titan Wireless, made a $5 millioninvestment to acquire 80% of the outstanding equity interests in Ivoire TelecomS.A., a Luxembourg-chartered

 

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company thatintended to engage, through various majority-owned local subsidiaries, in awireless telecommunications business in Africa using a satellite uplink throughFrance.  Titan’s primary long-terminvestment objective was to acquire through the various majority-owned localsubsidiaries of Ivoire Telecom what Titan considered to be potentially valuabletelecommunications licenses in African countries, build out a supportingnetwork and backbone system to carry traffic in these countries and then,ultimately, to realize its investment by sale of the fully operationalbusiness.  This investment wassubsequently sold in 2003 for approximately $0.5 million cash consideration.

 

At the time of the initial equity investment, Titan also advanced anadditional $5.5 million to Ivoire Telecom for working capital in exchangefor a promissory note.  In addition,Titan agreed to lend Ivoire Telecom up to $35 million in additional fundspursuant to a line of credit agreement. Such funds were to be used for capital and other expenditures necessaryto acquire licenses, fund operations and construct and build out the necessaryinfrastructure of Ivoire Telecom’s telecom network in Africa.  To that end, Titan also contributedequipment with an approximate aggregate value of $4.5 million to IvoireTelecom.

 

At the time Titan made its investment, Ivoire Telecom held only a fewlicenses and was just beginning operations and the build-out of itsnetwork.  Titan had arranged to workwith Ivoire Telecom’s chief executive officer to enhance Ivoire Telecom’sexisting system of financial controls, policies and procedures such that Titanwould have the ability to exercise significant influence through its status asthe majority stockholder over each of Ivoire Telecom’s operating subsidiaries,through which the business was to be conducted.  As part of this effort, it was Titan’s plan to develop and havein place a system of financial controls, policies and procedures sufficient forU.S. financial reporting purposes and conforming to the requirements of Section13(b) of the Securities Exchange Act of 1934. In pertinent part, subsection (2) of that section of the Exchange Actrequires Titan to: 

 

 
|   | (A)     | Make and keep books, records, and accounts which, in reasonable  detail, accurately and fairly reflect the transactions and dispositions of  assets of Titan; and |
|--------|-----------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                        |                                                                                                                                                              |
|   | (B)     | Devise and maintain a system of internal accounting controls  sufficient to provide reasonable assurances that:                                                   |
|   |                        |                                                                                                                                                              |
|   |                        | (i)                                                                                                                                           | Transactions are executed in accordance with management’s general or  specific authorization; |
|   |                        |                                                                                                                                                              |
|   |                        | (ii)                                                                                                                                          | Transactions are recorded as necessary (I) to permit preparation of  financial statements in conformity with generally accepted accounting  principles or any other criteria applicable to such statements, and (II) to  maintain accountability for assets; |
|   |                        |                                                                                                                                                              |
|   |                        | (iii)                                                                                                                                         | Access to assets is permitted only in accordance with management’s  general or specific authorization; and |
|   |                        |                                                                                                                                                              |
|   |                        | (iv)                                                                                                                                          | The recorded accountability for assets is compared with the existing  assets at reasonable intervals and appropriate action is taken with respect  to any differences. |

 

Titan encountered significant difficulties in obtaining consolidatedfinancial results from Ivoire Telecom shortly after the initial investment wasmade.  The difficulties in obtainingaccurate and timely financial information were further complicated by therapidly growing business of Ivoire Telecom, which expanded from a start-upbusiness to a company with 14 operating subsidiaries in various countries.  Although this rapid growth was contemplatedby the business plan and positive from a business perspective, it producedmultiple-currency and multiple-entity consolidation implications.  Beginning in July 2000, the Chief FinancialOfficer of Titan Wireless and other Titan personnel made regular trips,generally on a monthly basis, to Ivoire Telecom’s headquarters to attempt towork directly with Ivoire Telecom’s accounting staff and management to improvereporting awareness and capability. After Titan’s repeated attempts to obtain the requisite financialinformation were unsuccessful, Titan was forced to conclude that enhancingIvoire Telecom’s existing system of financial controls, policies and proceduresto a system sufficient for U.S. financial reporting purposes was not a priorityof Ivoire Telecom’s management and accounting personnel.

 

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Titan engaged a global independent public accounting firm to audit thefinancial statements of Ivoire Telecom for the year ended December 31,2001.  The independent public accountingfirm did not complete its audit procedures due to difficulties encountered inresolving open audit issues. Specifically, the independent public accounting firm reported that therewere weaknesses in internal controls, inconsistent accounting policies andprocedures, and limited use of management information systems, all resulting inthe inability of Ivoire Telecom to prepare and report accurate financialstatements sufficient for U.S. financial reporting purposes.  All of Titan’s requests and other directactions have resulted in no success in obtaining timely and reliable financialstatements meeting U.S. standards from Ivoire Telecom.

 

Titan consolidated the operating results of Ivoire Telecom for theperiod from July 1, 2000 through December 31, 2000 in Titan’s reporting periodfrom October 1, 2000 through March 31, 2001 (reflecting a three month reportinglag), which cumulative results included approximately $0.4 million ofrevenues and $3.4 million of pre-tax operating losses.  During the second quarter of 2001, however,Titan appropriately concluded that, as a result of its inability to control orexert significant influence on Ivoire Telecom’s financial policies, Titanceased consolidation and determined that the cost method was appropriate.

 

Additionally, Titan believes that it has taken all actions necessary tobe kept well informed of Ivoire Telecom’s business, network build-out and useof proceeds from the advances through regular operational status reports andcontinuing discussions with Ivoire Telecom’s management and major equipmentproviders, as well as through the physical installation, test and inspection ofassets and equipment purchased using such proceeds.  Specifically, Titan Wireless’s technical team performedin-country installation and test procedures on selected network equipment, andprovided direct installation guidelines to Ivoire Telecom’s equipmentproviders.  Further, Titan Wirelessmanagement performed periodic site visits of the significant subsidiaries,which included a physical verification of the significant network assets.  As a result of this continuing interactionwith Ivoire Telecom and the verification from its customers that Ivoire Telecomwas in fact carrying long distance traffic over the network, Titan was able tomonitor the use of Ivoire Telecom’s assets and equipment.  In this regard, Titan believes that itscontrols were sufficient to have reasonable assurances that the assets wereused in accordance with Titan’s authorization of the advances.

 

Titan engaged in substantial efforts to establish appropriate financialcontrols and procedures to enable accurate and timely reporting of financialresults of Ivoire Telecom.  Theseefforts, as discussed above, were not successful, leading Titan to ceaseconsolidating the operating results of Ivoire Telecom and reporting itsinvestment on the cost method.  Whileinadequate to support continued consolidation, Ivoire Telecom did have adequatecontrols and practices in place to permit Titan to monitor the use of funds byIvoire Telecom to acquire telecommunications equipment, licenses, and relatedinfrastructure in accordance with the business plan developed by IvoireTelecom.  Accordingly, Titan believesthat it complied with the requirements of Section 13(b) noted above in allmaterial respects.  In the third quarterof 2002, the entire carrying value of the investment of approximately$52 million was determined to be impaired and written off.  In the second quarter of 2003, Titansold its interest in Ivoire Telecom for consideration of approximately $0.5million cash.

 

*SakonLLC*

 

In January 1999, theCompany invested approximately $0.5 million for a 19.9% ownership interestin a joint venture with Sakon.  InJuly 2000, Titan loaned Sakon $15 million pursuant to a loan agreement.  In October 2000, Titan exercised itsoption pursuant to the loan agreement to convert amounts owed under the loaninto additional equity interest of 30.0% of Sakon, bringing the total equityinterest in Sakon to 49.9%.  This equityinterest was converted in August 2002 from a 49.9% voting interest to a 15%voting interest and a 34.9% non-voting interest.  At such time, the amount outstanding of $15 million underthe loan was converted to purchase consideration as the initial payment dueunder the terms of the agreement and recorded as goodwill.  Under the terms of the agreement, anadditional $12.5 million of consideration was due and payable upon certainrevenue targets being attained.  Thesetargets were met in January 2001, and a $5.0 million installment was madein the second quarter of 2001, a $3.75 million installment was made in thefirst quarter of 2002, and the remainder was paid in the third quarter of2002.  The excess of the purchase priceover the estimated fair market value of the net assets acquired, which has beenamortized over 20 years, was approximately $26.8 million at December 31,2001.  In connection with the newrequirements for evaluation of goodwill under SFAS No. 142, the$26.8 million was determined to be impaired and

 

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was fully expensed in the third quarter of 2002.  Prior to August 2002, Titan consolidated theoperating results of Sakon due to Titan’s ability to control and significantlyinfluence the operations and policies of Sakon, in accordance with a managementagreement with Sakon.  In August 2002,the management agreement was modified to nullify Titan’s ability to controlSakon, and Titan resigned from the management committee of Sakon.  Accordingly, Titan has no ability tosubstantially influence or control the operations of Sakon.  Thereafter, Titan’s investment in Sakon hasbeen accounted for under the cost method, for which the investment carryingvalue was written down to zero in 2002.

 

*Benin*

 

OnDecember 10, 1999, Titan’s wholly owned subsidiary, Titan Africa, Inc. (TitanAfrica), in connection with its contract to build a satellite-based telephonesystem for its customer, the national telephone company of Benin, Africa (theOPT), entered into a Loan Facility agreement for up to 30.0 billion Francs CFA(the currency of the African Financial Community), equivalent to approximately$45.0 million U.S. dollars, with a syndicate of five banks, with AfricaMerchant Bank as the arranger.  Thisfinancing was subsequently increased by 6.0 billion francs CFA to approximately$54.0 million.  This medium termfinancing is a non-recourse loan to Titan Africa which is guaranteed by thenational telephone company of Benin, Africa and secured by the nationaltelephone company’s equipment and revenues related to the project.  The facility has a fixed interest rate of9.5% per year and was originally to be repaid in seven equal semi-annualpayments from the net receipts of this project, or by the OPT in the event thatsuch receipts are not adequate to make these payments, which commenced onDecember 31, 2000 and were scheduled to end on December 31, 2003.  The payment terms were subsequently amendedcalling for quarterly payments through mid 2006.  The borrowings on this facility have been utilized to fundvarious equipment and subcontractor costs incurred most notably by Alcatel ofFrance, a major subcontractor to this project.

 

Related to Titan’s contract with the OPT, Titan has a$46.2 million gross receivable due from the OPT, which is reflected inCurrent Assets of Discontinued Operations as of December 31, 2003.  Of this amount, approximately$32.3 million is recorded as a receivable on the project, reflecting theoutstanding balance on the non-recourse loan, drawn to cover subcontractcosts.  The remaining $14 million netreceivable represents amounts due from the OPT under the Titan settlementagreement entered into with the OPT. Titan entered into the settlement in October 2003 pursuant to whichTitan was to be paid $29.5 million in full satisfaction of Titan’s performanceon the OPT contract, of which $14 million remains outstanding as of December31, 2003.

 

Operating Results

 

For the year endedDecember 31, 2003, Titan Wireless generated $71.5 million of revenues andnet income of $1.0 million, net of a $7.4 million tax benefit.  The revenues were primarily generated by theGlobalNet business for the period prior to the sale of the business in thethird quarter of 2003.  The net income wasprimarily a result of operating losses of $2.8 million, and the gain from thedisposition of the GlobalNet business of $12.2 million, resulting from aprevious write-down of the carrying value of the net assets, for which a taxprovision was not provided due to prior losses.  The gain was offset by impairment charges of $10.8 millionresulting from the terms of the settlement agreements with Titan’s customers inNigeria and Benin, and by approximately $5 million of charges accrued for theexit activities in Benin.  Included inthe operating losses of Titan Wireless for 2003 is interest expense allocatedto discontinued operations of $0.7 million.

 

Included in TitanWireless’ net loss for the year ended December 31, 2002 are impairment chargesof $211.4 million, or $137.4 million, net of tax, that were recordedas a result of Titan’s decision to exit its international telecommunicationsbusiness.  The charges were comprised ofthe following:  (1) impairment of goodwill in accordance with SFASNo. 142 of approximately $74.8 million, primarily comprised of Titan’s acquisition of GlobalNet discussed aboveand Sakon, recorded in accordance with SFAS No. 142; (2) impairment ofinvestments of approximately $62.6 million, primarily comprised of Titan’sinvestment in Ivoire Telecom discussed above; (3) and impairment of fixed and otherassets of approximately $74.0 million.

 

Inaddition, exit charges of approximately $20.1 million were recorded in thethird quarter of 2002, primarily related to outstanding commitments of warrantyobligations of $3.9 million, commitments for space satellite

 

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segments of$3.0 million, and outstanding lease obligations of $1.6 million.  The remaining $11.6 million of thecharge is primarily related to employee termination costs of $2.6 million,other estimated direct costs to exit these businesses of $4.0 million andthe estimated settlements of other obligations of approximately$5.0 million.  Such commitments areexpected to be paid through the first half of 2004.  As of December 31, 2003, approximately $9.8 million isincluded in current liabilities of discontinued operations.

 

Insummary, included in Titan Wireless’ net loss for 2002 is an impairment chargeof $211.4 million, exit charges of $20.1 million and pre-tax lossesexcluding impairment and exit charges of $8.8 million for the year endedDecember 31, 2002.  Included in theoperating losses of Titan Wireless for 2002 is interest expense allocated todiscontinued operations of $0.7 million.

 

*Titan Technologies*

 

Forthe year ended December 31, 2003, the discontinued operations of TitanTechnologies had revenues of approximately $13.8 million and a net loss of $1.9million, net of a tax benefit of $8.2 million. The loss was comprised of a $7.4 million operating loss and a $2.7million impairment loss recorded to reflect the most recent indications of fairvalue of the carrying value of the net assets.  Included inthe results for Titan Technologies is a tax benefit of $2.3 million to reflectthe estimated tax impact of adjusting the carrying value of certain assetswhich are currently held for sale related to the remaining commercialinformation technology business that was formerly reported in the TitanTechnologies segment.  Included in theoperating losses of 2003 is interest expense allocated to discontinuedoperations of $0.4 million.

 

For the year endedDecember 31, 2002, the discontinued operations of Titan Technologies generatedrevenues of $31.4 million and a net loss of $48.0 million, net of a$20.6 million tax benefit.  Included in Titan Technologies’ net loss for2002 is an impairment charge of $43.7 million, related to LinCom Wireless,AverCom and Titan’s commercial information technology business.  The measurement of this impairment is basedupon indications of fair value, resulting in a write-off of the carrying valueof its assets which included an impairment of goodwill of $21.0 million,in accordance with SFAS No. 142, and impairment of other assets of$22.7 million consisting primarily of fixed assets and capitalizedsoftware.  In addition, exit charges ofapproximately $4.3 million were recorded primarily related to employeetermination costs, lease termination costs and other outstanding commitments.

 

In September 2002,certain assets of the AverCom business were sold for $0.5 million cash andan earn-out of $0.6 million of additional consideration based on certaingross margin targets.  In addition,Titan retained approximately $3.0 million of net accounts receivablebalances, which were substantially collected by December 31, 2002.  In addition to the impairment of goodwill of$21.0 million, a charge of $14.9 million was recorded on January 1,2002, when Titan adopted SFAS No. 142 which was reported as a cumulativeeffect of a change in accounting principle.

 

In addition to theimpairment charges discussed above, pre-tax losses excluding impairment andexit charges for the Titan Technologies businesses for 2002 were$20.5 million.  Included in theoperating losses for 2002 is interest expense allocated to discontinuedoperations of $0.8 million.

 

*Cayenta*

 

In July 2002, thetwo information technology businesses of Cayenta were sold, for cash receivedto date of $0.2 million.  For the yearended December 31, 2002, these businesses generated revenues of $6.4 millionand a net loss of $4.8 million, net of a tax benefit of$2.7 million.  Included in the netloss is a charge for goodwill impairment in accordance with SFAS No. 142associated with these two businesses of approximately $1.1 million, andother asset impairments of approximately $3.2 million.  In addition, a $27.5 million impairmentof goodwill was recorded on January 1, 2002, when Titan adopted SFASNo. 142 which was reported as a cumulative effect of a change inaccounting principle.  In addition tothe impairment charges noted above, operating losses, net of tax, for the yearended December 31, 2002 were $3.2 million, and included$0.1 million in interest expense allocated to discontinued operations.

 

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The consolidatedfinancial statements of Titan for all periods presented have been restated toreflect all businesses discussed above as discontinued in accordance with SFASNo. 144.

 

***2001 Discontinued Operations***

 

On March 16, 2001,SureBeam Corporation, Titan’s former subsidiary that provided electronicirradiation systems and services, completed an initial public offering (IPO) of6,700,000 shares of Class A common stock at a price of $10 per share.  On October 16, 2001, Titan adopted adefinitive plan to spin off SureBeam in the form of a tax-free dividend toTitan stockholders within the next 12 months from that date.  The plan involved filing a letter rulingrequest with the IRS to obtain approval of the tax-free distribution.  Titan received a favorable ruling in May2002, and on August 5, 2002, Titan’s remaining ownership interest in SureBeamwas spun-off to Titan stockholders as a tax-free dividend.  Prior to the adoption of the spin-off plan,Titan reported the SureBeam business as a separate segment.  In accordance with Accounting PrinciplesBoard Opinion No. 30, “Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” the consolidated financialstatements of Titan for all periods prior to the spin-off have been restated toreflect SureBeam as a discontinued business. The net assets of SureBeam as of August 5, 2002 and tax liabilitiesand other costs resulting from the spin-off resulted in a net dividend ofapproximately $105.4 million which was recorded as a decrease topaid-in-capital, partially offset by the reduction in deferred compensationrelated to deferred compensation charges in 2000 and 2001, reflecting the netvalue distributed to Titan’s stockholders. The net assets excluded SureBeam’s liability to Titan of$15 million at August 5, 2002 under SureBeam’s line of credit withTitan (see Note 5).

 

At the time Titan adoptedthe plan to spin-off SureBeam, in accordance with APB No. 30, we recordeda charge of $35.4 million for estimated costs of disposal and forestimated operating losses up to the date of disposal.  This charge was recorded in the thirdquarter of 2001.  All losses incurred bySureBeam after that time were charged against this accrual.  Losses charged against the accrual in 2001were $14.9 million and in 2002 were $20.5 million in the six monthsended June 30, 2002.  An additionalcharge of $11.0 million was taken during the second quarter of 2002 torecord the net losses (in excess of the accrual) incurred by SureBeam duringthe second quarter of 2002 as well as estimated operating losses and spin-offexpenses expected to be incurred through the spin-off date of August 5,2002.  Subsequent to that date, SureBeamis no longer included in Titan’s results of operations.  Losses through August 5, 2002 chargedagainst the accrual in the third quarter of 2002 were $1.8 million.  Approximately $3.5 million of costsrelated to the spin-off were charged against the loss accruals, which is $0 asof December 31, 2003.

 

Revenues and net lossgenerated by SureBeam for the year ended December 31, 2001 were$24.2 million and $76.1 million, respectively.  Included in SureBeam’s net loss in 2001 isdeferred compensation of $54.3 million. Included in SureBeam’s net losses is interest expense of$7.0 million for the year ended December 31, 2001, related to thepromissory note SureBeam had payable to us.

 

Followingare summaries in tabular format of the loss from discontinued operations for2003 and 2002:

 

|                          |   | **Year ended  December 31, 2003** |   |
|-------------------------------|--------|-----------------------------------|--------|
|                          |   | **Titan  Wireless**               |   | **Titan  Technologies** |   | **Total** |   |
| Gain on sale of business, net |   | $                                 | 12,195 |   | $ | — |   | $ | 12,195 |   |
| Exit charges                  |   | (5,000                            | )      | — |   | (5,000 | ) |
| Impairment of assets          |   | (10,790                           | )      | (2,679 | ) | (13,469 | ) |
|                          |   | (3,595                            | )      | (2,679 | ) | (6,274 | ) |
| Loss from operations          |   | (2,783                            | )      | (7,406 | ) | (10,189 | ) |
|                          |   | (6,378                            | )      | (10,085 | ) | (16,463 | ) |
| Tax benefit                   |   | (7,392                            | )      | (8,217 | ) | (15,609 | ) |
| Net income (loss)             |   | $                                 | 1,014  |   | (1,868 | ) | (854 | ) |
|                               |        |                                   |        |  |  |  |  |  |  |  |

 

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As discussed above, the2003 tax benefit reflected in Titan Wireless was impacted by the GlobalNet salefor which a tax provision was not provided due to prior losses,  and the Titan Technologies tax benefit wasimpacted by an adjustment to the carrying value of certain assets which arecurrently held for sale in Titan’s remaining commercial information technologybusiness that was previously part of Titan Technologies.

 
|                                  |   | **Year ended  December 31, 2002** |     |
|---------------------------------------|--------|----------------------------------------|----------|
|                                  |   | **Titan  Wireless**                    |     | **Titan  Technologies** |   | **Cayenta** |   | **SureBeam** |   | **Total** |   |
| Impairment of  goodwill               |   | $                                      | (74,818  | ) | $ | (21,022 | ) | $ | (1,121 | ) | $ | — |   | $ | (96,961 | ) |
| Impairment of  investments            |   | (62,600                                | )        | — |   | — |   | — |   | (62,600 | ) |
| Impairment of  fixed and other assets |   | (74,001                                | )        | (22,714 | ) | (3,134 | ) | — |   | (99,849 | ) |
| Exit charges                          |   | (20,062                                | )        | (4,341 | ) | — |   | — |   | (24,403 | ) |
|                                  |   | (231,481                               | )        | (48,077 | ) | (4,255 | ) | — |   | (283,813 | ) |
| Losses from  operations               |   | (8,824                                 | )        | (20,508 | ) | (3,197 | ) | (11,014 | ) | (43,543 | ) |
|                                  |   | (240,305                               | )        | (68,585 | ) | (7,452 | ) | (11,014 | ) | (327,356 | ) |
| Tax benefit                           |   | (84,888                                | )        | (20,563 | ) | (2,698 | ) | (1,101 | ) | (109,250 | ) |
| Net loss                              |   | $                                      | (155,417 | ) | $ | (48,022 | ) | $ | (4,754 | ) | $ | (9,913 | ) | $ | (218,106 | ) |

** **

**BalanceSheet Summary**

 

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

 

|                                                 |   | **As of  December 31,** |   |
|------------------------------------------------------|--------|------------------------------|--------|
|                                                 |   | **2003**                     |   | **2002** |   |
| Current assets of discontinued operations:           |   |                         |   |   |   |
| Titan Wireless                                       |   | $                            | 46,584 |   | $ | 93,145 |   |
| Cayenta                                              |   | —                       |   | 661 |   |
| Titan Technologies                                   |   | 8,185                        |   | 10,065 |   |
|                                                 |   | $                            | 54,769 |   | $ | 103,871 |   |
| Non-current assets of discontinued  operations:      |   |                         |   |   |   |
| Titan Wireless                                       |   | $                            | — |   | $ | 4,212 |   |
| Titan Technologies                                   |   | —                       |   | 2,370 |   |
|                                                 |   | $                            | — |   | $ | 6,582 |   |
| Current liabilities of discontinued  operations:     |   |                         |   |   |   |
| Titan Wireless                                       |   | $                            | 12,540 |   | $ | 38,603 |   |
| Cayenta                                              |   | 97                           |   | 2,155 |   |
| SureBeam                                             |   | —                       |   | 187 |   |
| Titan Technologies                                   |   | 6,146                        |   | 8,198 |   |
|                                                 |   | $                            | 18,783 |   | $ | 49,143 |   |
| Non-current liabilities of discontinued  operations: |   |                         |   |   |   |
| Titan Wireless                                       |   | $                            | 32,307 |   | $ | 42,821 |   |
| Cayenta                                              |   | 535                          |   | 1,205 |   |
| Titan Technologies                                   |   | 1,504                        |   | 800 |   |
|                                                 |   | $                            | 34,346 |   | $ | 44,826 |   |

 

71

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Included in the total assets of Titan Wireless as of December 31, 2002are approximately $46.6 million of gross accounts receivable, lessapproximately $32.3 million (classified as a non current liability)representing the amounts drawn on the non recourse loan facility with theAfrican Merchant Bank to cover subcontract costs on Titan Wireless’s contractwith the Office of Post and Telecommunications (OPT).  The net accounts receivable of $14.3 million are comprisedof approximately $14 million due from the OPT, and $0.3 million duefrom Titan Wireless’s customer in Nigeria. The amount due from the customer in Nigeria was collected in the firstquarter of 2004.  The currentliabilities of $12.5 million of Titan Wireless include approximately$9.8 million of remaining exit costs.

 

The currentassets of Titan Technologies are primarily comprised of cash, accountsreceivable balances and prepaid assets.

 

**Note9.  Other Financial Data**Following are details concerning certain balance sheetaccounts: 

 

|                                 |   | **At  December 31,** |    |
|--------------------------------------|--------|----------------------|---------|
|                                 |   | **2003**             |    | **2002** |   |
| Accounts Receivable:                 |   |                 |    |   |   |
| U.S. Government — billed   |   | $                    | 313,578 |   | $ | 250,118 |   |
| U.S. Government — unbilled |   | 63,141               |    | 48,728 |   |
| Trade                                |   | 14,818               |    | 22,295 |   |
| Less allowance for doubtful accounts |   | (3,574               | )       | (6,778 | ) |
|                                 |   | $                    | 387,963 |   | $ | 314,363 |   |

 

Billing in excess ofcosts incurred are recorded as reductions to accounts receivable and total $5.1million and $8.9 million at December 31, 2003 and 2002, respectively.  Deferred revenue included in Other AccruedLiabilities totaled $12.9 million at December 31, 2003.

 

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|                                           |   | **At  December 31,** |    |
|------------------------------------------------|--------|----------------------|---------|
|                                           |   | **2003**             |    | **2002** |   |
| Inventories:                                   |   |                 |    |   |   |
| Materials                                      |   | $                    | 8,448   |   | $ | 11,213 |   |
| Work-in-process                                |   | 15,554               |    | 9,947 |   |
| Finished goods                                 |   | 5,403                |    | 10,120 |   |
|                                           |   | $                    | 29,405  |   | $ | 31,280 |   |
| Property and Equipment:                        |   |                 |    |   |   |
| Machinery and equipment                        |   | $                    | 127,629 |   | $ | 118,540 |   |
| Furniture and fixtures                         |   | 21,855               |    | 26,225 |   |
| Land, buildings and leasehold improvements     |   | 28,281               |    | 28,162 |   |
| Construction in progress                       |   | 1,985                |    | 1,664 |   |
|                                           |   | 179,750              |    | 174,591 |   |
| Less accumulated depreciation and amortization |   | (113,959             | )       | (110,886 | ) |
|                                           |   | $                    | 65,791  |   | $ | 63,705 |   |

 

Following is informationrelated to intangible assets:

 

|                        |   | **As of  December 31, 2003** |   |
|-----------------------------|--------|------------------------------|--------|
|                        |   | **Gross  Carrying  Amount**  |   | **Accumulated  Amoritization** |   | **Net Value** |   |
| Purchased intangibles       |   | $                            | 18,735 |   | $ | 10,110 |   | $ | 8,625 |   |
| License agreement           |   | 8,000                        |   | 1,006 |   | 6,994 |   |
| Deferred financing costs    |   | 16,481                       |   | 2,565 |   | 13,916 |   |
| All other intangible assets |   | 2,566                        |   | 350 |   | 2,216 |   |
|                        |   | $                            | 45,782 |   | $ | 14,031 |   | $ | 31,751 |   |

 

 

 

|                                      |   | **As of  December 31,** |   |
|-------------------------------------------|--------|-------------------------|--------|
|                                      |   | **2003**                |   | **2002** |   | **2001** |   |
| Aggregate amortization expense            |   | $                       | 5,232  |   | $ | 6,380 |   | $ | 246 |   |
|                                      |   |                    |   |   |   |   |   |
| Estimated aggregate amortization expense: |   |                    |   |   |   |   |   |
| 2004                                      |   | $                       | 6,599  |   |   |   |   |   |
| 2005                                      |   | $                       | 6,193  |   |   |   |   |   |
| 2006                                      |   | $                       | 4,518  |   |   |   |   |   |
| 2007                                      |   | $                       | 3,383  |   |   |   |   |   |
| 2008                                      |   | $                       | 3,383  |   |   |   |   |   |
|                                           |        |                         |        |  |  |  |  |  |  |  |

 

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Supplemental disclosuresof cash flow information: 

 
|                                                                        |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Noncash investing and financing activities:                                 |   |     |   |     |   |     |   |
|                                                                        |   |     |   |     |   |     |   |
| Stock issued for acquisitions                                               |   | $        | 3,259  |     | $      | 137,811  |   | $ | 144,764 |   |
| Gain related to issuance of stock in subsidiary                             |   | —   |   | —   |   | 52,025   |   |
| Deferred compensation related to the issuance of stock options         |   | —   |   | 29,834   |   | 78,725   |   |
| Shares contributed to employee benefit plans                                |   | 6,527    |   | 7,529    |   | 4,941    |   |
| Write-off of deferred debt issuance costs                                   |   | 8,071    |   | 9,435    |   | —   |   |
| Write-off of deferred compensation related to discontinued  operations |   | —   |   | 629      |   | —   |   |
| Shares tendered for option exercises                                        |   | 144      |   | —   |   | 392      |   |
|                                                                        |   |     |   |     |   |     |   |
| Cash paid for interest                                                      |   | $        | 31,557 |     | $      | 32,408   |   | $ | 38,021 |   |
| Cash paid (refunds) for taxes                                               |   | 1,149    |   | (8,747   | )      | 3,612    |   |

 

In 2002, Titan issued172,153 shares of Titan common stock valued at $3.8 million as considerationfor the purchase of assets of a company which became part of the Cayentabusiness, now reported in discontinued operations.  In the second quarter of 2003, the indemnification period as definedper the asset purchase agreement expired, and as provided for in the purchaseagreement, Titan elected to exchange all of the Titan common stock for cash of$2.0 million and the extinguishment of notes receivable of $1.8 million forcash advances made in 2002.

 

Details regarding theacquisition of businesses, net of cash acquired, in the Consolidated Statementsof Cash Flows are as follows:

 

|                                                                        |   | **Year Ended  December 31, 2003** |    |
|-----------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                        |   | **Cash Paid**                     |    | **Cash  Acquired** |   | **Net** |   |
| Acquisition:                                                                |   |                              |    |   |   |   |   |
| Advent Systems                                                              |   | $                                 | (14,781 | ) | $ | 2,682 |   | $ | (12,099 | ) |
| International Systems                                                       |   | (217                              | )       | — |   | (217 | ) |
| Earn-out consideration for Atlantic  Aerospace Electronics Corporation |   | (1,773                            | )       | — |   | (1,773 | ) |
|                                                                        |   | $                                 | (16,771 | ) | $ | 2,682 |   | $ | (14,089 | ) |
|                                                                        |   |                              |    |   |   |   |   |
|                                                                        |   | **Year Ended  December 31, 2002** |    |
|                                                                        |   | **Cash Paid**                     |    | **Cash  Acquired** |   | **Net** |   |
| Acquisition:                                                                |   |                              |    |   |   |   |   |
| Jaycor                                                                      |   | $                                 | —  |   | $ | 35,982 |   | $ | 35,982 |   |
| Wave Systems                                                                |   | (8,476                            | )       | 4,678 |   | (3,798 | ) |
| International Systems                                                       |   | —                            |    | 172 |   | 172 |   |
| Purchase adjustments for prior year  acquisitions                           |   | (4,947                            | )       | — |   | (4,947 | ) |
|                                                                        |   | $                                 | (13,423 | ) | $ | 40,832 |   | $ | 27,409 |   |

 

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|                                              |   | **Year Ended  December 31, 2001** |    |
|---------------------------------------------------|--------|-----------------------------------|---------|
|                                              |   | **Cash Paid**                     |    | **Cash  Acquired** |   | **Net** |   |
| Acquisition:                                      |   |                              |    |   |   |   |   |
| BTG                                               |   | $                                 | (23,423 | ) | $ | 1,193 |   | $ | (22,230 | ) |
| Datron                                            |   | —                            |    | 3,652 |   | 3,652 |   |
| Maxwell                                           |   | (10,661                           | )       | — |   | (10,661 | ) |
| Purchase adjustments for prior year  acquisitions |   | (4,932                            | )       | — |   | (4,932 | ) |
|                                              |   | $                                 | (39,016 | ) | $ | 4,845 |   | $ | (34,171 | ) |

 

Titan’s investments innon-marketable securities as of December 31, 2003, include $3.5 million inEtenna Corporation, reported in Other Assets. In 2003, we recorded a loss on investments of $6.2 million related to anunrealized loss on the carrying value of our investment in Etenna Corporationbased upon recent indications of fair value, and an unrealized loss on ourinvestment in DOAR Communications that was subsequently sold at a loss inJanuary 2004.  All other investments innon-marketable securities totaled $8.5 million at December 31, 2003, andare reported in Other Assets.

 

Substantially all ofTitan’s operations are located in the United States.  Export and foreign revenues amounted to approximately$36.6 million, $29.6 million, and $21.4 million in 2003, 2002,and 2001, respectively, related primarily to customers in Europe, the MiddleEast, Africa and Asia.  Substantially allinternational sales are denominated in U.S. dollars.  The increase in export and foreign revenues from 2002 to 2003 isprimarily due to increased revenues of approximately $10.4 million to Titan’scustomers in the United Kingdom.

 

Sales to the U.S. government,including both defense and non-defense agencies, and sales as a subcontractoras well as direct sales, aggregated approximately $1,702.0 million in2003, $1,320.0 million in 2002, and $905.3 million in 2001.

 

**Note10.  Income Taxes**

 

The components of theincome tax provision (benefit) from continuing operations are as follows: 

 

 

|     |   | **2003** |   | **2002** |   | **2001** |   |
|----------|--------|----------|--------|----------|--------|----------|--------|
| Current: |   |     |   |     |   |     |   |
| Federal  |   | $        | — |     | $      | —   |   | $ | — |   |
| Foreign  |   | —   |   | —   |   | —   |   |
| State    |   | 2,372    |   | 1,458    |   | 1,255    |   |
|     |   | 2,372    |   | 1,458    |   | 1,255    |   |
| Deferred |   | 19,981   |   | (7,937   | )      | (248     | )      |
|     |   | $        | 22,353 |     | $      | (6,479   | )      | $ | 1,007 |   |

 

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Following is areconciliation of the income tax provision (benefit) from continuing operationsexpected (based on the United States federal income tax rate applicable in eachyear) to the actual tax provision (benefit) on income (loss): 

 
|                                                          |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Expected federal tax provision on continuing operations       |   | $        | 18,308 |     | $      | (6,706   | )      | $ | (2,441 | ) |
| State income taxes, net of federal income tax benefit         |   | 2,354    |   | (1,128   | )      | 1,255    |   |
| State taxes in separate filing states, net of federal benefit |   | —   |   | 963      |   | —   |   |
| Goodwill amortization                                         |   | —   |   | —   |   | 1,283    |   |
| Change in valuation allowance                                 |   | —   |   | —   |   | —   |   |
| Adjustment to estimated tax accruals                          |   | (2,285   | )      | —   |   | —   |   |
| Capital loss not benefited                                    |   | 2,277    |   | —   |   | —   |   |
| Acquisition charges and other                                 |   | 796      |   | —   |   | 740      |   |
| Meals and entertainment                                       |   | 399      |   | 251      |   | 175      |   |
| Other                                                         |   | 504      |   | 141      |   | (5       | )      |
| Actual tax provision (benefit) on continuing operations       |   | $        | 22,353 |     | $      | (6,479   | )      | $ | 1,007 |   |

 

The net deferred taxasset as of December 31, 2003 and 2002, results from the followingtemporary differences: 

 

|                                        |   | **2003** |    | **2002** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|
| Loss carryforward                           |   | $        | 85,072  |     | $      | 69,053 |   |
| Employee benefits                           |   | 24,696   |    | 32,018   |   |
| Purchased other intangibles                 |   | (3,287   | )       | (5,487   | )      |
| Tax credit carryforwards                    |   | 7,264    |    | 4,336    |   |
| Inventory, contract loss and other reserves |   | 39,254   |    | 50,608   |   |
| Accounts and unbilled receivables           |   | (6,471   | )       | (4,893   | )      |
| Accrued liabilities                         |   | 11,974   |    | 10,850   |   |
| Depreciation and amortization               |   | (9,027   | )       | 18,723   |   |
| Other                                       |   | 2,277    |    | —   |   |
|                                        |   | 151,752  |    | 175,208  |   |
| Valuation allowance                         |   | (8,767   | )       | (24,712  | )      |
| Deferred tax asset, net                     |   | $        | 142,985 |     | $      | 150,496 |   |

 

Realization of certaincomponents of the net deferred tax asset is dependent upon our generatingsufficient taxable income prior to expiration of loss and creditcarryforwards.  The federal netoperating loss carryforwards at December 31, 2003, are approximately$230 million, which carryforwards will expire in periods through 2023.  Although realization is not assured,management believes it is more likely than not that the net deferred tax assetwill be realized.  The amount of the netdeferred tax asset considered realizable, however, could be reduced in the nearterm if estimates of future taxable income during the carryforward period arereduced.  Also,

 

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under Federal tax law, certain potential changes inownership of Titan may limit annual future utilization of thesecarryforwards.  As such, the valuationallowance recorded is provided against certain carryforwards which may not beutilized.  The change in the valuationallowance from 2002 to 2003 primarily reflects the sale of GlobalNet in 2003,for which a valuation allowance had been provided for GlobalNet’s deferred taxassets in 2002.  Prepaid Expenses andOther at December 31, 2003 and 2002 include prepaid taxes of $4.0 million  and $3.1 million.   Other Non-current Liabilities atDecember 31, 2003 and 2002 include a deferred tax liability of$11.1 million and $17.4 million, respectively.

 

During 2003, 2002 and2001, Titan recognized certain tax benefits related to stock option exercisesin the amount of $0.8 million, $9.9 million, and $13.9 million, respectively,or $0.3 million, $3.6 million, and $4.1 million, net of tax.  The net benefits were recorded as anincrease to capital in excess of par value.

 

**Note11.  Debt**

 

**Senior Subordinated Notes**

 

OnMay 15, 2003, Titan sold $200 million of 8% senior subordinated notes dueMay 15, 2011 in a private placement (the Notes).  We used the net proceedsfrom the issuance of the Notes, plus borrowings of $50 million under therevolving credit facility and additional cash on hand, to redeem all of the$250 million of the then-outstanding 5 3/4% HIGH TIDES convertible preferredsecurities.  The redemption of HIGHTIDES occurred on June 4, 2003.

 

Titanis required to make interest payments on the Notes semi-annually in arrears onMay 15 and November 15 at the rate of 8% per annum.  The first scheduled interest payment for theoutstanding Notes was made on November 15, 2003.  Titan may redeem the Notes, in whole or in part, on or afterMay 15, 2007 at the following redemption prices, plus accrued and unpaidinterest and liquidated damages, if any:

 

| **Year**            |   | **Percentage** |   |
|---------------------|--------|----------------|--------|
| 2007                |   | 104.0          | %      |
| 2008                |   | 102.0          | %      |
| 2009 and thereafter |   | 100.0          | %      |

 

Inaddition, on or prior to May 15, 2006, Titan may redeem up to 35% of theaggregate principal amount of the Notes with the net proceeds of certain equityofferings at a redemption price of 108% of principal together with accrued and unpaidinterest.  The Notes are unsecured andrank or will rank equally with Titan’s current or future senior subordinatedindebtedness.  Each of Titan’s domesticsubsidiaries other than Cayenta guarantee the Notes.  The guarantees are unsecured and rank equally with eachguarantor’s senior subordinated indebtedness. The Notes and the guarantees are junior to all of Titan’s and eachguarantor’s senior indebtedness and senior to all of Titan’s and eachguarantor’s subordinated indebtedness.

 

Inconnection with its proposed merger with Lockheed Martin, on February 11, 2004,Titan commenced an offer to exchange the existing Notes for a new series ofsubstantially identical 8% senior subordinated notes registered under theSecurities Act of 1933 and a consent solicitation relating to proposedamendments to the indenture governing the Notes and the termination of theregistration rights agreement Titan delivered in May 2003 for the benefit ofthe holders of the Notes. Titan announced on February 25, 2004 that it hadreceived the requisite consents from the holders of more than a majority inaggregate principal amount of the Notes to effect the proposed amendments tothe indenture and the termination of the registration rights agreement.  Accordingly, Titan has entered into asupplemental indenture with the indenture trustee to effect the proposedamendments to the indenture and has entered into an amendment to theregistration rights agreement providing for its termination; however, theamendments and the termination of the registration rights agreement will notbecome operative until immediately prior to the completion of the proposedmerger with Lockheed Martin.  If themerger is completed, Lockheed Martin will guarantee the surviving entity’sobligations as the obligor of the Notes. If the merger is not completed, the amendments will not becomeoperative.  Until that point, theindenture and the registration rights agreement, without

 

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giving effect to the proposedamendments or the termination of the registration rights agreement, will remainin effect.  The receipt of the requisiteconsents and the execution of the supplemental indenture satisfy one of theconditions to the closing of the proposed merger with Lockheed Martin.

 

Liquidateddamages of 0.25% per annum per $1,000 whole dollars in principal amount of theexisting Notes  began to accrue inOctober 2003 when Titan did not complete an exchange offer required under theregistration rights agreement.  Titandid not complete the exchange offer because of the proposed merger withLockheed Martin.  Beginning in January2004, the liquidated damages rate increased to 0.50% and such liquidateddamages will continue to accrue, at rates increasing by 0.25% per annum per$1,000 whole dollars in principal amount of existing notes, until the exchangeoffer described above is completed.  Thebalance accrued at December 31, 2003 is $0.1 million.  If the merger does not close for any reason, then Titan intendsto seek to complete the exchange offer.

 

Weincurred approximately $12.4 million in charges in 2003 related to theextinguishment of the HIGH TIDES, comprised of the write-off of$8.1 million of remaining deferred debt issuance costs of HIGH TIDES, acall premium of $3.6 million to redeem the HIGH TIDES, and approximately$0.7 million of interest during the call period.  All extinguishment charges were recorded in the second quarter of2003 as a charge to income from continuing operations.  Following the redemption of the HIGH TIDES,availability on the revolving credit facility was reduced by $50 millionfor the borrowings required to complete the redemption.  The $50 million in availability was restoredwhen the draw was repaid by December 31, 2003, from positive cash flowgenerated form the Company’s operations.

 

**Senior Credit Facility**

 

Inconnection with the issuance of the Notes, Titan entered into an amendment toits senior credit facility to permit, among other things, the issuance of theNotes and the redemption of the HIGH TIDES.

 

*General.*On May 23,2002, Titan entered into an agreement with Wachovia Bank, National Associationand Wachovia Securities for a $485 million senior credit facility from asyndicate of commercial banks including Wachovia Securities acting as sole leadarranger and Wachovia Bank, National Association, as Administrative Agent, TheBank of Nova Scotia and Comerica Bank as Co-Syndication Agents and BranchBanking and Trust Company and Toronto Dominion Bank as Co-Documentation Agentsand other financial institutions.  Thesenior credit facility is comprised of an aggregate credit commitment of$485 million, consisting of a seven-year term loan in an aggregateprincipal amount of $350 million and a six-year $135 millionrevolving credit facility.

 

*InterestRates; Fees.*As amended in connection with the issuance of theNotes, the senior credit facility provides for interest rates per annumapplicable to amounts outstanding under the term loan and the revolving creditfacility that are, at Titan’s option, either the administrative agent’s mostrecently established base rate for U.S. dollars loaned in the United States(or, if greater, the Federal Funds Rate plus 0.5%) plus a margin of 0.75% perannum to 2.00% per annum, based on Titan’s ratio of total debt to EBITDA (asdefined in the senior credit facility), or the LIBOR rate for the applicableinterest period plus a margin of 2.00% per annum to 3.25% per annum, based onTitan’s ratio of total debt to EBITDA. Titan’s interest rates for base rate and LIBOR revolving loans aregenerally 0.50% to 0.75% lower than its interest rates for base rate and LIBORterm loans at the same ratio of total debt to EBITDA.  Titan is required to pay the lenders under the senior creditfacility a non-utilization fee ranging from 0.50% per annum to 1.00% per annum,payable quarterly in arrears, based on the applicable percentage of the undrawnportion of the revolving credit facility. Titan is also required to pay letter of credit fees for outstandingletters of credit equal to 0.25% per annum of the stated amount of the letterof credit, plus the product of the applicable margin (from 2.00% to 2.75%,based on its ratio of total debt to EBITDA) for loans under the revolvingcredit facility maintained as LIBOR loans multiplied by the stated amount ofthe letter of credit.

 

*Amortization;Prepayments.*Titan’s seven-year term loan matures onJune 30, 2009 and the revolving credit facility matures on May 23,2008.  The seven-year term loanamortizes at 1.0% per year for years one through six (through the quarterending June 30, 2008), with the remaining 94% due in four equal quarterlypayments in year seven of the loan (through the quarter ending June 30,2009).  Titan may prepay amountsborrowed under the term loan and the revolving credit facility at its optionwithout any fee.  Titan is also requiredto make prepayments,

 

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subject to certainexceptions, of the outstanding amounts under the term loan and the revolvingcredit facility from asset sales, issuance of subordinated debt and equitysecurities, insurance or condemnation proceeds and from excess cash flows.  Any such prepayments will be applied firstto reduce the amount of the term loan outstanding under the senior creditfacility, and then to reduce revolving loans under the senior credit facility.Pursuant to the amendment to the senior credit facility that was entered intoin connection with the issuance of the outstanding Notes, none of thatoffering’s proceeds were subject to mandatory prepayments under the seniorcredit facility.

 

*Covenants.*The terms ofthe senior credit facility require Titan to provide certain customary covenantsfor a senior credit facility, including certain financial covenants.  As amended, these financial covenants, asdefined per the senior credit agreement, are comprised of a maximum total debtto EBITDA ratio of 5.5 to 1, declining to 5.25 to 1 beginning with the quarterending September 30, 2003 through the quarter ending March 31, 2004,a maximum total senior debt to EBITDA ratio of 3.75 to 1, declining to 3.5 to 1beginning with the quarter ending December 31, 2003 through the quarterending March 31, 2004, a minimum interest coverage ratio of 2.75 to 1through the quarter ending March 31, 2004, a minimum fixed charge coverageratio of 1.25 to 1 through the quarter ending March 31, 2004 and a minimumnet worth of approximately $254 million at December 31, 2003.  The maximum and minimum thresholds forcompliance under the financial covenants in the senior credit facility willfurther adjust in the future in accordance with the terms of the senior creditfacility.  For instance, the maximumtotal senior debt to EBITDA ratio will decline to 3.25 to 1 beginning thequarter ending June 30, 2004, declining to 3.0 to 1 beginning the quarterending December 31, 2004, declining to 2.75 to 1 beginning with the quarterending June 30, 2005 and finally declining to 2.50 to 1 beginning with thequarter ending December 31, 2005.

 

Deferredcosts and expenses of $8.2 million related to the senior credit facilityare included in Other Assets at December 31, 2003 and will be amortized overthe remaining term of the senior credit facility.  Deferred costs and expenses of $5.7 million related to theissuance of the Notes are also included in Other Assets at December 31, 2003,and will be amortized over the term of the Notes.

 

At December 31, 2003,Titan had other secured and unsecured debt outstanding under various agreementstotaling $0.9 million short-term and $1.0 million long-term, withinterest rates ranging from 8.50% to 9.30%. These agreements mature by 2015.

 

**OtherDebt Information**

 

Details of long-term debtare as follows:

 
|                                                                                                                                                                                                       |   | **December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                                                                                                       |   | **2003**              |    | **2002** |   |
| Senior credit facility                                                                                                                                                                                     |   | $                     | 344,750 |   | $ | 348,250 |   |
| Senior subordinated debt                                                                                                                                                                                   |   | 200,000               |    | — |   |
| Note payable to bank, interest at 9.30%, due February 2005,  secured by a First Deed of Trust on an office building                                                                                   |   | 355                   |    | 430 |   |
| Note payable to Urban Business Development Corporation, interest at  8.58%, due January 2015, guaranteed by the Small Business Administration and  secured by a Second Deed of Trust on an office building |   | 558                   |    | 587 |   |
| Acquisition related notes payable of acquired companies, interest at  8.5%, due March 2005                                                                                                            |   | 938                   |    | 1,875 |   |
|                                                                                                                                                                                                       |   | 546,601               |    | 351,142 |   |
| Less:  Current portion                                                                                                                                                                           |   | (4,363                | )       | (4,347 | ) |
|                                                                                                                                                                                                       |   | $                     | 542,238 |   | $ | 346,795 |   |

 

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**TitanDebt Maturities**

 

Maturities of long-termdebt, excluding non-recourse debt, are as follows: 

 

| 2004       |   | $       | 4,363   |   |
|------------|--------|---------|---------|--------|
| 2005       |   | 3,997   |    |
| 2006       |   | 3,538   |    |
| 2007       |   | 3,541   |    |
| 2008       |   | 166,295 |    |
| Thereafter |   | 364,867 |    |
|       |   | $       | 546,601 |   |

** **

**Note12.  Commitments and Contingencies**

 

**Leases**

 

Titan leases certainbuildings and equipment under noncancelable operating lease agreements.  These leases generally require Titan to payall executory costs such as taxes, insurance and maintenance related to theleased assets.  Certain of the leasescontain provisions for periodic rate accelerations to reflect cost-of-livingincreases.  Rental expense under theseleases was $40.6 million in 2003, $40.1 million in 2002, and$23.8 million in 2001.  InFebruary 2000, Titan’s Cayenta subsidiary entered into a new long-termlease agreement which requires future minimum lease payments of approximately$6.6 million over 7 years.  Titanis a guarantor on the lease.  Due toTitan’s discontinuance of its Cayenta business, Titan has subleased thisfacility under agreements that extend through 2007.  Rental expense in 2002 and 2001 includes $0.9 million and$0.8 million, respectively, paid related to this space.

 

Future minimum leasepayments under noncancellable operating leases at December 31, 2003, areas follows: 

 

| 2004                         |   | $      | 43,492  |   |
|------------------------------|--------|--------|---------|--------|
| 2005                         |   | 36,923 |    |
| 2006                         |   | 32,558 |    |
| 2007                         |   | 26,556 |    |
| 2008                         |   | 18,075 |    |
| Thereafter                   |   | 54,058 |    |
| Total minimum lease payments |   | $      | 211,662 |   |

 

Obligations under capitalleases were $0.8 million at December 31, 2003, including $0.2 millionshort-term in Other Accrued Liabilities and $0.6 million long-term inOther Non-current Liabilities in the consolidated balance sheet.

 

Duringthe first quarter of 2003, Titan entered into new long-term lease and subleaseagreements for office space in Virginia and Maryland as part of ourrestructuring efforts to consolidate various facilities of our governmentbusiness into centralized locations (see Note 6).  The lease and subleases in Virginia require future minimum leasepayments of approximately $100.4 million over approximately 13 years,commencing at various dates from May

 

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2003 through May 2004.  The lease in Maryland requires futureminimum lease payments of approximately $45.8 million over 10 years,commencing approximately July 1, 2004.

 

**Legal Matters**

 

*RecentlyAnnounced Governmental Investigation*

 

On February 13, 2004, Titanannounced that representatives of Lockheed Martin and Titan recently initiatedmeetings with the Department of Justice and the Securities and ExchangeCommission to advise of an internal review relating to certain agreementsbetween Titan and international consultants or representatives and relatedpayments in foreign countries.  Titanhas been sharing the results of the internal review with the Department ofJustice and the Securities and Exchange Commission.  Titan also announced that it had learned that the SEC hadcommenced an investigation into whether payments involving foreign consultantswere made in violation of applicable law. On March 5, 2004, Titanlearned that the Department of Justice had opened a criminal inquiry into thismatter.  Titan has continued itsinternal review relating to these issues, in cooperation with Lockheed MartinCorporation, which is conducting a parallel review inconnection with its proposed acquisition of Titan.  The SEC has issued a subpoena for productionof documents, but has suspended actual production of documents at thistime.  Titan intends to continue tocooperate fully with the Department of Justice and SEC in connection with theirinvestigation of the matters under review.

 

Aspart of its ongoing review, Titan and Lockheed Martin learned of allegationsthat improper payments were made, or items of value were provided, by itsconsultants to foreign officials.  Thealleged payments or provision of items of value, if true, raise questionsconcerning whether there has been a violation of the Foreign Corrupt PracticesAct or other applicable law.  In thecourse of Titan’s investigation, information has been identified that may indicate thatthere have been violations of U.S. or foreign law arising out ofpayments involving Titan’s foreign representatives.  These matters are subject to ongoing SEC and Department ofJustice review.  If the governmentdetermines that unlawful payments were made, the government could take actionagainst Titan and/or some of its employees. These actions could include criminal and civil fines, penalties,criminal sanctions and limitations on Titan’s or Titan’s affected businesses’ability to export products or enter into future U.S. government contracts.

 

Informationgathered as part of the internal review raises questions as to whetherapplicable law has been violated.  Inrelation to the government investigations, after consideration of factorsincluding publicly available information of recent resolutions of other FCPAissues, and following discussions with legal counsel, Titan has recorded as$3.0 million provision as of and for the year ended December 31, 2003,representing management’s estimate of potential liabilities related to thismatter.  The ultimate resolution of thismatter is dependent upon the final results of such inquiries and investigationsand associated liabilities, if any, could be different from the amountcurrently estimated.

 

*OtherProceedings*

 

On January 23, 2004,Titan, together with its wholly owned subsidiaries, Titan Wireless, Inc. andTitan Africa, Inc., were named as defendants in *Gonzales Communications, Inc. v. Titan Wireless, Inc., Titan Africa,Inc., The Titan Corporation, Geolution International Inc., Mundi Development,Inc.,*a lawsuit filed in the U.S. District Court for the SouthernDistrict of California. The complaint relates to the purchase by GonzalesCommunications of equipment and related services under an equipment purchaseagreement entered into with Titan Wireless in June 2001. Gonzales Communicationscontends that the equipment delivered was unsatisfactory. In the complaint,Gonzales Communications seeks direct damages in the amount of $0.9 million plusinterest, representing the amount Gonzales Communications alleges to havepreviously paid under the agreement, and consequential damages of approximately$16.3 million. To date, Titan and its subsidiaries have not received payment infull under the agreement for the equipment that was delivered to GonzalesCommunications. Titan believes that the claims of Gonzales Communications arewithout merit, and intends to defend its position vigorously.

 

Since September 2003,Titan has been named as a defendant in the following purported class actionlawsuits each filed  on behalf ofholders of common stock of SureBeam Corporation, a former subsidiary of Titan:(1) *Bernd Bilstein, IRA v. SureBeamCorporation, et. al.*, filed in the U.S. District Court for theSouthern District of New York on September 10, 2003; (2) *Steven Morrow v. SureBeam Corporation, et. al.*,filed in the U.S. District Court for the Southern District of California onOctober 23, 2003; and (3) *Gordon Reed v.Oberkfell, et. al,*filed in the U.S. District Court for theSouthern District of California on December 24, 2003. Both the *Bilstein* and *Morrow* complaints allege that Titan, as a “control person”of SureBeam within the meaning of the Securities Act, should be held liable forallegedly false and misleading statements contained in the prospectus issued inconnection with SureBeam’s initial public offering in March 2001. SureBeam andcertain investment banks serving as lead underwriters in SureBeam’s offeringalso were named as defendants in both the *Bilstein*and *Morrow* complaints. The *Reed* complaint alleges that Titan, as thethen majority shareholder of SureBeam, breached fiduciary duties

 

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owed to the minority stockholders by, among otherthings, causing Surebeam to go public with false and misleading statementscontained in the prospectus for SureBeam’s initial public offering, grosslymismanaging SureBeam to Titan’s benefit and by being unjustly enriched at theexpense and detriment of SureBeam. SureBeam and certain officers and directorsof SureBeam also were named as defendants in the *Reed* complaint. Dr. Ray and Susan Golding, two of Titan’scurrent directors, were named as defendants in the *Bilstein* and *Reed*complaints in their capacity as directors of SureBeam. The plaintiffs in the *Bilstein,**Morrow*and*Reed* complaints seekunspecified statutory damages from Titan. Titan believes that the allegationscontained in these complaints are without merit and intends to defend theclaims vigorously.

 

 OnAugust 16, 2002, Perimex International Corporation (Perimex) filed a complaintagainst Titan, Titan Wireless, and a former Titan Wireless employee in SanDiego Superior Court in San Diego, California.  The complaint allegedbreach of contract, breach of the covenant of good faith and fair dealing,intentional interference with existing contractual relationships andprospective business advantage and violation of the California unfaircompetition law arising from an alleged failure of Titan Wireless to enter ajoint venture with Perimex to provide wireless telecommunication services inArgentina and other related alleged misconduct.  The complaint soughtdamages of $52.65 million and sought injunctive relief prohibiting Titanand Titan Wireless from transferring any of Titan Wireless’s assets.  Thecourt denied Perimex’s request for a preliminary injunction, sustained Titan’sand Titan Wireless’s demurrer as to all causes of action in the complaint andgranted Perimex leave to amend the complaint.  Perimex dismissed itscomplaint voluntarily without prejudice.  On May 22, 2003, however,Perimex filed a new complaint in the United States District Court for theSouthern District of California alleging substantially similar causes of actionand claiming a similar amount of damages.  Titan believes that Perimex’sclaims are without merit and intends to defend our position vigorously.

 

InOctober 2002, Titan received a grand jury subpoena from the Antitrust Divisionof the Department of Justice requesting the production of documents relating toinformation technology services performed for the Air Force at Hanscom AirForce Base in Massachusetts.  Titan hasbeen informed that other companies who have performed such services havereceived subpoenas as well.  Titan isnot aware of any illegal or inappropriate conduct, and has been and willcontinue to cooperate fully with the investigation.

 

In March 2003,Titan received a subpoena from the Office of Inspector General for the NationalAeronautics and Space Administration, or NASA, seeking certain records relatingto billing for labor services in connection with our contracts with NASA.  Titan also received a subpoena from theOffice of Inspector General for the General Services Administration, or GSA,seeking similar records relating to billing for labor categories in connectionwith contracts with GSA.  Titan is not awareof any illegal or inappropriate conduct, and is  fully cooperating with the government’s inquiries in these areas.

 

 Titan isinvolved in legal actions in the normal course of our business, includingaudits and investigations by various governmental agencies that result from ourwork as a defense contractor.  Titan andits subsidiaries are named as defendants in legal proceedings from time to timeand third parties including the government, may assert claims againstTitan from time to time.  In addition,Titan had acquired companies from time to time that have legal actions pendingagainst them at the time of acquisition.

 

Basedupon current information available, in the opinion of management, the amount ofultimate liability or recovery with respect to these other actions andproceedings is not expected to materially affect Titan’s consolidated financialposition or results of operations taken as a whole.   However, Titan’s evaluation of the likely impact of these otheractions and proceedings could change in the future, and an unfavorable outcome,depending upon the amount and timing, could have a material adverse effect onTitan’s results of operations or cash flows in a future period.

 

*Guarantees*

 

Titanhas guaranteed certain lease obligations of SureBeam, and SureBeam is obligatedto reimburse Titan for any payments Titan makes under these guarantees.  Titan has also guaranteed certain loanpayments related to

 

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Hawaii Pride, a strategicpartner of SureBeam. Refer to Note 5 for further discussion of Titan’sguarantees related to Hawaii Pride and SureBeam.

 

**Note13.  Cumulative Convertible Preferred Stock**

 

Each share of $1.00cumulative convertible preferred stock is entitled to a vote equal to one-thirdper common share, annual dividends of $1 per share and is convertible at anytime into .781 share of Titan’s common stock (subject to customaryanti-dilution adjustments).  Commonstock of 536,413 shares has been reserved for this purpose.

 

OnFebruary 9, 2004, Titan announced that all outstanding shares of its cumulativeconvertible preferred stock will be redeemed, on March 15, 2004.  The redemption is being undertaken inanticipation of and as a condition to the close of the proposed merger withLockheed Martin but is not contingent on the merger closing.  The convertible preferred shares areredeemable at Titan’s option at a redemption price of $20 per share, pluscumulative dividends in arrears.  Titanwill redeem the shares using available cash balances.  Holders of the preferred stock will not be entitled to vote onthe Lockheed Martin merger proposal because the shares will be redeemed priorto the special meeting of stockholders. The preferred stock is listed on the New York Stock Exchange under thesymbol “TTN_Pr” and closed at $19.85 per share on March 8, 2004.

 

**Note14.  Common Stock**

 

At December 31,2003, approximately 109,717,100 common shares were reserved for future issuancefor conversion of preferred stock and securities, employee benefit and stockincentive plans.

 

On September 25,2002, Titan Systems Corporation, Titan’s national security subsidiary, wasmerged into The Titan Corporation.  As aresult of this merger, outstanding stock options held by employees of Titan SystemsCorporation were exchanged using an exchange ratio of .8371, for approximately5.4 million stock options in The Titan Corporation.  The exchange ratio was determined by Titanusing a valuation of Titan Systems Corporation, as determined by a globallyrecognized valuation firm, and the average Titan Corporation closing stockprice for the 20 trading days ending on the day before the merger.

 

The exchange of Titanoptions resulted in a non-cash deferred compensation charge of approximately$21.3 million in the third quarter of 2002, which is reflected in selling,general and administrative expense in the accompanying consolidated statementsof operations.  Approximately $4.8million and $2.0 million was amortized in 2003 and 2002,respectively.  Unamortized non-cash deferredcompensation of $1.6 million will be amortized through 2005 as the options vestover time.

 

On July 26, 2001, Titansold 8,048,685 shares of its common stock in a public offering, which includedan over-allotment of 1,125,000 shares, at a price of $18.00 per share.  We received approximate aggregate proceedsfrom the offering of $137.6 million in July 2001, net ofunderwriters’ commissions.  Transactionexpenses related to the offering were approximately $1.4 million.  In addition, certain Titan stockholders sold576,315 shares, including 489,972 shares from the exercise of options, fromwhich Titan received proceeds of $3.0 million.

 

On August 17, 1995,the Board of Directors adopted a Shareholder Rights Agreement and subsequentlydistributed one preferred stock purchase right (Right) for each outstandingshare of Titan common stock.  Each Rightentitles the registered holder to purchase from Titan one one-hundredth of ashare of Series A Junior Participating Preferred Stock, par value $1.00per share (the Preferred Shares) at a price of $42.00 per one one-hundredth ofa Preferred Share, subject to adjustment. The Rights become exercisable if a person or group acquires, in atransaction not approved by Titan’s Board of Directors (Board), 15% or more ofTitan’s common stock or announces a tender offer for 15% or more of the stock.

 

If a person or groupacquires 15% or more of Titan’s common stock, each Right (other than Rightsheld by the acquiring person or group which become void) will entitle the holderto receive upon exercise a number of shares of Titan’s common stock having amarket value of twice the Right’s exercise price.  If Titan is acquired in a transaction

 

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not approved by the Board, each Right may be exercisedfor common shares of the acquiring company having a market value of twice theRight’s exercise price.  Titan mayredeem the Rights at $.01 per Right, subject to certain conditions.  The Rights expire on August 17, 2005.

 

The Titan board adopted aresolution providing that Lockheed Martin’s acquisition of Titan will nottrigger the exercisability of the Rights.

 

Options authorized forgrant under the 2002 Employee and Director Stock Option and Incentive Plan (the2002 Plan) and under the 2000 Employee and Director Stock Option Plan (the 2000Plan) are 5,500,000 and 4,000,000, respectively.  Options authorized for grant under the Stock Option Plans of 1994and 1997 are 2,000,000 and under The 1996 Directors’ Stock Option and EquityParticipation Plan (the 1996 Directors’ Plan) are 125,000.  Grants in 1999 and the beginning of 2000exceeded the remaining shares available under the stock option plans of 1994and 1997.  The 2000 Plan was approved byTitan’s stockholders on May 30, 2000. Under all plans, the options outstanding have been granted at pricesthat are equal to the market price of Titan’s stock on the date of grant.  Under the intrinsic value method prescribedby APB 25, no compensation cost is recorded.  However, the grants in 1999 that exceeded the shares available atthat time were placed under the 2000 Plan after its approval by thestockholders.  Under the provisions ofFinancial Accounting Standards Board Interpretation No. 44 “Accounting forCertain Transactions Involving Stock Compensation” (an Interpretation ofAPB 25), the plan approval date becomes the grant date for purposes ofcomparison of market value to exercise price. This resulted in deferred compensation related to these options of$15.6 million in 2000 based on the difference in market value atMay 30, 2000, and the grant price. This deferred compensation has been fully amortized to expense over thefour-year vesting period of these options, including $2.4 million in 2003,$3.9 million in 2002 and $3.9 million in 2001, respectively.

 

Under the 2002 and 2000Employee and Director plans, and previous employee plans, an option’s maximumterm is ten years.  Under these plans,vested options expire 90 days after a grantee’s termination of employment orother relationship.  Under the 1996Directors’ Plan, options expire 90 days after the option holder ceases to be adirector.  Under the applicable plans,directors may elect to receive stock in lieu of fees, such stock to have a fairmarket value equal to the fees.  Employeeoptions may be granted throughout the year; directors’ options are grantedannually.  Under the 2000 Plan, vestingfor directors and first-time option grantees is over four years, with 25%exercisable at the completion of one year, and monthly vesting thereafter.  For option grants prior to the 2000 Plan,vesting is monthly over 4 years. Options in the Stock Option Plans of 1994 and 1997 and the 1996Directors’ Plan vest in 25% increments beginning one year after the grantdate.  Stock options assumed by Titan asa result of the mergers in prior years generally retain the terms under whichthey were granted.  Stock optionsassumed by The Titan Corporation as a result of the merger with Titan SystemsCorporation discussed above retain the terms of the Titan Systems plans.

 

At the effective time ofthe proposed merger with Lockheed Martin, each outstanding option or right topurchase shares of Titan common stock will fully vest and become exercisable inaccordance with the terms and conditions of the plan or agreement under whichit was granted, except that it thereafter will represent the right to receiveshares of Lockheed Martin common stock upon exercise.  After the effective time of the merger, the number of shares ofLockheed Martin common stock subject to each Titan stock option will be thenumber of shares of Titan common stock subject to such Titan stock option priorto the effective time of the merger multiplied by the exchange rate, and theexercise price of each stock option will be adjusted by dividing the per shareexercise price under such Titan stock option by the exchange rate.

 

Titan elected to followAPB No. 25 and related interpretations in accounting for its stockoptions.  See Note 3 for a calculationof Titan’s pro forma net income and earnings per share under the fair valuemethod pursuant to SFAS No. 123.

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model using the following weighted-average assumptions: zerodividend yield and an expected life of 5 years in all years; expectedvolatility of 73% in 2003, 73% in 2002, and 76% in 2001; and a risk freeinterest rate of 3.82% in 2003, 3.82% in 2002, and 4.38% in 2001.

 

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A summary of the statusof Titan’s fixed stock option plans as of December 31, 2003, 2002 and 2001, andchanges during the years ending on those dates is presented below: 

 
|                                                           |   | **2003**          |   | **2002**                                |   | **2001**          |   |
|----------------------------------------------------------------|--------|-------------------|--------|-----------------------------------------|--------|-------------------|--------|
|                                                           |   | **Shares  (000)** |   | **Weighted-  Average  Exercise  Price** |   | **Shares  (000)** |   | **Weighted-  Average  Exercise  Price** |   | **Shares  (000)** |   | **Weighted-  Average  Exercise  Price** |   |
| Outstanding at beginning of year                               |   | 11,006            |   | $                                       | 8.56   |              | 5,128  |   | $ | 14.45 |   | 4,972 |   | $ | 11.84 |   |
| Granted                                                        |   | 2,108             |   | 8.14                                    |   | 952               |   | 13.32 |   | 953 |   | 17.16 |   |
| Adjustment for TSC merger                                      |   | —            |   | —                                  |   | 5,248             |   | 4.55 |   | — |   | — |   |
| Adjustment for SureBeam spin-off                               |   | —            |   | —                                  |   | 1,789             |   | — |   | — |   | — |   |
| Exchanged in acquisitions                                      |   | —            |   | —                                  |   | 14                |   | 12.79 |   | 1,169 |   | 12.68 |   |
| Exercised                                                      |   | (2,758            | )      | 5.57                                    |   | (1,209            | )      | 6.92 |   | (1,735 | ) | 7.07 |   |
| Canceled                                                       |   | (708              | )      | 12.04                                   |   | (916              | )      | 9.07 |   | (231 | ) | 15.36 |   |
| Outstanding at end of year                                     |   | 9,648             |   | 9.04                                    |   | 11,006            |   | 8.56 |   | 5,128 |   | 14.45 |   |
| Options exercisable at year-end                                |   | 6,190             |   |                                    |   | 6,957             |   |   |   | 2,863 |   |   |   |
| Weighted-average fair value of options granted during the year |   | $                 | 5.08   |                                    |   |              | $      | 8.49 |   |   |   | $ | 12.15 |   |   |   |
|                                                                |        |                   |        |                                         |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following tablesummarizes information about fixed stock options outstanding atDecember 31, 2003: 

 
|                          |   |                                 |   |                                              |   | **Options  Outstanding**             |   | **Options  Exercisable**             |   |
|-------------------------------|--------|--------------------------------------|--------|---------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
| **Range of Exercise  Prices** |   | **Number  Outstanding  at 12/31/03** |   | **Weighted-Average  Remaining  Contractual Life** |   | **Weighted-Average  Exercise Price** |   | **Number  Exercisable  at 12/31/03** |   | **Weighted-Average  Exercise Price** |   |
| $                             | 1.04   |                                 | — |                                              | $      | 4.18                                 |   | 2,321,715                            |   | 4.57 years |   | $ | 1.97 |   | 2,298,891 |   | $ | 1.97 |   |
| 4.23                          |   | —                               |   | 10.90                                             |   | 4,299,317                            |   | 7.92 years                           |   | 8.16 |   | 1,945,887 |   | 7.81 |   |
| 10.94                         |   | —                               |   | 17.29                                             |   | 2,786,106                            |   | 7.20 years                           |   | 14.69 |   | 1,724,140 |   | 15.12 |   |
| 19.43                         |   | —                               |   | 29.74                                             |   | 240,544                              |   | 6.17 years                           |   | 27.54 |   | 221,135 |   | 27.70 |   |
|                          |   |                                 |   |                                              |   | 9,647,682                            |   | 6.86 years                           |   | 9.04 |   | 6,190,053 |   | 8.39 |   |
|                               |        |                                      |        |                                                   |        |                                      |        |                                      |        |  |  |  |  |  |  |  |  |  |  |

 

As a result of theSureBeam spin-off, all Titan outstanding stock options under each of Titan’sstock option plans were adjusted such that the number of options was increasedby a factor of 1.345 and the exercise price was decreased by dividing by1.345.  This adjustment maintained the same aggregate intrinsic value ofthe stock options that existed prior to the spin-off compared to the aggregateintrinsic value of the stock options immediately after the transaction andensured that the ratio of the exercise price per share to the market value pershare was not reduced.  The adjustment was determined in accordance withthe FASB’s Financial Interpretation No. 44 (FIN 44), “Accounting forCertain Transactions Involving Stock Compensation,” and resulted in nocompensation charge.

 

Under the 2000 EmployeeStock Purchase Plan, Titan is authorized to issue up to 1,500,000 shares ofcommon stock to its full-time employees. This plan replaced Titan’s 1995 Employee Stock Purchase Plan, which wasauthorized to issue 500,000 shares.  Allemployees of Titan are eligible to participate in the plan.  Under the terms of

 

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the plan, employees may elect to have between 1 and 15percent of their regular earnings, as defined in the plan, withheld to purchaseTitan’s common stock.  The purchaseprice of the stock is 85 percent of the lower of its market price at thebeginning or at the end of each offering period.  An offering period is six months, beginning January 1 andJuly 1 of each year.  Approximately14%, 21%, and 24% of eligible employees participated in the Plan and purchasedapproximately 784,000, 655,100, and 476,100 shares of Titan’s common stock in2003, 2002, and 2001, respectively. During 2003 and 2002, grants of approximately 243,400 and 202,800 sharesof Titan stock under the 2002 Employee and Director Stock Option and IncentivePlan were utilized to fulfill Titan’s funding requirement under this plan.  The weighted-average fair value of thepurchase rights granted in 2003, 2002, and 2001 was $2.37, $3.73, and $5.09,respectively, which represents the approximate intrinsic value to theparticipants related to the benefits of participation in the plan as determinedin accordance with SFAS 123.

 

At December 31, 2003,Titan also had warrants outstanding for 74,372 shares of the Titan’s commonstock at prices ranging from $14.86 to $23.16 per share.

 

**Note 15.  Related Party Transactions**

 

*Agreements With Executive Officers*

 

*Change in Control Agreements*. In March 2000, Titanentered into executive agreements with Titan’s Chairman of the Board, Presidentand Chief Executive Officer (hereinafter referred to as the CEO) and Titan’sGeneral Counsel, which provide special benefits after a change in control. Theparties subsequently amended these agreements on September 14, 2003 to clarifycertain terms and conditions as they related to the change in control thatwould result from the proposed merger with Lockheed Martin.  Effective as of August 20, 2003, Titan alsoentered into an executive agreement with Titan’s Chief Financial Officer, whichmirrors the executive agreement, as amended, for Titan’s General Counsel.Pursuant to these agreements, as amended, if (1) there is a change in controlof Titan (which will occur at the effective time of the proposed merger withLockheed Martin) and (2) the executive is terminated by Titan (or, after themerger, by Lockheed Martin) other than for “Cause” (as defined in theagreements) or such executive terminates his employment for “Good Reason” (asdefined in the agreements) within three years following such change in controlor if the executive is terminated prior to a change in control and theexecutive reasonably believes that his termination arose in connection with oranticipation of a change in control, the terminated executive will be entitledto a lump sum payment amount equal to three times the sum of his base salaryand his “Highest Annual Bonus” (as defined in the agreements). Each executivewill have a right under these agreements to resign for “Good Reason” at theeffective time of the merger by virtue of the fact that Titan will cease to bea publicly traded company. Also, the executive will receive a prorated bonusfor the year of termination and continuation of the executive’s and hisfamily’s welfare benefits (including, without limitation, medical,prescription, dental, disability, employee life, group life, accidental deathand travel accident insurance plans and programs) for three years after thelater of the executive’s date of termination or, as applicable, the expirationof the executive’s continuation coverage period under the Consolidated OmnibusBudget Reconciliation Act, referred to as COBRA. In addition, all options thathave been previously granted to the executive to acquire shares of Titan or anyaffiliate of Titan that have not previously been forfeited or exercised willvest and become exercisable in full and will remain exercisable for theremainder of their original terms. Based on current compensation levels, thetotal estimated cost of the severance payments and continued welfare benefitspayable to the CEO, Titan’s General Counsel and Titan’s Chief Financial Officeris, respectively, $5.5 million, $2.1 million and$2.0 million.  These estimates donot include any tax gross up payment which Titan (or, after the merger,Lockheed Martin) might be required to make pursuant to these agreements. Titan(or, after the merger, Lockheed Martin) will be obligated under theseagreements to reimburse the CEO, Titan’s General Counsel and Titan’s ChiefFinancial Officer for all legal fees and all expenses which they incur inasserting or in defending their rights under these agreements.

 

*Certain Relationships And Related Transactions*

 

Inconjunction with Titan’s exit of its international telecommunications business,Titan entered into an agreement with Geolutions, Inc. (Geolutions) to assumeand perform all of Titan Wireless’s outstanding warranty obligations.  Geolutions was a newly formed company,founded by a former executive of Titan Wireless and former officer ofTitan.  Titan entered into a fixed pricecontract of $1.9 million, plus incidental expenses of up to$0.6 million and other third party costs of an aggregate maximum of$1.4 million, which was subsequently reduced

 

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by $0.5 million.  These fees are payable through mid 2004, theperiod over which Titan’s warranty obligations exist on its existing customercontracts.  The contract is cancelableby Titan under certain circumstances of non-performance by Geolutions.  In conjunction with Titan’s agreement withGeolutions, Titan assigned its existing warranty obligations in itsinternational telecommunications business with its existing customers toGeolutions.  If Geolutions fails to performthese contracted obligations, Titan Wireless remains obligated to perform themand may incur costs in excess of these contracted amounts.

 

InMarch 2002, our Board of Directors adopted a stock option relinquishmentprogram, the primary purpose of which was to align the interests of our directorsand senior executives more closely with our stockholders’ interests by allowingdirectors and senior executives to participate in the appreciation in ourequity value: 

 

•                           withoutrequiring our Directors and executive officers to trade shares of our commonstock obtained through the exercise of options on the open market; and

 

•                           withoutthe dilutive and potentially stock-price depressive effects associated with theexercise and subsequent sale of stock option shares.

 

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

 

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

 

•                           Dr. Ray,Chairman of the Board and Chief Executive Officer: 222,380 options relinquishedon June 18, 2002, $3,985,725 principal amount of loan, 5.48% interest perannum;

 

•                           Mr. Fink,Director: 15,000 options relinquished on June 27, 2002, $336,337.50principal amount of loan, 5.48% interest per annum; and

 

•                           Mr. Alexander,Director: 19,972 options relinquished effective June 19, 2002, $499,999principal amount of loan, 5.48% interest per annum.

 

Theamount of the stock options relinquished under the program do not reflect anyadjustment as a result of the spin-off of our subsidiary SureBeam Corporationon August 5, 2002, since the relinquishment occurred before the date forsaid adjustment.  Titan has recordedinterest income of $0.5 million to date related to the accrued interest on theoutstanding loans due from the directors noted above.

 

Asof the effective date of the Sarbanes-Oxley Act in July 2002, whichprecludes such loans to company officers and directors, the Stock Option andRelinquishment Plan was no longer available to our Directors and executive officers.

 

Priorto the spin-off of SureBeam Corporation, Titan and SureBeam entered into anumber of agreements.  These agreementsincluded a $50 million senior secured revolving credit line, Titan guaranteesof certain lease obligations of SureBeam, sublease agreements with SureBeam,and a Tax Allocation Agreement and Tax Disaffiliation and Tax SharingAgreement.  In addition, Titan enteredinto other agreements including a license agreement and supply agreement.  Refer to Note 5 for further discussion ofthe terms of these agreements.

 

Anofficer of one of our operating units has a financial interest in a facilityrented by the unit.  Total rent paid bythe unit in 2003 related to this facility was $0.2 million.

 

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**Note 16.  Benefit Plans**

 

Titan has various definedcontribution benefit plans covering certain employees.  Titan’s contributions to these plans were$19.5 million, $14.6 million, and $12.6 million in 2003, 2002and 2001, respectively.  Nodiscretionary contributions were made in 2003, 2002, or 2001.  

 

Titan has a non-qualifiedexecutive deferred compensation plan for certain officers and keyemployees.  Titan’s expense for thisplan, including interest, was $1.9 million, $0.9 million, and$0.6 million in 2003, 2002, and 2001, respectively.  Interest expense for the years endedDecember 31, 2003, 2002, and 2001 includes $0.3 million,$0.6 million and $0.5 million, respectively, related to the plan.  This obligation has been fully funded and iscarried in a Rabbi trust.  Included inother non-current liabilities is $15.6 million and $10.7 millionrelated to this plan at December 31, 2003 and 2002, respectively.  Cash surrender value of the life insurancerelated to this plan was $15.8 million and $10.9 million included inOther Assets in the consolidated balance sheet at December 31, 2003 and2002, respectively.  Titan also hasperformance bonus plans for certain of its employees.  Related expense amounted to approximately $21.9 million,$14.5 million, and $10.5 million in 2003, 2002, and 2001,respectively.

 

Titan has previouslyprovided for postretirement benefit obligations of certain operationsdiscontinued in prior years.  Titan alsoimplemented a post retirement medical benefit plan for senior executives in2000.  All values related to this planare immaterial.  Titan has no otherpostretirement benefit or pension obligations for any of its continuingoperations or for its recently discontinued businesses.  

 

**Note 17.  Guarantor Condensed Consolidating Financial Statements**

 

On May 15, 2003, we sold$200 million aggregate principal amount of 8% senior subordinated notes in aprivate placement.  We used the netproceeds from our issuance of the 8% senior subordinated notes, plus borrowingsof $50 million we made under our revolving credit facility and additional cashon hand, to redeem all of our then-outstanding 5 3⁄4% HIGH TIDES convertiblepreferred securities, effective June 4, 2003.

 

Following areconsolidating condensed financial statements to quantify the financial positionas of December 31, 2003, and 2002, and the operations and cash flows forthe years ended December 31, 2003, 2002, and 2001, for the GuarantorSubisdiaries listed below and the Non-Guarantor Subsidiaries listed below.  The following consolidating condensedbalance sheets, consolidating condensed statements of operations andconsolidating condensed statements of cash flows present financial informationfor:

 

Parent:  TheTitan Corporation on a stand-alone basis.

 

GuarantorSubsidiaries:  All directly and indirectly owned domesticsubsidiaries of Parent other than Cayenta Inc. on a stand-alone basis.

 

Non-GuarantorSubsidiaries:  Cayenta Inc. and all direct and indirect subsidiariesof Parent that are not organized under the laws of the United States, any stateof the United States or the District of Columbia and that conduct substantiallyall business operations outside the United States.

 

Reclassifications andEliminations:  Entries that eliminate the investment in subsidiariesand intercompany balances and transactions.

 

The Titan Corporation andSubsidiaries:  The Financial information for The Titan Corporation ona condensed consolidated basis.

 

The classification ofoperating entities within each of the columns is based on the legal status ofthe entity as of December 31, 2003. Accordingly, certain legal entities that existed in prior years that hadbeen merged into Titan as of December 31, 2003 have been reclassified inthe prior year condensed financial statements to conform with the current yearpresentation.

 

88

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**Condensed Consolidating Parent Company, Guarantor andNon-guarantorStatement of OperationsFor the Year Ended December 31, 2003(In thousands)**

 
|                                                          |   | **Parent** |      | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications    and Eliminations** |   | **The Titan  Corporation and   Subsidiaries** |   |
|---------------------------------------------------------------|--------|------------|-----------|-----------------------------|--------|---------------------------------|--------|-------------------------------------------|--------|-----------------------------------------------|--------|
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Revenues                                                      |   | $          | 1,678,777 |                        | $      | 67,598                          |   | $                                         | 31,376 |                                          | $      | (2,744 | ) | $ | 1,775,007 |   |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Cost and expenses:                                            |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Cost of revenues                                              |   | 1,398,467  |      | 55,335                      |   | 27,365                          |   | (2,536                                    | )      | 1,478,631                                     |   |
| Selling, general and administrative                           |   | 146,779    |      | 11,582                      |   | 5,558                           |   | —                                    |   | 163,919                                       |   |
| Research and development                                      |   | 9,189      |      | 2,135                       |   | —                          |   | —                                    |   | 11,324                                        |   |
| Impairment charge related to SureBeam                         |   | 15,757     |      | —                      |   | —                          |   | —                                    |   | 15,757                                        |   |
| Merger related costs                                          |   | 2,247      |      | —                      |   | —                          |   | —                                    |   | 2,247                                         |   |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Total costs and expenses                                      |   | 1,572,439  |      | 69,052                      |   | 32,923                          |   | (2,536                                    | )      | 1,671,878                                     |   |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Operating profit (loss)                                       |   | 106,338    |      | (1,454                      | )      | (1,547                          | )      | (208                                      | )      | 103,129                                       |   |
| Interest expense                                              |   | (34,459    | )         | (89                         | )      | (26                             | )      | —                                    |   | (34,574                                       | )      |
| Interest income                                               |   | 2,315      |      | 4                           |   | 7                               |   | —                                    |   | 2,326                                         |   |
| Debt extinguishment costs                                     |   | (12,423    | )         | —                      |   | —                          |   | —                                    |   | (12,423                                       | )      |
| Loss on investments                                           |   | (6,154     | )         | —                      |   | —                          |   | —                                    |   | (6,154                                        | )      |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Income (loss) from continuing operations  before income taxes |   | 55,617     |      | (1,539                      | )      | (1,566                          | )      | (208                                      | )      | 52,304                                        |   |
| Income tax provision (benefit)                                |   | 23,692     |      | (622                        | )      | (633                            | )      | (84                                       | )      | 22,353                                        |   |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Income (loss) from continuing operations                      |   | 31,925     |      | (917                        | )      | (933                            | )      | (124                                      | )      | 29,951                                        |   |
| Loss from discontinued operations, net of  taxes              |   | (278       | )         | 239                         |   | (815                            | )      | —                                    |   | (854                                          | )      |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Earnings (loss) before equity in losses of  subsidiaries      |   | 31,647     |      | (678                        | )      | (1,748                          | )      | (124                                      | )      | 29,097                                        |   |
| Equity in losses of subsidiaries                              |   | (2,426     | )         | —                      |   | —                          |   | 2,426                                     |   | —                                        |   |
|                                                          |   |       |      |                        |   |                            |   |                                      |   |                                          |   |
| Net earnings (loss)                                           |   | $          | 29,221    |                        | $      | (678                            | )      | $                                         | (1,748 | )                                             | $      | 2,302 |   | $ | 29,097 |   |

 

**Condensed Consolidating Parent Company, Guarantor andNon-guarantorStatement of OperationsFor the Year Ended December 31, 2002(In thousands)**

 
|                                                                                                         |   | **Parent** |      | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications  and  Eliminations** |    | **The Titan  Corporation and  Subsidiaries** |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------|-----------|-----------------------------|--------|---------------------------------|--------|------------------------------------------|---------|----------------------------------------------|--------|
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Revenues                                                                                                     |   | $          | 1,344,626 |                        | $      | 22,258                          |   | $                                        | 30,306  |                                         | $      | (5,030 | ) | $ | 1,392,160 |   |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Cost and expenses:                                                                                           |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Cost of revenues                                                                                             |   | 1,097,936  |      | 17,073                      |   | 18,586                          |   | (4,534                                   | )       | 1,129,061                                    |   |
| Selling, general and administrative                                                                          |   | 164,623    |      | 7,472                       |   | 7,464                           |   | —                                   |    | 179,559                                      |   |
| Research and development                                                                                     |   | 9,177      |      | 378                         |   | —                          |   | —                                   |    | 9,555                                        |   |
| Exit and restructuring charges and other                                                                     |   | 41,642     |      | —                      |   | 11,675                          |   | —                                   |    | 53,317                                       |   |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Total costs and expenses                                                                                     |   | 1,313,378  |      | 24,923                      |   | 37,725                          |   | (4,534                                   | )       | 1,371,492                                    |   |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Operating profit (loss)                                                                                      |   | 31,248     |      | (2,665                      | )      | (7,419                          | )      | (496                                     | )       | 20,668                                       |   |
| Interest expense                                                                                             |   | (32,552    | )         | (110                        | )      | (2                              | )      | —                                   |    | (32,664                                      | )      |
| Interest income                                                                                              |   | 1,708      |      | —                      |   | —                          |   | —                                   |    | 1,708                                        |   |
| Debt extinguishment costs                                                                                    |   | (9,435     | )         | —                      |   | —                          |   | —                                   |    | (9,435                                       | )      |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Loss from continuing operations before  income taxes and cumulative effect of change in accounting principle |   | (9,031     | )         | (2,775                      | )      | (7,421                          | )      | (496                                     | )       | (19,723                                      | )      |
| Income tax benefit                                                                                           |   | (975       | )         | (666                        | )      | (4,783                          | )      | (55                                      | )       | (6,479                                       | )      |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Loss from continuing operations before  cumulative effect of change in accounting principle                  |   | (8,056     | )         | (2,109                      | )      | (2,638                          | )      | (441                                     | )       | (13,244                                      | )      |
| Loss from discontinued operations, net of  taxes                                                             |   | (16,678    | )         | (157,480                    | )      | (43,948                         | )      | –                                   |    | (218,106                                     | )      |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Loss before cumulative effect of change in  accounting principle                                             |   | (24,734    | )         | (159,589                    | )      | (46,586                         | )      | (441                                     | )       | (231,350                                     | )      |
| Cumulative effect of change in accounting  principle, net of tax benefit                                     |   | (9,414     | )         | –                      |   | (30,697                         | )      | –                                   |    | (40,111                                      | )      |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Loss before equity in losses of  subsidiaries                                                                |   | (34,148    | )         | (159,589                    | )      | (77,283                         | )      | (441                                     | )       | (271,461                                     | )      |
| Equity in losses of subsidiaries                                                                             |   | (236,872   | )         | (35,972                     | )      | —                          |   | 272,844                                  |    | —                                       |   |
|                                                                                                         |   |       |      |                        |   |                            |   |                                     |    |                                         |   |
| Net earnings (loss)                                                                                          |   | $          | (271,020  | )                           | $      | (195,561                        | )      | $                                        | (77,283 | )                                            | $      | 272,403 |   | $ | (271,461 | ) |

 

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**Condensed Consolidating Parent Company, Guarantor andNon-guarantor**

**Statement of Operations**

**For the Year Ended December 31, 2001**

**(In thousands)**

 
|                                                                                 |   | **Parent** |    | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications  and  Eliminations** |    | **The Titan  Corporation and  Subsidiaries** |   |
|--------------------------------------------------------------------------------------|--------|------------|---------|-----------------------------|--------|---------------------------------|--------|------------------------------------------|---------|----------------------------------------------|--------|
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Revenues                                                                             |   | $          | 944,933 |                        | $      | 13,702                          |   | $                                        | 21,881  |                                         | $      | (6,019 | ) | $ | 974,497 |   |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Cost and expenses:                                                                   |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Cost of revenues                                                                     |   | 741,187    |    | 6,335                       |   | 12,511                          |   | (4,918                                   | )       | 755,115                                      |   |
| Selling, general and administrative                                                  |   | 136,261    |    | 4,863                       |   | 14,664                          |   | (1,274                                   | )       | 154,514                                      |   |
| Research and development                                                             |   | 7,683      |    | 689                         |   | 352                             |   | 586                                      |    | 9,310                                        |   |
| Acquisition and integration related charges  and other                               |   | 12,236     |    | —                      |   | 15,611                          |   | —                                   |    | 27,847                                       |   |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Total costs and expenses                                                             |   | 897,367    |    | 11,887                      |   | 43,138                          |   | (5,606                                   | )       | 946,786                                      |   |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Operating profit (loss)                                                              |   | 47,566     |    | 1,815                       |   | (21,257                         | )      | (413                                     | )       | 27,711                                       |   |
| Interest expense                                                                     |   | (26,439    | )       | (550                        | )      | (9,680                          | )      | —                                   |    | (36,669                                      | )      |
| Interest income                                                                      |   | 1,770      |    | 9                           |   | —                          |   | —                                   |    | 1,779                                        |   |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Income (loss) from continuing operations  before income taxes and minority interests |   | 22,897     |    | 1,274                       |   | (30,937                         | )      | (413                                     | )       | (7,179                                       | )      |
| Income tax provision (benefit)                                                       |   | 10,020     |    | 471                         |   | (9,304                          | )      | (180                                     | )       | 1,007                                        |   |
| ,                                                                                    |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Income (loss) from continuing operations  before minority interests                  |   | 12,877     |    | 803                         |   | (21,633                         | )      | (233                                     | )       | (8,186                                       | )      |
| Minority interests                                                                   |   | 4,636      |    | 93                          |   | —                          |   | —                                   |    | 4,729                                        |   |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Income (loss) from continuing operations                                             |   | 17,513     |    | 896                         |   | (21,633                         | )      | (233                                     | )       | (3,457                                       | )      |
| Income (loss) from discontinued operations,  net of taxes                            |   | (85,305    | )       | 3.998                       |   | (13,850                         | )      | —                                   |    | (95,157                                      | )      |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Income (loss) before equity in losses of  subsidiaries                               |   | (67,792    | )       | 4,894                       |   | (35,483                         | )      | (233                                     | )       | (98,614                                      | )      |
| Equity in losses of subsidiaries                                                     |   | (30,589    | )       | (3,525                      | )      | —                          |   | 34,114                                   |    | –                                       |   |
|                                                                                 |   |       |    |                        |   |                            |   |                                     |    |                                         |   |
| Net earnings (loss)                                                                  |   | $          | (98,381 | )                           | $      | 1,369                           |   | $                                        | (35,483 | )                                            | $      | 33,881 |   | $ | (98,614 | ) |

 

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**Condensed Consolidating Parent Company, Guarantor andNon-guarantorBalance SheetAs of December 31, 2003(In thousands)**

 
|                                                           |   | **Parent** |      | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications  and  Eliminations** |     | **The Titan  Corporation and  Subsidiaries** |   |
|----------------------------------------------------------------|--------|------------|-----------|-----------------------------|--------|---------------------------------|--------|------------------------------------------|----------|----------------------------------------------|--------|
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| **Assets**                                                     |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Current Assets:                                                |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Cash and cash equivalents                                      |   | $          | 25,073    |                        | $      | (64                             | )      | $                                        | 1,965    |                                         | $      | — |   | $ | 26,974 |   |
| Accounts receivable-net                                        |   | 342,767    |      | 17,835                      |   | 27,361                          |   | —                                   |     | 387,963                                      |   |
| Inventories                                                    |   | 20,217     |      | 2,352                       |   | 6,836                           |   | —                                   |     | 29,405                                       |   |
| Prepaid expenses and other                                     |   | 23,175     |      | 781                         |   | 296                             |   | (208                                     | )        | 24,044                                       |   |
| Deferred income taxes                                          |   | 91,272     |      | —                      |   | —                          |   | —                                   |     | 91,272                                       |   |
| Current assets of discontinued operations                      |   | —     |      | 46,584                      |   | 8,185                           |   | —                                   |     | 54,769                                       |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Total current assets                                           |   | 502,504    |      | 67,488                      |   | 44,643                          |   | (208                                     | )        | 614,427                                      |   |
| Property and equipment, net                                    |   | 38,698     |      | 15,154                      |   | 11,939                          |   | —                                   |     | 65,791                                       |   |
| Goodwill                                                       |   | 460,916    |      | 18,648                      |   | 59                              |   | —                                   |     | 479,623                                      |   |
| Other assets-net                                               |   | 59,672     |      | 8,336                       |   | 5                               |   | —                                   |     | 68,013                                       |   |
| Non-current assets of discontinued  operations                 |   | 62,781     |      | —                      |   | —                          |   | —                                   |     | 62,781                                       |   |
| Intercompany investments and advances-net                      |   | 361,081    |      | (195,438                    | )      | (165,643                        | )      | —                                   |     | –                                       |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Total assets                                                   |   | $          | 1,485,652 |                        | $      | (85,812                         | )      | $                                        | (108,997 | )                                            | $      | (208 | ) | $ | 1,290,635 |   |
| **Liabilities and  Stockholders’ Equity**                 |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Current Liabilities:                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Current portion of amounts outstanding  under line of credit   |   | $          | 3,500     |                        | $      | —                          |   | $                                        | —   |                                         | $      | — |   | $ | 3,500 |   |
| Accounts payable                                               |   | 77,777     |      | 10,604                      |   | 2,902                           |   | —                                   |     | 91,283                                       |   |
| Current portion of long-term debt                              |   | 863        |      | —                      |   | —                          |   | —                                   |     | 863                                          |   |
| Accrued compensation and benefits                              |   | 76,821     |      | 3,693                       |   | 1,309                           |   | —                                   |     | 81,823                                       |   |
| Other accrued liabilities                                      |   | 89,388     |      | 4,184                       |   | 1,767                           |   | —                                   |     | 95,339                                       |   |
| Current liabilities of discontinued  operations                |   | 368        |      | 13,692                      |   | 4,723                           |   | —                                   |     | 18,783                                       |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Total current liabilities                                      |   | 248,717    |      | 32,173                      |   | 10,701                          |   | —                                   |     | 291,591                                      |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Long-term portion of amounts outstanding  under line of credit |   | 341,250    |      | —                      |   | —                          |   | —                                   |     | 341,250                                      |   |
| Senior subordinated debt                                       |   | 200,000    |      | —                      |   | —                          |   | —                                   |     | 200,000                                      |   |
| Other long-term debt                                           |   | 988        |      | —                      |   | —                          |   | —                                   |     | 988                                          |   |
| Other non-current liabilities                                  |   | 47,360     |      | 491                         |   | 3,200                           |   | —                                   |     | 51,051                                       |   |
| Non-current liabilities of discontinued  operations            |   | 1,041      |      | 32,307                      |   | 998                             |   | —                                   |     | 34,346                                       |   |
| Stockholders’ equity (deficit)                            |   | 646,296    |      | (150,783                    | )      | (123,896                        | )      | (208                                     | )        | 371,409                                      |   |
|                                                           |   |       |      |                        |   |                            |   |                                     |     |                                         |   |
| Total liabilities and equity                                   |   | $          | 1,485,652 |                        | $      | (85,812                         | )      | $                                        | (108,997 | )                                            | $      | (208 | ) | $ | 1,290,635 |   |

 

**Condensed Consolidating Parent Company,Guarantor and Non-guarantorBalance Sheet****As of December 31, 2002**

**(In thousands)**

 
|                                                                                                                                                                      |   | **Parent** |      | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications  and   Eliminations** |     | **The Titan  Corporation and   Subsidiaries** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|-----------------------------|--------|---------------------------------|--------|-------------------------------------------|----------|-----------------------------------------------|--------|
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| **Assets**                                                                                                                                                                |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Current Assets:                                                                                                                                                           |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Cash and cash equivalents                                                                                                                                                 |   | $          | 33,390    |                        | $      | 793                             |   | $                                         | (60      | )                                             | $      | — |   | $ | 34,123 |   |
| Restricted cash                                                                                                                                                           |   | 394        |      | —                      |   | —                          |   | —                                    |     | 394                                           |   |
| Accounts receivable- net                                                                                                                                                  |   | 278,511    |      | 8,736                       |   | 27,116                          |   | —                                    |     | 314,363                                       |   |
| Inventories                                                                                                                                                               |   | 24,901     |      | 1,854                       |   | 4,525                           |   | —                                    |     | 31,280                                        |   |
| Prepaid expenses and other                                                                                                                                                |   | 17,915     |      | 293                         |   | 1,986                           |   | (753                                      | )        | 19,441                                        |   |
| Deferred income taxes                                                                                                                                                     |   | 108,046    |      | —                      |   | —                          |   | —                                    |     | 108,046                                       |   |
| Current assets of discontinued operations                                                                                                                                 |   | 661        |      | 93,145                      |   | 10,065                          |   | —                                    |     | 103,871                                       |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Total current assets                                                                                                                                                      |   | 463,818    |      | 104,821                     |   | 43,632                          |   | (753                                      | )        | 611,518                                       |   |
| Property and equipment, net                                                                                                                                               |   | 40,206     |      | 14,358                      |   | 9,141                           |   | —                                    |     | 63,705                                        |   |
| Goodwill                                                                                                                                                                  |   | 458,527    |      | 4,133                       |   | 59                              |   | —                                    |     | 462,719                                       |   |
| Other assets-net                                                                                                                                                          |   | 98,505     |      | 1,393                       |   | 5                               |   | —                                    |     | 99,903                                        |   |
| Deferred income taxes                                                                                                                                                     |   | 53,015     |      | —                      |   | —                          |   | —                                    |     | 53,015                                        |   |
| Non-current assets of discontinued operations                                                                                                                             |   | —     |      | 4,212                       |   | 2,370                           |   | —                                    |     | 6,582                                         |   |
| Intercompany investments and advances-net                                                                                                                                 |   | 329,178    |      | (172,801                    | )      | (156,377                        | )      | —                                    |     | –                                        |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Total assets                                                                                                                                                              |   | $          | 1,443,249 |                        | $      | (43,884                         | )      | $                                         | (101,170 | )                                             | $      | (753 | ) | $ | 1,297,442 |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                             |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Current Liabilities:                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Current portion of amounts outstanding under line  of credit                                                                                                              |   | $          | 3,500     |                        | $      | —                          |   | $                                         | —   |                                          | $      | — |   | $ | 3,500 |   |
| Accounts payable                                                                                                                                                          |   | 65,740     |      | 5,747                       |   | 9,889                           |   | —                                    |     | 81,376                                        |   |
| Current portion of long-term debt                                                                                                                                         |   | 847        |      | —                      |   | —                          |   | —                                    |     | 847                                           |   |
| Accrued compensation and benefits                                                                                                                                         |   | 64,521     |      | 1,551                       |   | 567                             |   | —                                    |     | 66,639                                        |   |
| Other accrued liabilities                                                                                                                                                 |   | 75,089     |      | 9,319                       |   | 3,194                           |   | —                                    |     | 87,602                                        |   |
| Current liabilities of discontinued operations                                                                                                                            |   | 1,999      |      | 41,506                      |   | 5,638                           |   | —                                    |     | 49,143                                        |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Total current liabilities                                                                                                                                                 |   | 211,696    |      | 58,123                      |   | 19,288                          |   | —                                    |     | 289,107                                       |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Long-term portion of amounts outstanding under line  of credit                                                                                                            |   | 344,750    |      | —                      |   | —                          |   | —                                    |     | 344,750                                       |   |
| Other long-term debt                                                                                                                                                      |   | 2,045      |      | —                      |   | —                          |   | —                                    |     | 2,045                                         |   |
| Other non-current liabilities                                                                                                                                             |   | 49,522     |      | 4,868                       |   | 11                              |   | —                                    |     | 54,401                                        |   |
| Non-current liabilities of discontinued operations                                                                                                                        |   | —     |      | 43,230                      |   | 1,596                           |   | —                                    |     | 44,826                                        |   |
| Company obligated mandatory redeemable convertible  preferred securities of a subsidiary trust whose sole assets are senior  subordinated convertible debentures of Titan |   | 250,000    |      | —                      |   | —                          |   | —                                    |     | 250,000                                       |   |
| Stockholders’ equity (deficit)                                                                                                                                       |   | 585,236    |      | (150,105                    | )      | (122,065                        | )      | (753                                      | )        | 312,313                                       |   |
|                                                                                                                                                                      |   |       |      |                        |   |                            |   |                                      |     |                                          |   |
| Total liabilities and equity                                                                                                                                              |   | $          | 1,443,249 |                        | $      | (43,884                         | )      | $                                         | (101,170 | )                                             | $      | (753 | ) | $ | 1,297,442 |   |

 

91

----

 

**Condensed Consolidating Parent Company, Guarantor andNon-guarantorStatement of Cash FlowsFor the Year Ended December 31, 2003(In thousands)**

 
|                                                                                                                                                            |   | **Parent** |   | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications  and  Eliminations** |   | **The Titan  Corporation and  Subsidiaries** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|---------------------------------|--------|------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| **Cash Flows from  Operating Activities:**                                                                                                                      |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Income (loss) from continuing operations                                                                                                                        |   | $          | 31,925 |                        | $      | (917                            | )      | $                                        | (933   | )                                            | $      | (124 | ) | $ | 29,951 |   |
| Adjustments to reconcile income (loss) from  continuing operations to cash provided by (used for) continuing operations,  net of effects of businesses acquired |   | 75,048     |   | (15,905                     | )      | (10,741                         | )      | 124                                      |   | 48,526                                       |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Net cash provided by (used for) continuing  operations                                                                                                          |   | 106,973    |   | (16,822                     | )      | (11,674                         | )      | —                                   |   | 78,477                                       |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Income (loss) from discontinued operations                                                                                                                      |   | (278       | )      | 239                         |   | (815                            | )      | —                                   |   | (854                                         | )      |
| Adjustments to reconcile income (loss) from  discontinued operations to cash used for discontinued operations                                                   |   | (2,814     | )      | 6,663                       |   | (6,614                          | )      | —                                   |   | (2,765                                       | )      |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Net cash provided by (used for) discontinued  operations                                                                                                        |   | (3,092     | )      | 6,902                       |   | (7,429                          | )      | —                                   |   | (3,619                                       | )      |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Net cash provided by (used for) operating  activities                                                                                                           |   | 103,881    |   | (9,920                      | )      | (19,103                         | )      | —                                   |   | 74,858                                       |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| **Cash Flows from  Investing Activities:**                                                                                                                      |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Capital expenditures                                                                                                                                            |   | (10,943    | )      | (3,097                      | )      | (64                             | )      | —                                   |   | (14,104                                      | )      |
| Acquisition of businesses, net of cash  acquired                                                                                                                |   | (1,840     | )      | (12,249                     | )      | —                          |   | —                                   |   | (14,089                                      | )      |
| Other investments                                                                                                                                               |   | (1,615     | )      | —                      |   | —                          |   | —                                   |   | (1,615                                       | )      |
| Proceeds (payments) on intercompany  investments and advances                                                                                                   |   | (45,925    | )      | 24,622                      |   | 21,303                          |   | —                                   |   | —                                       |   |
| Other                                                                                                                                                           |   | 583        |   | (20                         | )      | 31                              |   | —                                   |   | 594                                          |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Net cash provided by (used for) investing  activities                                                                                                           |   | (59,740    | )      | 9,256                       |   | 21,270                          |   | —                                   |   | (29,214                                      | )      |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| **Cash Flows from  Financing Activities:**                                                                                                                      |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Extinguishment of HIGH TIDES and other debt  reductions                                                                                                         |   | (254,541   | )      | —                      |   | —                          |   | —                                   |   | (254,541                                     | )      |
| Issuance of senior subordinated notes and  other debt additions                                                                                                 |   | 200,000    |   | —                      |   | —                          |   | —                                   |   | 200,000                                      |   |
| Deferred debt issuance costs                                                                                                                                    |   | (8,924     | )      | —                      |   | —                          |   | —                                   |   | (8,924                                       | )      |
| Debt extinguishment costs                                                                                                                                       |   | (4,352     | )      | —                      |   | —                          |   | —                                   |   | (4,352                                       | )      |
| Proceeds from stock issuances                                                                                                                                   |   | 15,491     |   | —                      |   | —                          |   | —                                   |   | 15,491                                       |   |
| Dividends paid                                                                                                                                                  |   | (688       | )      | —                      |   | —                          |   | —                                   |   | (688                                         | )      |
| Decrease in restricted cash                                                                                                                                     |   | 394        |   | —                      |   | —                          |   | —                                   |   | 394                                          |   |
| Other                                                                                                                                                           |   | 162        |   | (193                        | )      | (59                             | )      | —                                   |   | (90                                          | )      |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Net cash used for financing activities                                                                                                                          |   | (52,458    | )      | (193                        | )      | (59                             | )      | —                                   |   | (52,710                                      | )      |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Effect of exchange rate changes on cash                                                                                                                         |   | —     |   | —                      |   | (83                             | )      | —                                   |   | (83                                          | )      |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Net increase (decrease) in cash and cash  equivalents                                                                                                           |   | (8,317     | )      | (857                        | )      | 2,025                           |   | —                                   |   | (7,149                                       | )      |
| Cash and cash equivalents at beginning of  year                                                                                                                 |   | 33,390     |   | 793                         |   | (60                             | )      | —                                   |   | 34,123                                       |   |
|                                                                                                                                                            |   |       |   |                        |   |                            |   |                                     |   |                                         |   |
| Cash and cash equivalents at end of year                                                                                                                        |   | $          | 25,073 |                        | $      | (64                             | )      | $                                        | 1,965  |                                         | $      | — |   | $ | 26,974 |   |

 

92

----

 

**Condensed Consolidating Parent Company, Guarantor andNon-guarantor**

**Statement of Cash Flows**

**For the Year Ended December 31, 2002**

**(In thousands)**

 
|                                                                                                                                                   |   | **Parent** |   | **Guarantor  Subsidiaries** |   | **Non-guarantor    Subsidiaries** |   | **Reclassifications  and   Eliminations** |   | **The Titan  Corporation and  Subsidiaries** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|-----------------------------------|--------|-------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| **Cash Flows from  Operating Activities:**                                                                                                             |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Loss from continuing operations                                                                                                                        |   | $          | (8,056 | )                           | $      | (2,109                            | )      | $                                         | (2,638 | )                                            | $      | (441 | ) | $ | (13,244 | ) |
| Adjustments to reconcile loss from  continuing operations to cash provided by (used for) continuing operations,  net of effects of businesses acquired |   | 141,144    |   | 30,661                      |   | (3,285                            | )      | 441                                       |   | 168,961                                      |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Net cash provided by (used for) continuing  operations                                                                                                 |   | 133,088    |   | 28,552                      |   | (5,923                            | )      | —                                    |   | 155,717                                      |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Loss from discontinued operations                                                                                                                      |   | (16,678    | )      | (157,480                    | )      | (43,948                           | )      | —                                    |   | (218,106                                     | )      |
| Adjustments to reconcile loss from discontinued  operations to cash used for discontinued operations                                                   |   | (80,325    | )      | 126,480                     |   | 37,557                            |   | —                                    |   | 83,714                                       |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Net cash used for discontinued operations                                                                                                              |   | (97,003    | )      | (30,998                     | )      | (6,391                            | )      | —                                    |   | (134,392                                     | )      |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Net cash provided by (used for) operating  activities                                                                                                  |   | 36,085     |   | (2,446                      | )      | (12,314                           | )      | —                                    |   | 21,325                                       |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| **Cash Flows from Investing Activities:**                                                                                                              |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Capital expenditures                                                                                                                                   |   | (13,760    | )      | (4,054                      | )      | (8,188                            | )      | —                                    |   | (26,002                                      | )      |
| Acquisition of businesses, net of cash acquired                                                                                                        |   | 27,237     |   | 172                         |   | —                            |   | —                                    |   | 27,409                                       |   |
| Capitalized software development costs                                                                                                                 |   | —     |   | (1,341                      | )      | (245                              | )      | —                                    |   | (1,586                                       | )      |
| Proceeds from sales of investments                                                                                                                     |   | 6,917      |   | —                      |   | —                            |   | —                                    |   | 6,917                                        |   |
| Advances to SureBeam on line of credit                                                                                                                 |   | (25,000    | )      | —                      |   | —                            |   | —                                    |   | (25,000                                      | )      |
| Other investments                                                                                                                                      |   | (6,851     | )      | —                      |   | —                            |   | —                                    |   | (6,851                                       | )      |
| Proceeds (payments) on intercompany investments and  advances                                                                                          |   | (27,319    | )      | 9,328                       |   | 17,991                            |   | —                                    |   | –                                       |   |
| Other                                                                                                                                                  |   | 4,307      |   | (46                         | )      | 3,333                             |   | —                                    |   | 7,594                                        |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Net cash provided by (used for) investing  activities                                                                                                  |   | (34,469    | )      | 4,059                       |   | 12,891                            |   | —                                    |   | (17,519                                      | )      |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| **Cash Flows from Financing Activities:**                                                                                                              |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Additions to debt                                                                                                                                      |   | 18,250     |   | —                      |   | —                            |   | —                                    |   | 18,250                                       |   |
| Retirements of debt                                                                                                                                    |   | (4,177     | )      | (470                        | )      | —                            |   | —                                    |   | (4,647                                       | )      |
| Deferred debt issuance costs                                                                                                                           |   | (8,908     | )      | —                      |   | —                            |   | —                                    |   | (8,908                                       | )      |
| Proceeds from stock issuances                                                                                                                          |   | 8,566      |   | —                      |   | —                            |   | —                                    |   | 8,566                                        |   |
| Issuance of stock in subsidiaries                                                                                                                      |   | 15         |   | 4                           |   | —                            |   | —                                    |   | 19                                           |   |
| Dividends paid                                                                                                                                         |   | (689       | )      | —                      |   | —                            |   | —                                    |   | (689                                         | )      |
| Increase in restricted cash                                                                                                                            |   | (394       | )      | —                      |   | —                            |   | —                                    |   | (394                                         | )      |
| Other                                                                                                                                                  |   | 139        |   | (187                        | )      | (193                              | )      | —                                    |   | (241                                         | )      |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Net cash provided by (used for) financing  activities                                                                                                  |   | 12,802     |   | (653                        | )      | (193                              | )      | —                                    |   | 11,956                                       |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Effect of exchange rate changes on cash                                                                                                                |   | —     |   | (220                        | )      | (40                               | )      | —                                    |   | (260                                         | )      |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Net increase in cash and cash equivalents                                                                                                              |   | 14,418     |   | 740                         |   | 344                               |   | —                                    |   | 15,502                                       |   |
| Cash and cash equivalents at beginning of year                                                                                                         |   | 18,972     |   | 53                          |   | (404                              | )      | —                                    |   | 18,621                                       |   |
|                                                                                                                                                   |   |       |   |                        |   |                              |   |                                      |   |                                         |   |
| Cash and cash equivalents at end of year                                                                                                               |   | $          | 33,390 |                        | $      | 793                               |   | $                                         | (60    | )                                            | $      | — |   | $ | 34,123 |   |

 

93

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**Condensed Consolidating Parent Company,Guarantor and Non-guarantorStatement of Cash Flows**For the YearEnded December 31, 2001(In thousands)

 
|                                                                                                                                                            |   | **Parent** |    | **Guarantor  Subsidiaries** |   | **Non-guarantor  Subsidiaries** |   | **Reclassifications  and Eliminations** |    | **The Titan  Corporation and Subsidiaries** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|-----------------------------|--------|---------------------------------|--------|-----------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| **Cash Flows from  Operating Activities:**                                                                                                                      |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Income (loss) from continuing operations                                                                                                                        |   | $          | 17,513  |                        | $      | 896                             |   | $                                       | (21,633 | )                                           | $      | (233 | ) | $ | (3,457 | ) |
| Adjustments to reconcile income (loss) from  continuing operations to cash provided by (used for) continuing operations,  net of effects of businesses acquired |   | 4,503      |    | (917                        | )      | 9,980                           |   | 233                                     |    | 13,799                                      |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Net cash provided by (used for) continuing  operations                                                                                                          |   | 22,016     |    | (21                         | )      | (11,653                         | )      | —                                  |    | 10,342                                      |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Income (loss) from discontinued operations                                                                                                                      |   | (85,305    | )       | 3,998                       |   | (13,850                         | )      | —                                  |    | (95,157                                     | )      |
| Adjustments to reconcile income (loss) from  discontinued operations to cash used for discontinued operations                                                   |   | 75,109     |    | (75,375                     | )      | (18,926                         | )      | —                                  |    | (19,192                                     | )      |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Net cash used for discontinued operations                                                                                                                       |   | (10,196    | )       | (71,377                     | )      | (32,776                         | )      | —                                  |    | (114,349                                    | )      |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Net cash used for operating activities                                                                                                                          |   | 11,820     |    | (71,398                     | )      | (44,429                         | )      | —                                  |    | (104,007                                    | )      |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| **Cash Flows from  Investing Activities:**                                                                                                                      |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Capital expenditures                                                                                                                                            |   | (10,393    | )       | (1,339                      | )      | (2,505                          | )      | —                                  |    | (14,237                                     | )      |
| Acquisition of businesses, net of cash  acquired                                                                                                                |   | (34,171    | )       | —                      |   | —                          |   | —                                  |    | (34,171                                     | )      |
| Capitalized software development costs                                                                                                                          |   | 4          |    | (8                          | )      | —                          |   | —                                  |    | (4                                          | )      |
| Proceeds from sales of investments                                                                                                                              |   | 3,217      |    | —                      |   | —                          |   | —                                  |    | 3,217                                       |   |
| Other investments                                                                                                                                               |   | (12,546    | )       | —                      |   | —                          |   | —                                  |    | (12,546                                     | )      |
| Proceeds (payments) on intercompany  investments and advances                                                                                                   |   | (117,594   | )       | 72,897                      |   | 44,697                          |   |                                    |    | —                                      |   |
| Other                                                                                                                                                           |   | 238        |    | (149                        | )      | (295                            | )      | —                                  |    | (206                                        | )      |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Net cash provided by (used for) investing  activities                                                                                                           |   | (171,245   | )  | 71,401                      |   | 41,897                          |   | —                                  |    | (57,947                                     | )      |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| **Cash Flows from  Financing Activities:**                                                                                                                      |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Additions to debt                                                                                                                                               |   | 66,875     |    | —                      |   | —                          |   | —                                  |    | 66,875                                      |   |
| Retirements of debt                                                                                                                                             |   | (38,100    | )       | —                      |   | —                          |   | —                                  |    | (38,100                                     | )      |
| Deferred debt issuance costs                                                                                                                                    |   | (1,600     | )       | —                      |   | —                          |   | —                                  |    | (1,600                                      | )      |
| Proceeds from stock issuances                                                                                                                                   |   | 147,579    |    | —                      |   | —                          |   | —                                  |    | 147,579                                     |   |
| Issuance of stock in subsidiaries                                                                                                                               |   | 20         |    | —                      |   | 22                              |   | —                                  |    | 42                                          |   |
| Dividends paid                                                                                                                                                  |   | (690       | )       | —                      |   | —                          |   | —                                  |    | (690                                        | )      |
| Other                                                                                                                                                           |   | 2          |    | —                      |   | —                          |   | —                                  |    | 2                                           |   |
| — —                                                                                                                                                   |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Net cash provided by financing activities                                                                                                                       |   | 174,086    |    | —                      |   | 22                              |   | —                                  |    | 174,108                                     |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Effect of exchange rate changes on cash                                                                                                                         |   | —     |    | 48                          |   | (28                             | )      | —                                  |    | 20                                          |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Net increase (decrease) in cash and cash  equivalents                                                                                                           |   | 14,661     |    | 51                          |   | (2,538                          | )      | —                                  |    | 12,174                                      |   |
| Cash and cash equivalents at beginning of  year                                                                                                                 |   | 4,311      |    | 2                           |   | 2,134                           |   | —                                  |    | 6,447                                       |   |
|                                                                                                                                                            |   |       |    |                        |   |                            |   |                                    |    |                                        |   |
| Cash and cash equivalents at end of year                                                                                                                        |   | $          | 18,972  |                        | $      | 53                              |   | $                                       | (404    | )                                           | $      | — |   | $ | 18,621 |   |

 

94

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**Note 18.  UnauditedQuarterly Financial Data**

 
| **2003**                                                                                             |   | **First  Quarter** |    | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |    | **Total  Year** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------|---------|---------------------|--------|--------------------|--------|---------------------|---------|-----------------|--------|
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Revenues                                                                                             |   | $                  | 377,880 |                | $      | 437,680            |   | $                   | 471,854 |            | $      | 487,593 |   | $ | 1,775,007 |   |
| Gross profit                                                                                         |   | 62,604             |    | 72,392              |   | 75,657             |   | 85,723              |    | 296,376         |   |
| Income from continuing operations                                                                    |   | 7,939              |    | 5,083               |   | 14,987             |   | 1,942               |    | 29,951          |   |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Net income                                                                                           |   | 7,001              |    | 5,865               |   | 15,177             |   | 1,054               |    | 29,097          |   |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Basic earnings per share:                                                                            |   |               |    |                |   |               |   |                |    |            |   |
| Income from continuing operations                                                                    |   | $                  | 0.10    |                | $      | 0.06               |   | $                   | 0.18    |            | $      | 0.02 |   | $ | 0.37 |   |
| Net income                                                                                           |   | 0.09               |    | 0.07                |   | 0.18               |   | 0.01                |    | 0.36            |   |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Diluted earnings per share:                                                                          |   |               |    |                |   |               |   |                |    |            |   |
| Income from continuing operations                                                                    |   | 0.10               |    | 0.06                |   | 0.18               |   | 0.02                |    | 0.35            |   |
| Net income                                                                                           |   | 0.09               |    | 0.07                |   | 0.18               |   | 0.01                |    | 0.34            |   |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| **2002**                                                                                             |   | **First  Quarter** |    | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |    | **Total  Year** |   |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Revenues                                                                                             |   | $                  | 314,348 |                | $      | 345,631            |   | $                   | 352,819 |            | $      | 379,362 |   | $ | 1,392,160 |   |
| Gross profit                                                                                         |   | 60,923             |    | 68,872              |   | 65,842             |   | 67,462              |    | 263,099         |   |
| Income (loss) from continuing operations before  cumulative effect of change in accounting principle |   | 7,913              |    | 4,754               |   | (33,516            | )      | 7,605               |    | (13,244         | )      |
| Net loss                                                                                             |   | (33,624            | )       | (17,175             | )      | (225,298           | )      | (772                | )       | (271,461        | )      |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Basic earnings per share:                                                                            |   |               |    |                |   |               |   |                |    |            |   |
| Income (loss) from continuing operations before  cumulative effect of change in accounting principle |   | $                  | 0.11    |                | $      | 0.06               |   | $                   | (0.43   | )               | $      | 0.10 |   | $ | (0.18 | ) |
| Net loss                                                                                             |   | (0.48              | )       | (0.15               | )      | (2.89              | )      | (0.01               | )       | (3.58           | )      |
|                                                                                                 |   |               |    |                |   |               |   |                |    |            |   |
| Diluted earnings per share:                                                                          |   |               |    |                |   |               |   |                |    |            |   |
| Income (loss) from continuing operations before  cumulative effect of change in accounting principle |   | 0.11               |    | 0.05                |   | (0.43              | )      | 0.09                |    | (0.18           | )      |
| Net loss                                                                                             |   | (0.47              | )       | (0.16               | )      | (2.89              | )      | (0.01               | )       | (3.58           | )      |

 

95

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The above financialinformation for each quarter reflects all normal and recurring adjustments. 

 

Incomefrom continuing operations and net income in 2003 include an estimatedimpairment charge of $15.8 million related to Titan’s former subsidiary,SureBeam Corporation, debt extinguishment charges of $12.4 million and a losson investments of $6.2 million.  Netincome in 2003 also includes a net loss from discontinued operations of $0.9 million.

 

Income from continuingoperations and net loss for 2002 include exit and restructuring charges andother of $53.3 million and debt extinguishment charges of $9.4million.  Net loss for 2002 includes aloss from discontinued operations of $218.1 million.  The loss from continuing operations includesall costs previously related to the Cayenta headquarters and network operationscenter, which supported sales, marketing, administrative and operationalfunctions of all previously integrated Cayenta operations.  The headquarters and network operationscenter were eliminated on March 1, 2002 when certain of the components ofCayenta were discontinued.  Certain ofthese costs were previously included in the loss from discontinued operationsfor the interim period for the first quarter of 2002, as  filed in the  Company’s  Form 10-Qfor the quarter ended March 31, 2002, filed with the Commission on May 15,2002.  These headquarters and networkoperations costs of approximately $17.1 million, which includes animpairment charge of $14.9 million for certain assets of the networkoperations center and corporate headquarters of Cayenta, have now beenreclassified to continuing operations in the presentation above.

 

**Item 9.  Change In andDisagreements with Accountants on Accounting and Financial Disclosure**

 

No information isrequired by Item 9. 

 

**Item 9A.  Controls andProcedures**

 

Evaluation of DisclosureControls and Procedures.

 

Under the supervision andwith the participation of our executive management, including our ChiefExecutive Officer and Chief Financial Officer, we performed an evaluation ofthe effectiveness and design of our disclosure controls and procedures as ofthe end of the period covered by this annual report.  Based on that evaluation, our executive management, including ourChief Executive Officer and our Chief Financial Officer, concluded that ourdisclosure controls and procedures are effective as of December 31, 2003.

 

Changes in internalcontrols.

 

Our management, includingour Chief Executive Officer and Chief Ffinancial Officer, also supervised andparticipated in an evaluation of any changes in internal controls overfinancial reporting that occurred during the last fiscal quarter and that havematerially, or are reasonably likely to materially affect, our internalcontrols over financial reporting.  Thatevaluation did not identify any such changes to our internal control overfinancial reporting.

 

96

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PARTIII

 

**Item 10.  Directors andExecutive Officers of the Company**

 

The information requiredby Item 10 with respect to the directors and the executive officers of theCompany will be filed by amendment not later than April 29, 2004 or, iffiled by April 29, 2004, will be incorporated herein by this reference toTitan’s definitive proxy statement for the 2004 Annual Meeting of Stockholders.

 

The information regardingthe Company’s audit committee members and audit committee financial expertswill be filed by amendment not later than April 29, 2004 or, if filed byApril 29, 2004, will be incorporated by reference to Titan’s definitiveproxy statement for the 2004 Annual Meeting of Stockholders.

 

The information regardingthe Company’s code of ethics that applies to the chief executive offer, chieffinancial officer, principal accounting officer and controller will be filed byamendment not later than April 29, 2004 or, if filed by April 29,2004, will be incorporated by reference to Titan’s definitive proxy statementfor the 2004 Annual Meeting of Stockholders.

 

**Item 11.  ExecutiveCompensation**

 

The information requiredby Item 11 will be filed by amendment not later than April 29, 2004 or, iffiled by April 29, 2004, will be incorporated herein by this reference toTitan’s definitive proxy statement for the 2004 Annual Meeting of Stockholders.

 

**Item 12.  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The information requiredby Item 12 will be filed by amendment not later than April 29, 2004 or, iffiled by April 29, 2004, will be incorporated herein by this reference toTitan’s definitive proxy statement for the 2004 Annual Meeting of Stockholders.

 

**Item 13.  CertainRelationships and Related Transactions**

 

The information requiredby Item 13 will be filed by amendment not later than April 29, 2004 or, iffiled by April 29, 2004, will be incorporated herein by this reference toTitan’s definitive proxy statement for the 2004 Annual Meeting of Stockholders.

 

**Item 14.  PrincipalAccounting Fees and Services**

 

The information requiredby Item 14 will be filed by amendment not later than April 29, 2004 or, iffiled by April 29, 2004, will be incorporated by this reference to Titan’sdefinitive proxy statement for the 2004 Annual Meeting of Stockholders.

 

97

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**PART IV**

 

**Item 15.  Exhibits,Financial Statement Schedules, and Reports on Form 8-K**

 
| (a)    |   | 1  and 2. Financial Statements being filed as part of this report are listed in  the index in Item 8, on page.                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                              |
| (b)    |   | During  the three months ended December 31, 2003, and through the date of this  filing, the Company filed the following reports on Form 8-K: |
|   |   |                                                                                                                                              |
|   |   | (1)                                                                                                                                               |   | Current  Report on Form 8-K dated October 23, 2003, to furnish Regulation FD  disclosure pursuant to “Item 12. Results of Operations and Financial  Condition” in accordance with the Securities and Exchange Commission’s  Releases Nos. 33-8216 and 34-47583. |
|   |   | (2)                                                                                                                                               |   | Current  Report on Form 8-K dated February 11, 2004, and filed on  February 17, 2004, to furnish disclosure pursuant to “Item 11. Executive  Compensation” concerning the temporary suspension of trading under  Registrant’s Employee Benefit Plans. |
|   |   | (3)                                                                                                                                               |   | Current  Report on Form 8-K dated February 13, 2004, to furnish disclosure  pursuant to “Item 5. Other Events and Required FD Disclosure” regarding the  Company’s announcement that the U.S. Securities and Exchange Commission had  commenced an investigation into whether payments made pursuant to certain  agreements between Titan and international consultants were made in violation  of applicable law. |
|   |   | (4)                                                                                                                                               |   | Current  Report on Form 8-K dated February 23, 2004, to furnish Regulation FD  disclosure pursuant to “Item 12. Results of Operations and Financial  Condition” in accordance with the Securities and Exchange Commission’s  Releases Nos. 33-8216 and 34-47583. |
|   |   |                                                                                                                                              |
| (c)    |   | Exhibits.                                                                                                                                         |

 

**Exhibit Index**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **Page  No.** |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
| 2.1              |   | Agreement  and Plan of Merger, dated as of September 15, 2003, by and among  Lockheed Martin Corporation, LMC Sub One, Inc. and The Titan Corporation,  which was Exhibit 2.1 to Titan Corporation’s Form 8-K dated  September 17, 2003, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | *             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |          |
| 3.1              |   | Registrant’s  Certificate of Amendment of Restated Certificate of Incorporation dated as of  October 21, 1998, which was Exhibit No. 3.1 to Registrant’s  Quarterly Report on Form 10-Q dated November 16, 1998, is  incorporated herein by this reference.   Registrant’s Restated Certificate of Incorporation dated as of  November 6, 1986, which was Exhibit No. 3.1 to Registrant’s 1987  Annual Report on Form 10-K is incorporated herein by this  reference.  Registrant’s Certificate  of Amendment of Restated Certificate of Incorporation dated as of  June 30, 1987, which was Exhibit 3.2 to Registrant’s 1987 Annual  Report on Form 10-K is incorporated herein by this reference. |   | *             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |          |
| 3.2              |   | Registrant’s  Bylaws, which were Exhibit 3.3 to Registrant’s 1999 Annual Report on  Form 10-K, are incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | *             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |          |
| 3.3              |   | Amendments  to Bylaws of Registrant, dated March 22, 2000 and August 16, 2000,  which were Exhibit 3.4 to Registrant’s 2001 Annual Report on Form 10-K, is  incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | *             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |          |
| 4.1              |   | Rights  Amendment, dated as of August 21, 1995, between The Titan Corporation  and American Stock Transfer and Trust Company, which was Exhibit 1 to  Registrant’s Form 8-A dated September 5, 1995, is incorporated  herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | *             |

 

98

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| 4.2    |   | Indenture dated as of May 15, 2003 among The Titan Corporation, as  issuer of 8% Senior Subordinated Notes due 2011, the Guarantors named therein  and Deutsche Bank Trust Company Americas, as trustee, which was Exhibit 4.1  to Registration Statement of Form S-4 (SEC File No. 33-106911), filed by the Registrant  on July 9, 2003, incorporated herein by this reference.                                                                   |   | *      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 4.3    |   | First Supplemental Indenture Dated February 25, 2004, among The Titan  Corporation, Duetsche Bank Trust Company Americas, LMC, LLC One, LLC and  Lockheed Martin Corporation, which was Exhibit 4.3 to Post-Effective  Amendment No. 2 to a Registration Statement on Form S-4 (SEC File No.  333-106911-15) filed by the Registrant on February 9, 2004, incorporated  herein by this reference.                                                       |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 4.4    |   | Registration Rights Agreement dated as of May 15, 2003 by and among  The Titan Corporation, the Guarantors named therein and Credit Suisse First  Boston LLC, Goldman, Sachs & Co., and Wachovia Securities, Inc., which  was Exhibit 4.8 to Registration Statement on Form S-4 filed by the Registrant  on July 9, 2003, incorporated herein by this reference.                                                                               |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.1   |   | 1992  Directors’ Stock Option Plan which was filed in the 1993 definitive proxy  statement and was Exhibit 10.14 to Registrant’s 1992 Annual Report on  Form 10-K, is incorporated herein by this reference.                                                                                                                                                                                                                        |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.2   |   | Stock  Option Plan of 1994, which was filed in the 1994 definitive proxy statement  and was Exhibit 10.17 to Registrant’s 1993 Annual Report on  Form 10-K, is incorporated herein by this reference.                                                                                                                                                                                                                                    |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.3   |   | Amendment  to Stock Option Plan Of 1994, which was Exhibit 10.3 to Registrant’s  1999 Annual Report on Form 10-K, is incorporated herein by this  reference.                                                                                                                                                                                                                                                                             |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.4   |   | 1995  Employee Stock Purchase Plan, which was Exhibit 4 to Registrant’s  Form S-8 dated December 18, 1995, is incorporated herein by this  reference.                                                                                                                                                                                                                                                                               |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.5   |   | Executive  Severance Plan entered into by the Registrant with Ronald B. Gorda, which was  Exhibit 6(a)(10) to Registrant’s Quarterly Report on Form 10-Q  dated November 13, 1995, is incorporated herein by this reference.                                                                                                                                                                                                   |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.6   |   | 1996  Directors’ Stock Option and Equity Participation Plan, which was filed in the  1996 definitive proxy statement and was Exhibit 10.7 to Registrant’s  1995 Annual Report on Form 10-K, is incorporated herein by this  reference.                                                                                                                                                                                              |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.7   |   | Stock  Option Plan of 1997, which was filed in the Registrant’s 1997 Definitive  Proxy Statement as Appendix A, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                     |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.8   |   | Amendment  to Stock Option Plan of 1997, which was Exhibit 10.5 to Registrant’s  1999 Annual Report on Form 10-K, is incorporated herein by this  reference.                                                                                                                                                                                                                                                                             |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.9   |   | The  Titan Corporation 2000 Employee Stock Purchase Plan, which was  Exhibit 4.1 to Registrant’s Form S-8 dated July 11, 2000, is  incorporated herein by this reference.                                                                                                                                                                                                                                                           |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.10  |   | The  Titan Corporation 2000 Employee and Director Stock Option and Incentive Plan,  which was Exhibit 4.2 to Registrant’s Form S-8 (No. 333-41140)  dated July 11, 2000, is incorporated herein by this reference.                                                                                                                                                                                                                  |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.11  |   | The Titan Corporation 2002 Employee Stock Purchase Plan, which was  Exhibit 99.2 to Registrant’s Form S-8 (No. 333-103751) dated March 11,  2003, is incorporated herein by this reference.                                                                                                                                                                                                                                                   |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.12  |   | The Titan Corporation 2002 Employee and Director Stock Option and  Incentive Plan, which was Exhibit 99.1 to Registrant’s Form S-8 (No.  333-103751) dated March 11, 2003, is incorporated herein by this  reference.                                                                                                                                                                                                                         |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.13  |   | Lease  Agreement dated as of July 9, 1991, by and between Torrey Pines Limited  Partnership, a California limited partnership, as landlord, and Registrant,  as tenant, which was Exhibit 10.1 to Registrant’s Form 8-K dated  July 11, 1991, is incorporated herein by this reference.                                                                                                                                        |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.14  |   | Agreement  of Lease by and between NBP 220, LLC and The Titan Corporation (“220 National  Business Parl”), dated March 31, 2003, including all exhibits and  attachments, which was filed as Exhibit 10.1 to Registrant’s Quarterly Report  on form 10-Q dated May 15, 2003, is incorporated herein by this reference.                                                                                                                   |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.15  |   | Deed  of Lease dated April 1, 2003, by and between Two Freedom Square, L.L.C. and  The Titan Corporation, including all exhibits and attachments, which was  filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q dated May  15, 2003, is incorporated herein by this reference.                                                                                                                                                         |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.16  |   | Loan  and Security Agreement, dated December 29, 1995, by and between  Registrant and Capital Associates International, Inc., which was  Exhibit 10.17 to Registrant’s 1995 Annual Report on Form 10-K, is  incorporated herein by this reference.                                                                                                                                                                             |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.17  |   | Rider  dated August 13, 1996, to Loan and Security Agreement dated  December 29, 1995 by and between Registrant and Capital Associates  International, Inc. which was Exhibit 10.28 to Registrant’s 1996  Annual Report on Form 10-K, is incorporated herein by this reference.                                                                                                                                           |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.18  |   | Loan  Facility Agreement dated as of December 10, 1999 among Titan  Africa, Inc., Office des Postes et Telecommunications of the State of  Benin, Banque Belgolaise, Eco Bank Benin, Banque Ouest Africain pour le  Developpement, Banque Internationale du Benin, Continental Bank Benin and  Bank of Africa Benin, which was Exhibit 10.32 to Registrant’s 1999 Annual  Report on Form 10-K, is incorporated herein by this reference. |   | *      |

 

99

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| 10.19  |   | Senior  Secured Credit Agreement dated as of May 23, 2002, among The Titan  Corporation, as the Borrower, various financial institutions from time to  time, as the Lenders, Wachovia Bank, National Association as Administrative  Agent, The Bank of Nova Scotia and Comerica Bank – California as Syndication  Agents, and Branch Banking and Trust Company and Toronto Dominion (New York),  Inc., as Documentation Agents, which was Exhibit 10.1 to Registrant’s Current  Report on Form 8-K dated May 23, 2002, and filed June 21, 2002 is  incorporated herein by this reference.                                                                                      |   | *      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.20  |   | Insurance Certificates, which are Annex I to Exhibit D to the  Senior Secured Credit Agreement dated as of May 23, 2002, among The  Titan Corporation, as the Borrower, various financial institutions from time  to time, as the Lenders, Wachovia Bank, National Association as  Administrative Agent, the Bank of Nova Scotia and Comerica Bank—California as  Syndication Agents, and Branch Banking and Trust Company and Toronto Dominion  (New York), Inc. as Documentation Agents, which were Exhibit 10.1 to  Registrant’s Current Report on Form 8-K/A dated as of May 23, 2002 and filed  August 9, 2002, are incorporated herein by this reference. |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.21  |   | Letter  Agreement dated March 29, 2002, between The Titan Corporation and  SureBeam Corporation, which was Exhibit 10.56 to Registrant’s 2001 Annual  Report on Form 10-K, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.22  |   | Senior Secured Credit Agreement between the Registrant and  SureBeam Corporation and Exhibits thereto dated as of August 2, 2002, which  was filed as Exhibits 10.1 through 10.9 with Registrant’s Form 8-K dated  August 2, 2002 and filed August 14, 2002, is incorporated herein by  this reference.                                                                                                                                                                                                                                                                                                                                                                   |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.23  |   | Amendment  to Senior Secured Credit Agreement dated as of May 7, 2003, among The Titan  Corporation, as the Borrower, various financial institutions form time to  time, as the Lenders, Wachovia Bank, National Association as Administrative  Agent, The Bank of Nova Scotia and Comerica Bank—California as Syndication  Agents, and Branch Banking and Trust Company and Toronto Dominion (New York),  Inc., as Documentation Agents.                                                                                                                                                                                                                                                |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.24  |   | License  Agreement dated October 17, 2001, between SB OperatingCo, Inc. and The  Titan Corporation, which was Exhibit 10.4 to the Registrant’s Current Report  on Form 8-K dated March 22, 2002, is incorporated herein by this  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.25  |   | The  Titan Corporation Deferred Compensation Plan, Master Plan Document effective  January 1, 2002, which was Exhibit 10.54 to Registrant’s 2001 Annual  Report on Form 10-K, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.26  |   | Amendment to The Titan Corporation Deferred Compensation Plan  effective July 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.27  |   | Amendment to The Titan Corporation Deferred Compensation Plan  effective November 18, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.28  |   | Executive Severance Plan enetered into by the Company with Gene W.  Ray and Nicholas J. Costanza, which was filed as Exhibit 10.15 to  Registrant's 1999 Annual Report on Form 10-K, is incorporated herein by this  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.29  |   | Amendment to Executive Agreement by and between The Titan Corporation  and Dr. Gene W. Ray dated September 14, 2003, which was filed as Exhibit 10.1  to Registrant’s Quarterly Report on Form 10-Q dated October 10, 2003, is  incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                   |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.30  |   | Amendment to Executive Agreement by and between The Titan Corporation  and Nicholas J. Costanza dated 14, 2003, which was filed as Exhibit 10.2 to  Registrant’s Quarterly Report on Form 10-Q dated October 10, 2003, is  incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                        |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.31  |   | Employment Agreement made and entered into as of April 3, 2003 by and  between The Titan Corporation, a Delware corporation, and Dr. Gene W. Ray,  which was filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q  dated May 15, 2003, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                          |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.32  |   | Employment Agreement made and entered into as of April 3, 2003 by and  between The Titan Corporation, a Delware corporation, and Nicholas J.  Costanza, which was filed as Exhibit 10.5 to Registrant’s Quarterly Report on  Form 10-Q dated May 15, 2003, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                     |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.33  |   | Employment Agreement made and entered into as of April 3, 2003 by and  between The Titan Corporation, a Delware corporation, and Mark W. Sopp, which  was filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q dated  May 15, 2003, is incorporated herein by this reference.                                                                                                                                                                                                                                                                                                                                                                                             |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.34  |   | Executive agreement dated August 20, 2003, by and between The Titan  Corporation and Mark W. Sopp, which was filed as Exhibit 10.2 to Registrant’s  Quarterly Report on Form 10-Q dated October 10, 2003, is incorporated herein  by this reference.                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | *      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 10.35  |   | Settlement Agreement dated as of March 5, 2004 by and between The  Titan Corporation and Richard Kipperman solely in his capacity as the Chapter  7 trustee for SureBeam Corporation and for SB Operating Co, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 12     |   | Computation  of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 21     |   | Subsidiaries  of Registrant as of March 8, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 23     |   | Consent  of KPMG LLP, Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| 32.1   |   | Certification  of Periodic Financial Reports pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |

 

100

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*                                         Previously filed as indicated andincorporated herein by reference from filings previously made by the Company. 

 

101

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized. 

 
|           | THE  TITAN CORPORATION                                           |
|----------------|------------------------------------------------------------------|
|           |                                                             |
| March  9, 2004 | By:                                                              | /s/ GENE W. RAY |   |
|           | Gene W. Ray,*Chief Executive Officer and  Chairman of the Board* |   |

 

**POWER OFATTORNEY**

 

We, the undersigneddirectors and officers of The Titan Corporation, do hereby constitute andappoint Mark W. Sopp, our true and lawful attorney and agent, to do any and allacts and things in our name and on our behalf in our capacities as directorsand officers and to execute any and all instruments for us and in our names inthe capacities indicated below, which said attorney and agent may deemnecessary or advisable to enable said corporation to comply with the Securitiesand Exchange Act of 1934, and any rules, regulations, and requirements of thesecurities and Exchange Commission, in connection with this Report, includingspecifically, but without limitation, power and authority to sign any and allamendments hereto; and we do hereby ratify and confirm all that said attorneyand agent shall do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signature**                     |   | **Title**                             |   | **Date**       |
|-----------------------------------|--------|---------------------------------------|--------|----------------|
|                              |   |                                  |   |           |
| /s/ GENE W. RAY              |   | Chief  Executive Officer and          |   | March  9, 2004 |
| Gene W. Ray                       |   | Chairman  of the Board                |   |           |
|                              |   |                                  |   |           |
| /s/ MARK W. SOPP             |   | Senior  Vice President and       |   | March  9, 2004 |
| Mark W. Sopp                      |   | Chief  Financial Officer              |   |           |
|                              |   | (Principal  Financial Officer)        |   |           |
|                              |   |                                  |   |           |
|                              |   |                                  |   |           |
| /s/ DEANNA H. LUND           |   | Vice  President, Corporate Controller |   | March  9, 2004 |
| Deanna H. Lund                    |   | (Principal  Accounting Officer)       |   |           |
|                              |   |                                  |   |           |
|                              |   |                                  |   |           |
| /s/ MICHAEL B. ALEXANDER     |   | Director                              |   | March  9, 2004 |
| Michael B. Alexander              |   |                                  |   |           |
|                              |   |                                  |   |           |
| /s/ EDWARD H. BERSOFF, Ph.D. |   | Director                              |   | March  9, 2004 |
| Edward H. Bersoff, Ph.D.          |   |                                  |   |           |

 

102

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| /s/ JOSEPH F. CALIGIURI   |   | Director |   | March  9, 2004 |
|--------------------------------|--------|----------|--------|----------------|
| Joseph F. Caligiuri            |   |     |   |           |
|                           |   |     |   |           |
| /s/ PETER A. COHEN        |   | Director |   | March  9, 2004 |
| Peter A. Cohen                 |   |     |   |           |
|                           |   |     |   |           |
| /s/ DANIEL J. FINK        |   | Director |   | March  9, 2004 |
| Daniel J. Fink                 |   |     |   |           |
|                           |   |     |   |           |
| /s/ SUSAN GOLDING              |   | Director |   | March  9, 2004 |
| Susan Golding                  |   |     |   |           |
|                           |   |     |   |           |
| /s/ ROBERT M. HANISEE     |   | Director |   | March  9, 2004 |
| Robert M. Hanisee              |   |     |   |           |
|                           |   |     |   |           |
| /s/ ROBERT E. LA BLANC    |   | Director |   | March  9, 2004 |
| Robert E. La Blanc             |   |     |   |           |
|                           |   |     |   |           |
| /s/ JAMES ROTH            |   | Director |   | March  9, 2004 |
| James Roth                     |   |     |   |           |
|                           |   |     |   |           |
| /s/ JOSEPH R. WRIGHT, JR. |   | Director |   | March  9, 2004 |
| Joseph R. Wright, Jr.          |   |     |   |           |

 

103

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**THETITAN CORPORATION**

 

**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS**

 

**For theyears ended December 31, 2003, 2002, and 2001**

 

**(inthousands of dollars)**

 
|                                                      |   | **Balance at  beginning  of year** |   | **Additions  (charges to  expense)(a)** |   | **Charged to  Other  Accounts** |   | **Deductions** |   | **Balance at  end of year** |   |
|-----------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|----------------|--------|-----------------------------|--------|
|                                                      |   |                               |   |                                    |   |                            |   |           |   |                        |   |
| 2003:                                                     |   |                               |   |                                    |   |                            |   |           |   |                        |   |
| Accrued exit charges                                      |   | $                                  | 37,761 |                                    | $      | —                          |   | $              | — |                        | $      | 9,833 |   | $ | 27,928 |   |
| Allowance for doubtful accounts                           |   | 6,778                              |   | 1,816                                   |   | 263                             |   | 4,757          |   | 3,574                       |   |
| Accrual for estimated losses for discontinued  operations |   | 266                                |   | —                                  |   | —                          |   | 266            |   | —                      |   |
|                                                      |   |                               |   |                                    |   |                            |   |           |   |                        |   |
| 2002:                                                     |   |                               |   |                                    |   |                            |   |           |   |                        |   |
| Accrued exit charges                                      |   | $                                  | — |                                    | $      | 53,317                          |   | $              | — |                        | $      | 15,556 |   | $ | 37,761 |   |
| Accrued merger and integration costs                      |   | 1,298                              |   | —                                  |   | —                          |   | 1,298          |   | —                      |   |
| Allowance for doubtful accounts                           |   | 7,750                              |   | 1,582                                   |   | —                          |   | 2,554          |   | 6,778                       |   |
| Accrual for estimated losses for discontinued  operations |   | 17,004                             |   | 11,014                                  |   | —                          |   | 27,752         |   | 266                         |   |
|                                                      |   |                               |   |                                    |   |                            |   |           |   |                        |   |
| 2001:                                                     |   |                               |   |                                    |   |                            |   |           |   |                        |   |
| Accrued merger and integration costs                      |   | $                                  | 3,846  |                                    | $      | 27,847                          |   | $              | — |                        | $      | 30,395 |   | $ | 1,298 |   |
| Allowance for doubtful accounts                           |   | 3,719                              |   | 7,531                                   |   | —                          |   | 3,500          |   | 7,750                       |   |
| Accrual for estimated losses for discontinued  operations |   | —                             |   | 35,413                                  |   | —                          |   | 18,409         |   | 17,004                      |   |

 

----

(a)                                  Includes $117 and $4,334 added throughacquisitions in 2002 and 2001, respectively.

 

(b)                                 Valuation allowance for unbilledreceivables not in accrued merger and integration costs.

 

Following is adescription of all exit charges and acquisition and integration charges:

 

*Fiscal 2002 Charges*

 

Included in the yearended December 31, 2002 is $53.3 million of restructuring costsrelated to the merger of Titan Systems into Titan on September 25, 2002and exit charges related to the shutdown of Cayenta’s headquarters office.  Approximately $11.7 million of theseexit charges are related to the shutdown of the Cayenta headquarters office andnetwork operations center, which includes employee termination costs and otherliabilities of approximately $4.5 million, lease commitment costs ofapproximately $4.8 million, and non-cash asset impairment charges ofapproximately $2.4 million relating primarily to the unamortized leaseholdimprovements and other fixed assets at the Cayenta headquarters.  The remaining lease commitment costs areexpected to be paid through future periods ending in January 2007.  Included in the employee termination costsare 33 personnel reductions.

 

Approximately$39.9 million of the restructuring charges were related to the merger ofTitan Systems into Titan and other associated reorganization and consolidationcosts.  The costs included approximately$32.2 million for the consolidation of various Titan Systems facilitiesinto centralized locations in Virginia and California.  This charge reflects the estimated losses,net of estimated sublease income, on future lease commitments of facilitieswith terms extending through year 2009.  The Company intends to actively market the facilities for subleaseopportunities.  However, the availablespace is in markets adversely affected by the economy and may not be subleasedat attractive rates or at all.  Includedin the employee termination costs are 19 personnel reductions.

 

 

104

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Approximately$7.7 million of the Titan Systems restructuring costs are primarilyrelated to employee termination costs, employee retention costs, duplicatetransition costs and professional fees related to acquisitions and certainreorganization and consolidation activities within Titan Systems.

 

The remaining $1.7million is related to direct transaction costs incurred by Titan onacquisitions that did not successfully close, primarily the Science andEngineering Associates, Inc. proposed acquisition.

 

*Fiscal 2001 Charges*

 

Acquisition andintegration related charges and other of $27.9 million in 2001 included$12.2 million related to the integration of ACS and AverStar and otherrestructuring and realignment activities, a $5.5 million impairment chargefor fixed assets associated with Cayenta’s network operations center and$10.0 million related to other asset impairments and restructuringactivities associated with Cayenta’s headquarters office, and $0.2 millionrelated to personnel reductions in Cayenta’s federal government business, whichis now a part of Titan’s government business.

 

 

105

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