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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from          to                                              

Commission file number 0-31807



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SureBeam Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                                    |  |                                                   
|--------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State or other jurisdiction of
    incorporation or organization)                          |  | 33-0921003(I.R.S. Employer
    Identification No.)
|9276 Scranton Road, Suite 600
    San Diego, California(Address of principal executive
    offices) |  | 92121(Zip code)                                   
|Registrants telephone number, including
    area code
    (858) 795-6300                          
|Securities registered pursuant to
    Section 12(b) of the Act: None                               
|Title of each class                                                                                 |  | Name of exchange on which registered              
|                                                                                                   
|None                                                                                                |  | None                                              

Securities registered pursuant to
Section 12(g) of the Act:

Class A Common Stock, $.001 par
value

(Title of class)




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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.o

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

Aggregate market value of the voting stock held
by non-affiliates of the registrant as of June 28, 2002:
$66,402,200.

Number of Registrants shares of
Class A Common Stock, $.001 par value outstanding as of
March 21, 2003 was 74,202,392

Documents Incorporated By Reference:


Portions of the Definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders on May 23, 2003.
(The Company will file a definitive proxy statement with the
Commission within 120 days after the close of the fiscal
year pursuant to Regulation 14A). With the exception of
those portions which are specifically incorporated by reference
in this Form 10-K Annual Report, the Proxy Statement for
the 2003 Annual Meeting of Stockholders is not deemed to be
filed as part of this Report.



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TABLE OF CONTENTS



|                                         |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                  
|                                         | Item 1. Business                                                                             
|                                         | Item 2. Properties                                                                           
|                                         | Item 3. Legal Proceedings                                                                    
|                                         | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                 
|                                         | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                         | Item 6. Selected Consolidated Financial Data (in thousands, except for per share data)       
|                                         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                         | Item 8. Consolidated Financial Statements and Supplementary Data                             
|                                         | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                
|                                         | Item 10. Directors and Executive Officers of the Company                                     
|                                         | Item 11. Executive Compensation                                                              
|                                         | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                         | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                 
|                                         | Item 14. Controls and Procedures                                                             
|                                         | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|CERTIFICATION OF CHIEF FINANCIAL OFFICER
|EXHIBIT 10.51                           
|EXHIBIT 21.1                            
|EXHIBIT 23.1                            
|EXHIBIT 23.2                            
|EXHIBIT 99.1                            
|EXHIBIT 99.2                            



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SUREBEAM CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31,
2002


INDEX

|         |          |  |                                                                                           |  |   
|-------- | -------- |  | ----------------------------------------------------------------------------------------- |  | --
|PART I   |          | 
|         | ITEM 1.  |  | BUSINESS                                                                                  |  | 2 
|         | ITEM 2.  |  | PROPERTIES                                                                                |  | 27
|         | ITEM 3.  |  | LEGAL PROCEEDINGS                                                                         |  | 28
|         | ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                   |  | 28
|PART II  |          | 
|         | ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS                 |  | 29
|         | ITEM 6.  |  | SELECTED CONSOLIDATED FINANCIAL DATA                                                      |  | 30
|         | ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 31
|         | ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                            |  | 51
|         | ITEM 8.  |  | CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                              |  | 52
|         | ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 88
|PART III
|         | ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                           |  | 88
|         | ITEM 11. |  | EXECUTIVE COMPENSATION                                                                    |  | 88
|         | ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT                        |  | 88
|         | ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                            |  | 88
|PART IV 
|         | ITEM 14. |  | CONTROLS AND PROCEDURES                                                                   |  | 88
|         | ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K                      |  | 88

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PART I




Item
1.     Business

The statements made in this report which are
not historical facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied
by such forward-looking statements. See our note regarding
forward-looking statements on page 31. Information
regarding certain of the risks and uncertainties that could
cause or contribute to such differences can be found in this
report in Part I, Item I under the caption
Factors Which May Affect Future Performance
Part II, Item 7 entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere throughout this report. We
recommend that you review all of the Companys filings made
with the Securities and Exchange Commission for a complete
description of factors which may affect our future performance.
Our internet address is www.surebeam.com. As required, as of
November 15, 2002, we make available free of charge on or
through our Internet website our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission.

Overview

We trace our corporate history to Titan
Purification, Inc., a wholly owned subsidiary of The Titan
Corporation, or Titan, formed in December 1997. Titan
Purification subsequently changed its name to SureBeam
Corporation. We were formed in August 2000 to facilitate a
reorganization of Titans food irradiation and medical
sterilization division. At that time, Titan contributed to us
its electronic food irradiation business and we, in turn,
contributed the business to SB Operating Co. (previously
named SureBeam Corporation and originally named Titan
Purification, Inc.) in exchange for all of the common stock of
SB Operating Co. held by Titan and its affiliates. We
completed our initial public offering on March 16, 2001,
and our spin-off from Titan was completed on August 5,
2002, when Titan distributed all of its shares of common stock
of SureBeam to the stockholders of Titan.

We are a leading provider of electronic
irradiation systems and services for the food industry. Our
SureBeam electronic food irradiation process significantly
improves food safety, prolongs shelf life and provides
disinfestation. Our SureBeam® process is based on proven
electron beam technology that destroys harmful food-borne
bacteria such as E-coli, salmonella and listeria, eliminates or
renders harmless fruit flies and other pests and reduces
bacteria driven food spoilage. Heightened awareness of food
safety issues has prompted food growers, packers, processors and
retailers to find new, safe and efficient ways to eliminate
bacteria and insects from their products and to reduce food
spoilage. Unlike older irradiation technologies, our SureBeam
process does not use radioactive isotopes as a means of
irradiation. Instead, our SureBeam system uses ordinary
electricity and operates in an efficient and environmentally
friendly manner. As a result, we believe we have an opportunity
to establish electronic irradiation as a new standard for food
safety and SureBeam as the leading brand for food safety
solutions.

Our electronic food irradiation system integrates
our patented material handling, controls, shielding sub-systems
with our proprietary software, electron beam and x-ray
technology. Under our business model, we intend to generate
revenue using our electronic food irradiation systems in
primarily three types of installations:



| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Service centers owned by us, at which we will
    charge customers for processing services;                                                                                                             
|
| |  | Service centers owned by third parties, using
    equipment they have purchased from us, at which we will charge a
    continuing royalty fee for the use of our technology on an
    ongoing basis; and
|
| |  | Systems owned by us and installed as part of a
    customers production line, for which customers will be
    charged for processing services.                                                         

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We built, own and operate three service centers
including a facility in Sioux City, Iowa that is the first
dedicated commercial electronic food irradiation service center
in the United States, and similar facilities in Chicago,
Illinois and Los Angeles, California. We use these service
centers both for commercial processing of food products,
including ground beef and spices, for customers and for testing
the processing of other food products for our customers. We are
in the process of completing a fourth company-owned service
center in Rio de Janeiro, Brazil, which we anticipate to be
operational by the end of the second quarter of 2003.

To date, we have sold a SureBeam system to Hawaii
Pride LLC, or Hawaii Pride, for operation of a service center in
Hilo, Hawaii for the disinfestation of fruits and vegetables. We
also are pursuing global opportunities to sell our systems
through strategic alliances with local entities in international
markets. In 2001, we entered into a purchase order contract with
RESAL Saudi Corp., or RESAL, to build electronic food
irradiation systems for the operation of multiple service
centers in the Saudi Arabia region for irradiating poultry and
disinfesting dates and we have begun construction on these
systems. In 2002, we sold systems to customers in Vietnam and
Texas.

We generally structure these sale transactions so
that we can participate in the potential future value created
through the use of the systems we have sold. Typically, we
obtain a right to acquire a minority equity interest in the
entity that owns and operates the system and/or charge a royalty
fee for the use of our technology on an ongoing basis. We
recognize revenue from the sale of the systems and expect to
recognize income from profits generated from processing services
commensurate with our equity ownership and/or a royalty fee to
be paid by these entities. We have provided and may in the
future provide working capital or project financing in
connection with these third party service centers. Substantially
all of our revenues to date have been derived from long-term
contracts using the percentage-of-completion method of
accounting. For example, we have commenced construction of the
systems for RESAL under our $53.0 million purchase order
contract for ten systems and have recognized total revenues of
$21.3 million through December 31, 2002 under the
percentage-of-completion method of accounting for these systems.

We have executed agreements with many of the
major meat and poultry providers and processors in the United
States, including American Food Service, Cargill, Huisken Meats,
IBP, Omaha Steaks, Tyson Foods, United Food Group and
WW Johnson, and spice producers Saratoga Specialties, Spice
Tec and Swift & Company. In addition, we have signed
agreements with Anchor Foods, Del Monte Foods, Square-H Brands,
Inc. and Kraft Foods for applying the SureBeam technology to
processed foods, with the expectation that the United States
Food and Drug Administration, or FDA, will approve irradiation
of processed foods. If the FDA does not approve irradiation of
processed foods, it is unlikely we will receive revenue under
these agreements. Our customer agreements generally provide that
we will be the exclusive provider of any food irradiation
services required by the customer. Revenues we receive under
these agreements, if any, are dependent upon the amount of
processing, if any, required by the customers. We are currently
electronically irradiating fresh and frozen ground beef and
spices for commercial sale by some of our customers. Those
customers and others are currently testing products processed by
our SureBeam system.

During 2002, we made significant advances in
implementing our strategy. The volume of food products processed
in 2002 increased by 33% from 2001, increasing from
11.1 million pounds to 14.8 million pounds. In
addition, we have experienced a significant increase in the
number of customers testing products at our Sioux City, Chicago,
and Los Angeles service centers and in the number of potential
customers, which are in discussions with us regarding the use of
our technology. Many of these discussions are preliminary and no
assurance can be made that we will enter into agreements with
these potential customers, or that any agreements we enter into
with these customers will prove to be profitable to us. We have
expanded the types of packaging configurations that we can
process using our technology and our customers have increased
the kinds of products we are processing for them. We believe the
increased level of processing by our customers indicates an
increasing level of consumer acceptance of electronically
irradiated food products. This acceptance is further evidenced
by the recent introduction of electronically irradiated food
products by several restaurants, as well as major retail grocery
stores, in the United States. For 2002, food processing services
represented a small portion, or 3%, of our total revenues versus
system sales. The volume of food processing services we are
providing has not increased as rapidly as we have expected.

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We have identified several global markets for our
SureBeam process, including over 19 billion pounds of
ground beef and over one trillion pounds of fruits and
vegetables. We also plan to target the poultry, cut beef,
seafood and processed food markets. Each of these markets is
substantial and represents a significant opportunity since our
long-term objective is to derive the majority of our revenue by
charging a per pound fee for food processed with our electronic
irradiation systems.

During 2002, in addition to performing activities
that are part of our core strategy, we were also involved in the
sale of SureBeam equipment to the United States Postal Service
(subcontracted through Titan) for treatment of mail to eliminate
the threat of anthrax. Titan entered into a contract with the
United States Postal Service to sell it electronic irradiation
equipment and we sold the equipment to Titan to enable it to
fulfill the contract. In addition, we are also involved in the
sale of SureBeam equipment to Titan for various applications
including medical sterilization, material cross-linking, and
other research and development applications.

Industry Background



| |            
| | -----------
| | Food Safety

There is growing concern about the safety of the
worlds food supply. The Centers for Disease Control and
Prevention reported in 2002 that food-borne bacteria cause more
than 5,200 deaths, 325,000 hospitalizations, and 76 million
cases of illness annually in the United States alone. In 2001,
the United States Department of Agriculture, or USDA, recalled
nearly 17 million pounds of food in over 45 reported
product recalls relating to food-borne bacteria. In 2002, the
USDA recalled over 54 million pounds of food in over
79 reported product recalls, including a recall in June
2002 of approximately 19 million pounds of ground beef and
beef trimmings thought to be contaminated with E-coli, and a
recall in October 2002 of approximately 28 million pounds
of turkey and chicken products thought to be contaminated with
listeria monocytogenes. The October 2002 recall was the largest
recall of food in the United States ever, and it resulted in the
food supplier voluntarily suspending operations. In addition to
the increasing volume of recalls, zero tolerance liability laws
on E-coli and listeria and increasing litigation related to
other food-borne illnesses are exerting further pressure on food
processors to meet stricter food safety standards. As a result,
food processors spend substantial amounts of capital to minimize
the risk of food contamination.

The FDA has stated that the only effective
methods of safeguarding against E-coli and other food-borne
bacteria in raw ground beef are cooking it to 160F or
irradiating it. Relying solely on cooking as a safeguard against
food-borne illnesses is not satisfactory, since bacteria can be
spread when contaminated food is handled prior to cooking and
can remain if food is undercooked. Irradiation offers food
producers and processors a method to safeguard against
food-borne bacteria after their products are packaged and before
their products reach consumers. Although the FDA approved the
irradiation of a number of foods in the early 1960s, we
believe food processors and consumers reacted unfavorably
towards the concept of irradiation because older food
irradiation methods involve exposing food to radioactive
isotopes. Furthermore, we believe that older food irradiation
methods can negatively affect the taste and texture of some
types of food.



| |                              
| | -----------------------------
| | Food Infestation and Spoilage

In addition to food safety, our SureBeam system
can be used to eliminate infestation of food by fruit flies and
other pests and to reduce food spoilage and prolong shelf life.
In October 2002, the USDA issued its final rule authorizing the
use of irradiation as a phytosanitary treatment for fruits and
vegetables imported into the United States. For instance, Hawaii
Prides facility disinfests produce, and it is expected
that RESALs Saudi Arabia facilities also will disinfest
dates, while our facility in Brazil is intended to use our
SureBeam process to both eliminate insect pests and to increase
the shelf life of fruits and vegetables.

Hawaii and countries such as Brazil and Australia
that produce fruits and vegetables with known insect
infestations are prohibited from shipping those fruits and
vegetables into the United States and other countries unless
they comply with disinfestation regulations. These regulations
are becoming more difficult to meet, as traditional methods of
disinfestation are being banned or reevaluated due to
environmental concerns and negative effects on food taste,
texture and nutritional value. Our SureBeam systems and related
technology

4



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allow compliance with the disinfestation
regulations in an environmentally friendly manner and with
minimal effects on food taste, texture and nutritional value.


Traditional methods of disinfesting food products
such as fruits and vegetables include the use of vapor heat,
fumigation and gamma ray irradiation. Using heat to disinfest
fruit can compromise taste, texture and nutritional value. The
use of fumigation, such as methyl bromide, is being phased out
worldwide beginning in January 2005 due to its negative
environmental impact. Regarding gamma irradiation, we believe
the use of radioactive isotopes to disinfest food products
elicits the same negative reaction from food processors and
consumers that is associated with using radioactive isotopes to
eliminate food-borne bacteria.

Food spoilage is a major concern for food
growers, processors and retailers because it limits both shelf
life and the distance food products may be shipped, thereby
limiting market access. Food spoilage in developing countries is
estimated to be 30% in fresh fruits and vegetables. In addition,
transportation distances in an increasingly global food industry
contribute to the food spoilage problem.

The SureBeam Solution

Our electronic food irradiation system offers a
newer method of irradiation that utilizes ordinary electricity
to accelerate electrons. Consumers have demonstrated acceptance
of food safety methods, as in the case of pasteurized milk, when
the method is environmentally safe and maintains the
products characteristics. We believe health officials
currently view irradiation positively and that consumers and
industry officials are beginning to view irradiation positively.
Many prominent health and medical organizations support the use
of irradiation technology, including the American Dietetic
Association, the American Medical Association, the Centers for
Disease Control, the FDA, the USDA and the World Health
Organization. The World Health Organization has specifically
approved the irradiation of all foods and its standards may
serve as uniform standards for some other countries.

Utilizing our patented technology, we have
developed an electronic irradiation system that we believe
addresses food safety, disinfestation and spoilage concerns and
provides many benefits including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Destroying dangerous bacteria.Our SureBeam system can effectively
    kill dangerous bacteria such as E-coli, listeria monocytogenes,
    salmonella and campylobacter in food products, including meats,
    poultry, vegetables, and seafood. We provide food processors
    with a solution that improves their ability to comply with food
    safety laws and may reduce costly product recalls or damaging
    liability lawsuits.                                                                                                                                                                                                                     
|
| |  | Killing fruit flies and other pests.Our SureBeam system can kill fruit
    flies and other pests or prevent them from reproducing, thereby
    rendering them harmless. This benefit may enable food producers
    and processors to gain access to new markets that have
    previously been denied or limited due to fruit fly and other
    pest quarantines.                                                                                                                                                                                                                                                                                             
|
| |  | Reducing food spoilage and prolonging shelf
    life.Our SureBeam system can increase
    the shelf life of foods such as meats, poultry, fruits and
    vegetables, by decreasing microbial levels that cause food
    spoilage. This benefit may enable shelf life to be extended by
    two to three times in foods such as raspberries, strawberries,
    raw beef and chicken. As a result, food processors have the
    ability to ship product less frequently and over further
    distances while food retailers and food service companies have
    the ability to stock and store product longer, thereby realizing
    supply chain efficiencies.
|
| |  | Utilizing ordinary electricity.Unlike older irradiation methods that
    use radioactive isotopes as their energy source, our SureBeam
    system uses ordinary electricity and has received greater
    acceptance from food processors and consumers because of its
    environmentally responsible features.                                                                                                                                                                                                                                                                                                                                              
|
| |  | Maintaining food taste, texture and
    nutritional value.Because of the
    rapid rate at which food is processed by our SureBeam system and
    the small increase in food product temperature during
    processing, the oxidation effects on food products are
    minimized. As a result, when properly applied, our SureBeam
    process has been shown to have minimal effect on taste, texture
    or nutritional value of most foods.                                                                                                                                                                                                               

5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrating fully into production lines.We believe our SureBeam system is the
    only food irradiation system available that can be fully
    integrated into customers production lines, avoiding
    additional product transportation costs. Food irradiation
    systems that use radioactive isotopes require extensive space
    and we believe have been proven to be impractical in existing
    production lines. We believe food processors will be unwilling
    to build new processing facilities to accommodate radioactive
    isotope based systems. Our SureBeam systems footprint and
    ability to accommodate different products make it efficient to
    integrate into an existing production line. Attributes that
    enable our SureBeam system to be incorporated into production
    lines include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Scalable system.Our
    SureBeam system is scalable and can be designed to meet a wide
    range of production volume requirements                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Fast processing time.Our SureBeam system irradiates
    dangerous food-borne bacteria in food products in a matter of
    seconds, maintaining the speed of a production line.                                                                                                                                                                                                                                                                                                                     
|
| |  | Precise dosing.Our
    SureBeam system uses electron beam or x-ray processing that
    delivers a measurable and consistent dose to products based upon
    pre-set parameters. All processing parameters are under constant
    measurement to maintain dosage within a predetermined range.                                                                                                                                                                                                      
|
| |  | Flexible dosing.Our
    SureBeam system can switch from one targeted dose to another in
    a matter of minutes. In addition, our system can be designed to
    utilize either electron beam or x-ray technology depending on
    the density and thickness of the product, with x-ray technology
    allowing us to process thicker products. Product changeovers are
    easy, can be accomplished in a few minutes and are designed to
    accommodate various products, packaged or unpackaged.



| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Environmentally responsible.Our SureBeam system uses ordinary
    electricity as its power source. There are no radioactive
    isotopes used in our SureBeam process, and as a result, the
    licensing and operation of facilities using our SureBeam system
    do not require any review by the Nuclear Regulatory Commission.

Our Strategy

Our goal is to leverage our proprietary
technology to be the premier global provider of electronic
irradiation systems and services to the food industry. To meet
this goal, we plan to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expand our customer base.We have already entered into
    relationships with leading food processors and other customers
    in the United States and abroad. We intend to continue to
    develop relationships with food processors, food retailers,
    foodservice operators and distributors both domestically and
    internationally and to sign exclusive agreements with food
    processors when possible. We believe food industry leaders will
    provide us with a growing stream of per pound processing fees as
    consumer acceptance of electronically irradiated food continues
    to expand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Pursue global opportunities through strategic
    alliances.We intend to continue to
    enter into strategic alliances with local partners in
    international markets to build and operate service centers in
    these countries. We believe these strategic alliances allow us
    to address global markets in the most efficient way without
    requiring us to commit excessive amounts of our financial
    resources to building consumer acceptance in these international
    markets. While we have provided and may in the future provide
    working capital or project financing in connection with these
    third party service centers, we believe these alliances are an
    efficient means of giving us a competitive advantage in
    establishing our SureBeam technology as a global leader for food
    irradiation. We have entered into a strategic alliance with
    RESAL with respect to the systems being sold for use in Saudi
    Arabia and will continue to target other key food and export
    markets, such as Australia, South America and Asia.
|
| |  | Build, own and operate additional electronic
    food irradiation service centers.We
    may continue to build service centers which are owned by us and
    which provide electronic irradiation services in strategic
    locations near major producers and processors of meat, poultry,
    fruits or vegetables. For example, our company-owned service
    centers in Sioux City, Iowa, Chicago, Illinois and Los Angeles,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | California are located in proximity to several
    leading meat producers processing plants, including IBP,
    United Foods and Cargill. We anticipate our Brazilian service
    center in Rio de Janeiro will be operational in the second
    quarter of 2003. This service center has also been strategically
    located near food processing plants. In addition, we share a
    service center in College Station, Texas with Texas A&M
    University, which is owned by the university. We believe
    building service centers in strategic locations will accelerate
    the development of a market for food irradiation services. These
    service centers also serve as test centers for food processors
    evaluating our process and as commercial irradiation centers for
    processors that have lower volume requirements or are otherwise
    situated such that installation of their own dedicated SureBeam
    system may not be cost effective.                                                                                                                                                                                                                                                                                 
|
| |  | Install and operate in-line electronic
    irradiation systems.We intend to
    offer in-line electronic irradiation systems that are directly
    integrated into customer production lines. We will generally
    retain ownership of the systems and customers will pay a per
    pound processing fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Build the SureBeam brand.Our goal is to establish SureBeam as
    the leading electronic irradiation brand with both food
    processors and consumers in the retail and foodservice markets.
    We believe establishing a leading brand with consumers will
    prompt food processors to purchase our products and services so
    that their products can carry our SureBeam seal, thereby
    creating pull-through demand for our process in the distribution
    chain. We expect to allocate significant additional resources to
    establish our brand in the retail and foodservice businesses. We
    will utilize a wide range of communication media to build
    awareness of the SureBeam brand. Our SureBeam logo currently
    appears on some of the products of thirteen food processors that
    currently sell food processed with our SureBeam system. In June
    2001, we started marketing the SureBeam brand in the
    Minneapolis-Saint Paul area. A survey of several hundred adults
    conducted at the Minnesota State Fair concluded that over 40% of
    the people surveyed recognized the SureBeam brand and over 78%
    said they would be willing to pay more for ground beef that had
    been treated by SureBeam.
|
| |  | Establish a new industry standard for food
    safety.We intend to promote the
    widespread use of electronic irradiation by food processors to
    establish a new industry standard for food safety and quality.
    We believe the need for such a standard is driven by food
    processors desires to meet retail and foodservice demand
    for safe food products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Promote consumer awareness of electron beam
    technology.We plan to utilize a
    variety of media to educate consumers on our SureBeam
    systems ability to increase food safety and provide other
    produce benefits and to highlight major endorsements of food
    irradiation technology by health and industry officials. In
    addition, we will leverage our contracts and alliances with
    major food producers and processors as validation of our
    SureBeam system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Protect our technology.Our electronic food irradiation system
    combines our patented conveyor and shielding systems and
    proprietary software, electron beam and x-ray technology. We
    protect our SureBeam technology through a combination of
    patents, patent applications, know-how, copyright and trade
    secrets. We have not granted any rights to our SureBeam
    technology, other than those granted to Texas A&M University
    and the Texas Agricultural Experiment Station solely for
    research and development purposes, and those granted to Titan
    for non-food applications, such as mail. We will continue to
    protect our technology aggressively by enforcing our current
    patents and filing additional patent applications in the United
    States and other countries.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Develop new opportunities for SureBeam.We will continue to develop new
    applications of our technology, including through acquisitions
    of complementary businesses or technologies. These opportunities
    may include the irradiation and disinfestation of additional
    products such as hides, flowers, grains, seeds, coffee beans and
    pet food.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

The SureBeam System

Our SureBeam system is based principally on
publicly available electron beam accelerator technology
initially developed in the 1980s. We, together with our
former parent, Titan, worked for approximately

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20 years to create and refine an electronic
processing system capable of meeting the functionality,
reliability and 24 hour-per-day cycles required in medical
equipment sterilization and electronic food irradiation
applications. The reliability of our SureBeam system has been
demonstrated with over 200,000 operating hours logged on our
systems for both medical equipment sterilization and food
irradiation applications.


We believe our patented SureBeam process is the
most efficient electronic food irradiation solution currently on
the market. Our SureBeam process combines proven linear
accelerator technology with a patented material handling system
and a real-time control-monitoring platform to provide the
highest degree of process integrity. The energy generated from
the acceleration of electrons is sufficient for processing
pre-packaged or post-packaged USDA fresh or frozen products in
seconds. The rapid speed of our SureBeam system makes it well
suited for integration into customer production lines.

Our SureBeam system is comprised of a linear
accelerator that produces a beam of electrons using ordinary
electricity. A series of resonant microwave cavities are then
used to accelerate the electrons to nearly the speed of light. A
magnetic deflection system is then used to scan the beam across
the product. The electrons disrupt the DNA chain of the scanned
organisms and either destroy them or prevent their reproduction,
thereby rendering them harmless. Our process utilizes ordinary
electricity to generate electrons to administer a direct
electron or x-ray treatment that is suitable for a wide range of
products of various sizes, shapes and densities. X-rays are
produced when electrons exit the accelerator and make contact
with a metal target. The x-rays are directed at the product
being processed and have the same ability as electron beams to
kill bacteria or pests, or inhibit their reproduction. X-rays
are generally used to penetrate larger and denser products than
electron beams. Electron beams can generally penetrate food
products of up to a thickness of approximately four inches,
while x-rays can penetrate thicker products. Generally, the
processing time using x-rays is slightly longer than the
processing time required when using electron beams.

Our SureBeam system is designed to contain the
irradiation process inside a protective shield to ensure the
operators safety. The operator and maintenance staff are
not exposed to a hazardous environment when they need to enter
the protective shield because the system is shut off and no
electrons are generated when the power supply is cut off. We
believe this ability to immediately terminate production of
ionizing energy at will provides our system with a greater level
of safety and security than other systems which use radioactive
isotopes, toxic gases or high temperatures. In addition to the
protective shield, a safety control system monitors the
operation of the system to detect abnormal operating conditions,
such as smoke and fire, intrusion into a restricted area, loss
of utilities or equipment failures (power, compressed air or
cooling) and the system is designed to shut down automatically
if any abnormal conditions are detected.

Our SureBeam system can provide doses in one or
more directions, and can handle food products in individual
packages or cases. Our proprietary SureTrack® information
and control system guides both the operator and material loaders
through the overall process, checking for the completion of each
task, and verifying the integrity of the process. The dose, or
the amount of energy deposited, is controlled by our proprietary
software, the SureTrack® system. The dose varies depending
on the thickness and density of the product and on whether the
objective is to irradiate harmful bacteria, disinfest or extend
shelf life. Our SureTrack® system provides dose
verification and validation, and continuously archives all the
processing information required to substantiate the successful
completion of the SureBeam process.

The FDA has approved all forms of food
irradiation technology, including the use of an electron beam
and x-ray as utilized by our SureBeam process. The FDA
rigorously evaluated the safety and efficacy of irradiation as
part of its standard approval process and established standards
for the use of irradiation based on this evaluation. The FDA
reviewed results from over 40 years of testing and research
of the impact of irradiation on food and concluded that
irradiated food is safe to eat, does not put consumers at risk
and does not adversely affect the nutritional value of food. If
the FDA were to reverse or limit its approval of irradiation,
such a change could have a material adverse effect upon our
operating results and financial condition. Each facility in the
United States that utilizes our SureBeam process must be
validated prior to opening by the U.S. regulatory agencies
to ensure compliance with standards of the USDA, Food Safety and
Inspection Service, or FSIS, and Animal Plant Health Inspection
Service, or APHIS.

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Our Services

We offer services for the electronic irradiation
of food through in-line systems and centrally located
company-owned service centers allowing food growers, packers and
processors to choose the most convenient and cost effective way
to utilize our SureBeam system for electronically irradiating
their products. We offer services directly and through third
parties with which we have strategic relationships. While no
in-line systems have as yet been installed in our
customers production facilities, three company-owned
service centers are currently in operation with the fourth
currently under construction and expected to be operational in
the second quarter of 2003.

Company-owned Service Centers.In 1999, we began operating the
nations first electronic food irradiation service center
in Sioux City, Iowa and now also operate service centers in
Chicago, Illinois and Los Angeles, California. In addition,
we share a service center in College Station, Texas with Texas
A&M University where we are allowed to use the service
center ten hours per day while the university may use the
balance of the hours for research and development purposes. Each
of these facilities currently has the capacity to process up to
approximately 40,000 pounds of meat per hour. To date, all
service centers have been operating at a very small percent of
their maximum processing capacity. The service centers have the
capability of irradiating large cases of products, as well as
products that are not uniform in shape or size. Our service
centers generate revenue by charging a per pound processing fee.
We are currently in the process of building an additional
company-owned service center in Rio de Janeiro, Brazil. We
expect the Brazil service center to be operational by the second
quarter of 2003.

In-line Systems.We
offer systems that can be integrated directly into a
customers production facility. We expect to generally
retain ownership of the systems and charge our customers a per
pound processing fee. In limited circumstances, we may sell
in-line systems directly to our customers, recognize revenue for
the sale and charge a royalty fee for the use of our technology.
There have been no in-line systems installed or sold to date.

Strategic
Relationships

We have maintained a strategy of establishing
strategic relationships with third parties to own and operate
service centers to provide food irradiation and disinfestation
services. In the past, we have generally structured these
relationships so that we receive an option to acquire a minority
equity interest in a company to be formed by the third party
and/or receive a royalty fee for the technology on an ongoing
basis to ensure our participation in the potential future value
created through the use of our systems. We intend to generate
revenue and recognize earnings from the sale of our systems to
the third parties, to recognize earnings from processing revenue
as allocated through our equity ownership of the companies
created to provide irradiation services, and in some cases, to
charge a royalty fee for the use of our systems and technology.

In May 2000, Tech Ion Industrial Brasil S.A., or
Tech Ion, placed purchase orders with us for eleven electronic
food irradiation systems, which we expected to result in
approximately $55.0 million in revenue over the next three
years, including $22.4 million that was recognized through
September 30, 2001. SureBeam Brasil Ltda., or SureBeam
Brasil, which was jointly established by Tech Ion, and Titan
SureBeam Brazil Inc., our wholly owned subsidiary, was to
provide, among other things, food irradiation services through
four planned service centers. In October 2001, in order to
ensure the completion of the project with Tech Ion to build
service centers in Brazil that were under construction, we
entered into a stock purchase agreement with Tech Ion to
purchase an additional 60.1% of SureBeam Brasil, bringing our
total equity ownership in SureBeam Brasil to 80.0%. In
connection with the additional equity interest, we paid Tech Ion
$750,000 upon the execution of the agreement and will pay an
additional $250,000 upon the nationalization of the linear
accelerators and material handling systems for the Rio de
Janeiro service center from Tech Ion to SureBeam Brasil. We also
exchanged our trade receivables of $22.4 million due from
Tech Ion and forgave $3.5 million of a loan we had
previously made to Tech Ion for building improvements and
equipment. We have recorded an intangible asset of
$2.5 million that represents the total consideration amount
of the agreement that exceeds the fair value of the assets
purchased. The intangible asset represents a favorable land
lease and location next to the Rio de Janeiro CEASA, the depot
for fresh food distribution in Rio de Janeiro, and the license
granted

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by CNEN, Brazils Nuclear Regulatory
Commission, for the use of our technology in Brazil, the only
electronic food irradiation license granted to date by CNEN.
Tech Ion obtained these items for SureBeam Brasil and they are
being amortized on a straight-line basis over five years, the
free rent period of the ten-year lease. On April 1, 2002,
the remaining $1.5 million owed us by Tech Ion was
exchanged for its remaining 20.0% interest in SureBeam Brasil.
The $1.5 million was included in prepaid expense and other
current assets in the accompanying balance sheet at
December 31, 2001. Due to the exchange we recorded an
additional $700,000 as an intangible asset that will be
amortized over the remaining 54-month life of the existing
intangible asset. The remaining $800,000 was recorded as part of
the service center building cost. We estimate that the first
service center in Brazil will become operational in the second
quarter of 2003 and we will be obligated to provide additional
working capital to fund its operations through its startup phase
and until it can generate its own cash needs.


Internationally, we intend to establish strategic
relationships with businesses that have expertise in their local
food markets and recognize an opportunity to utilize our
SureBeam system. In June 2001, we received a purchase order
contract in the aggregate of $50.0 million from RESAL for
ten electronic food irradiation systems to operate in multiple
service centers in the Saudi Arabia region for irradiating
poultry or disinfesting dates. In 2002, the order for these
system was modified to $53.0 million to construct systems
for three large service centers with a combination of high power
x-ray and electron beam technology. We commenced construction on
these systems and have recognized, under the
percentage-of-completion method of accounting,
$21.3 million of revenue through December 31, 2002.
See Critical Accounting Policies  Revenue
Recognition for further discussion. During the second
quarter of 2002, we successfully negotiated a joint venture
agreement with RESAL and established SureBeam Middle East
Company, LLC, which we own a 19.9% interest. The joint venture
agreement governs our strategic relationship with the operator
of these systems, including royalty fees and the management
structure and equity ownership of the operator that will operate
the service centers.

Customers

We currently have agreements with over
60 customers regarding food irradiation services at our
service centers. Thirteen customers use our service centers for
processing products for production purposes, while the balance
is conducting testing at our service centers. Our customer
agreements vary in some respects from customer to customer. The
following discussion is intended only to describe some of the
more common terms. The agreements to provide food irradiation
services are generally for an initial term of three to five
years with automatic annual renewals. Although our customers can
generally terminate these agreements upon 30 days notice,
such agreements typically provide that we will be the exclusive
provider of food irradiation services, including radioactive
isotope irradiation services we do not currently provide, for a
multi-year period, even if the customer terminates the agreement
before the end of the multi-year period. The exclusivity periods
of our customer contracts generally will terminate unless they
are renewed each year. We generally must release a customer from
the exclusive provider arrangement if the customer can find a
comparable service at a lower price, if we cannot fully meet the
customers demand or if we cannot demonstrate compatibility
with the customers products.

The agreements provide for both testing and
commercial production. We charge a per pound processing fee,
which generally decreases as monthly production volume
increases. A customer may elect to convert to the commercial
production period at any time during the test period, at which
time the per pound processing fee decreases and the customer is
required to commit to processing a minimum number of pounds of
food for each 12-month period. The customer agrees to pay us for
such minimum amount, even if the food is not processed. Those
customers operating in the test period are not required to
convert to the commercial production schedule in order to sell
irradiated food commercially. Revenues we receive under these
agreements, if any, are dependent upon the amount of processing,
if any, required by the customers.

Sales and Marketing

We focus our sales and marketing initiatives on
establishing SureBeam as the leading consumer brand in providing
solutions to food safety issues, such as the incidence of
bacteria and pests in food, as well as food

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spoilage. We promote our brand in order to build
revenues, gain worldwide market share, and promote consumer and
industry awareness and acceptance. We target the growing public
demand for safer food by helping food processors meet heightened
standards of quality and safety through our technology. Our
sales and marketing personnel, who possess technical expertise
regarding our SureBeam system, market and sell our systems and
services to food processors, as well as educate food industry
constituents, food processors and consumers on the uses and
benefits of our technology. In order to enhance our
commercialization efforts, we expect to continue to expand our
sales and marketing capabilities.


We conduct a number of sales and marketing
programs, including the use of media and in-store advertising
and promotional events, to support the promotion and sale of our
SureBeam processed products and to reinforce brand awareness.
Our consumer programs are designed to educate the public that
our SureBeam process is safe and environmentally responsible,
and to explain that the taste, texture and nutritional value of
food products remain essentially unaffected by this process. In
addition, we promote the placement of our SureBeam seal on
packages of food products processed with our patented SureBeam
system. Our goal is for consumers to easily identify SureBeam
processed products and associate our seal with food safety,
thereby increasing brand awareness and further developing brand
loyalty. We will seek to create consumer demand that will serve
to encourage food processors to co-brand with us and to use our
electronic irradiation system.

Our trade programs are designed to educate food
processors about the advantages of using our technology and to
encourage processors to market their SureBeam processed products
using our brand. We also work cooperatively with our service
center partners to reinforce the SureBeam brand and extend our
sales effort in international markets.

Manufacturing

Our manufacturing operation involves engineering,
assembly and testing of SureBeam systems. We obtain many of our
components under long-term supply contracts. While we currently
procure the accelerating section of the linear accelerator from
one supplier, we will seek to secure multiple sources for
substantially all of our components. No assurance can be made
that we will be able to secure such multiple sources. Delays
from our suppliers could have a material adverse effect upon our
ability to fulfill our contractual obligations and our financial
results. Our manufacturing operation allows us to build systems
to the size requested by our customers. We have an option to
manufacture Titans requirements of any SureBeam systems
for applications other than irradiation of food (excluding
water), animal hides and flowers through December 2003. We also
have agreed to supply Ion Beam Applications S.A., or IBA, its
requirements for systems for processing food and sanitizing mail
until January 2006. We believe our manufacturing capability is
sufficient to meet our currently anticipated commercial
requirements for food processing systems as well as the
requirements of Titan and IBA. Our sole manufacturing facility
is located in Dublin, California.

Research and Development

Our current research and development activities
are focused on increasing the capability and efficiency of our
existing technology, minimizing the space occupied by our
SureBeam systems, and developing new food product applications.
We have assembled a team of experts in our industry to enhance
and drive our research and development efforts. Our research and
development experts have many years of experience in the area of
enhancing food safety and extending shelf life using irradiation
in addition to their broad experience with linear accelerators
and charged particle beams. In addition, we have an agreement
with Texas A&M University and the Texas Agricultural
Experiment Station for the purpose of researching and developing
product applications for our technology. We are currently
working with Texas A&M on several research projects
which include studies on flavor profiles, viral destruction,
food product applications and consumers willingness to pay
more for irradiated foods. In addition, we often benefit from
the research and development efforts of our component suppliers.
Research and development expenditures for 2000, 2001 and 2002
were $524,000, $2.2 million, and $817,000, respectively.

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Patents and Proprietary Rights

We have 57 United States, or U.S., and
foreign patents and patent applications, consisting of
29 U.S. and foreign issued patents and 28 patent
applications pending in the U.S. and foreign countries. The U.S.
and foreign issued patents relating to our SureBeam technology
have claims relating to methods of transporting products through
the electron beam process, means of increasing the efficiency
and reliability of the process, and ways of shielding the
process that decreases the size of the system. Our pending
patent applications include claims relating to improvements in
the operation, efficiency, and reliability of our SureBeam
technology, shielding, multiple pass x-ray system and in-line
processing systems. While electron beam, x-ray and linear
accelerator machines and technology are considered to be part of
the public domain and not patentable, we believe our patents
cover the most efficient method of utilizing electron beam,
x-ray and linear accelerator technology for food and other
applications.

In 2001, Titan purchased a perpetual and
exclusive, non-royalty bearing license to use our intellectual
property for all applications and fields other than the food
(excluding water), animal hide and flower market in
consideration of the following: 1) to make available to us
a $50.0 million senior secured line of credit, with
customary financial and affirmative and negative covenants,
2) to exchange the outstanding $75.0 million debt owed
by us to Titan for additional shares of our common stock, and
3) a cash payment of $8.0 million, with a $4.0 million
payment on September 30, 2001 and four installments of
$1.0 million payable on each of March 31, 2002,
June 30, 2002, September 30, 2002 and
December 31, 2002. We received the $8.0 million in
2001 and 2002. We recognized $1.0 million and
$4.0 million of the cash payments related to the license
agreement as other income in 2001 and 2002, respectively. We
will recognize $1.0 million as other income each quarter,
over the first three quarters of 2003. The license agreement
with Titan was negotiated between related parties, without the
benefit of receiving an independent, third party opinion as to
the fairness of the terms and conditions of the agreement. The
terms of the agreement may be different, and may be less
favorable to us, than terms which may have been negotiated
between wholly independent parties.

Our U.S. and foreign patents have been assigned
to us and include patents related to electron beam or x-ray
systems issued to Thomas Allen, our Vice President, Systems
Engineering, Integration and Field Operations, that
Mr. Allen assigned to us. The initial patent was granted on
March 7, 1995. These issued patents will expire over the
period from 2009 to 2021. These patents have been issued or are
pending in those markets that are key targets for our expansion
such as Brazil, Korea and Japan. Protection of our proprietary
rights is vital to our business. In addition to our policy of
seeking patents on our inventions, we rely on trade secrets and
know-how that is not patented, and continuing technological
innovation to develop and maintain our competitive position. In
addition, we maintain a policy of entering into confidential
information and invention assignment agreements with our
employees, consultants and other third parties. We believe that
we have a strong patent position on the application of electron
beam technology in a conveyor-based irradiation process.

On January 6, 2000, Ion Beam Applications
S.A., a Belgian corporation, and some of its
U.S. subsidiaries, or IBA, filed an action for declaratory
judgment in a federal court in Virginia against Titan and us
relating to our patents for our SureBeam systems. On
January 25, 2002, we announced that we settled the
litigation with IBA. Under the settlement, IBA dropped all the
claims it made against Titan and us in the litigation, including
IBAs challenge to the validity and enforceability of our
core patent. Titan and we agreed that IBA and its customers
might continue to operate or use IBAs electronic
irradiation facility in Bridgeport, New Jersey. The settlement
terms include, among other things, that IBA will purchase its
requirements in the United States for e-beam and x-ray systems
(non-pallet based systems) for use for processing food and
sanitizing mail from Titan and us during the next four years,
provided Titan and we offer competitive terms. Titan and we also
agreed to purchase our requirements of accelerators with power
above 150 kilowatts from IBA during the same four-year
period, provided IBA offers competitive terms. Other terms of
the settlement agreement were not disclosed.

We periodically assess the strength of our patent
and intellectual property protection for our technologies and
products. Despite our assessments and our belief in the strength
of our patent protection for particular technologies or
products, our patents may not provide effective barriers to
entry against competitors because

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our competitors may develop competing
technologies and products that do not infringe upon our patents.
In addition, we may incur significant expense in protecting our
intellectual property and defending or assessing claims with
respect to intellectual property owned by others. We also could
choose to modify or abandon one or more planned or current
products because of these assessments or actual or threatened
claims by other companies. Our patents or pending patent
applications may be challenged, narrowed or invalidated. In
addition, we can make no assurances that our pending patent
applications will be issued, or that if issued, they will
provide us with significant competitive protection.


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

SureBeam is a registered trademark in the United
States. Applications to register this trademark are pending in
other key foreign jurisdictions.

Government Regulation

Domestically, our technology is subject to
significant regulation as a food additive under the Federal
Food, Drug and Cosmetic Act, which is administered by the FDA.
Use of our SureBeam system, including product labeling, is also
subject to regulation by the USDAs Food Safety and
Inspection Service and by health and environmental safety
departments within various states.

Food irradiation first gained regulatory approval
in the United States in 1963 for use in the control of insects
in wheat and wheat flour, followed by approval in 1964 for the
prevention of sprouting in potatoes. In February 1984, the FDA
granted approval for irradiation to inhibit the maturation of
fresh fruits and vegetables, to disinfest food of insects, and
to disinfect spices of microorganisms. In 1990, the FDA approved
the irradiation of poultry. In December 1997, the FDA approved
the irradiation of meat. In December 1999, the USDA issued
regulations setting forth the guidelines for irradiation of beef
and other fresh meats, leading to the approval of commercial
sales in February 2000. Our SureBeam technology complies with
these regulations. FDA approvals for the use of irradiation to
treat processed foods and seafood are currently pending. The
USDA has approved the use of irradiation for the purposes of
reducing food-borne pathogens and extending shelf life in meat
and poultry in accordance with the requirements established by
the FDA. While the FDA has approved the use of irradiation for
reducing food-borne pathogens in meat and poultry, it has not
approved the use of irradiation to extend shelf life of poultry.

Internationally, each country either sets its own
irradiation regulations or, will adopt the, soon to be
published, CODEX Standards. According to the International
Consultative Group for Food Irradiation (ICGFI), 58 countries
have approved the use of irradiation to destroy bacteria and
pests on specified foods. We are required to obtain regulatory
approval from a number of foreign regulatory authorities before
we can offer our services in those jurisdictions. We believe
that currently, we either comply with all applicable regulations
in countries where we intend to provide services or, are working
aggressively with our customers and the appropriate host country
ministerial contacts to develop and enact the required policy
framework. USDAs Animal Plant Health Inspection Services,
or APHIS, published on October 23, 2002, its rule approving
the use of irradiation as a phytosanitary treatment alternative
for fresh produce imported into the United States. As a result
of that rule there are several additional bilateral framework
agreements that must be in place between APHIS and the exporting
country. These include pest risk assessments where absent, an
equivalency agreement and a country work plan.

In the United States and other countries that
follow World Health Organization guidelines, all electronically
irradiated food, whether processed with our electron beam or
x-rays, must be labeled with the symbol for irradiation, known
as the Radura symbol, and the phrase Treated with
Radiation or Treated by Irradiation. In the
United States, this label does not have to be any larger than
the ingredients font size. If

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the irradiated product is to be used as an
ingredient in a further processed product, the Radura symbol is
not required and the only label required is in the ingredients
section (e.g. potatoes, irradiated ground beef, natural
flavors). Bulk or wholesale items processed with irradiation
require labeling only on the case of irradiated items and not
the individual contents. For items not in packages but processed
in their entirety (e.g. fruit and vegetables) the label may
either be placed on each individual item, on the bulk container,
or on a counter sign as long as it is next to the product and
plainly in view. U.S. federal regulations do not require retail
food service providers, such as fast food restaurants, to
disclose that their food products have been irradiated. Many of
our food service customers have used the SureBeam brand, as well
as a description of electronic irradiation on their menus. Since
irradiation is regulated as a food additive, our customers also
are subject to packaging and labeling requirements.
Additionally, states like Vermont have adopted, and others may
adopt similar labeling requirements.


Our service centers also are subject to various
other federal, state and municipal regulations with regards to
health, safety and environmental issues. Our service centers are
subject to supervision or periodic inspection by other
regulators. All SureBeam locations in the United States that
process meat are required to have a USDA inspector on the
premises when processing.

Competition

We compete against several companies seeking to
address the food safety market. Our electronic food irradiation
technology competes with gamma ray irradiation, as well as
alternatives to irradiation such as thermal sterilization, gas
fumigation, chemical washes, lactoferrin and high-pressure
sterilization techniques. We believe that none of our
competitors currently is using electron beam technology to
irradiate food for commercial sale. However, certain of our
competitors claim that they can provide electronic food
irradiation systems and services. Our irradiation competitors
include Ion Beam Applications, S.A., MDS/ Nordion Food
Technologies Service, Inc. and STERIS Corporation. We are aware
of other companies that are attempting to develop in-line
electronic food irradiation systems. While we believe that our
patents with respect to our conveyor and shielding systems
provide us with an advantage in processing products through the
electron beam, competitors may develop their own different
methods of processing that would not fall within the scope of
our patents and would adversely affect our competitive position.

Some or all of our competitors may have
significantly more capital, research and development,
regulatory, manufacturing, marketing, human and other resources
than we do. We believe that our system has advantages over gamma
ray irradiation in that our system uses ordinary electricity,
can be integrated into a customers production line and
irradiates harmful bacteria in food faster than gamma ray
irradiation. We believe the cost of overall operation of our
SureBeam system is comparable to that of other irradiation
technologies. We believe irradiation using electron beam or
x-ray, including our system, also has advantages over
alternatives to irradiation. Thermal and high-pressure
sterilization can alter the flavor and quality of most food
products. Gas fumigation is not approved for food use in the
United States and chemical washes kill surface bacteria but have
little effect on pathogens beneath the surface of food. However,
to the extent a customer is concerned with killing surface
pathogens only or is not concerned with alteration of food
flavor or quality, these alternative methods may be sufficient
and less expensive.

Employees

As of December 31, 2002, we employed
130 full-time employees. None of our employees is
represented by a collective bargaining agreement and we have
never experienced a strike or similar work stoppage. We consider
our relations with our employees to be good.

Factors Which May Affect Future
Performance

Risks Related to Our Business

An investment in shares of our common stock is
very risky. We encourage you to carefully consider the following
factors as well as the other information contained and
incorporated by reference in this report.

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| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We are likely to require significant
    additional capital to fund operations, which may not be
    available on acceptable terms or at all.

We are likely to require additional funds to
execute our current business plan which includes building new
SureBeam in-line systems and service centers, funding working
capital, including in relation to our international and domestic
strategic alliances, and funding our ongoing operations,
including our corporate infrastructure. Our future capital
requirements will depend on many factors, including:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fluctuations in our working capital requirements,
    including the continued or increased demand to build our systems
    in advance of payment;         
|
| |  | Unexpected delays in collecting accounts
    receivable from sales of our systems;                                                                        
|
| |  | The volume of food processed at our service
    centers and the fixed costs of operating these facilities at
    substantially less than current capacity;
|
| |  | The costs of components for our systems, and the
    production cost of assembling our systems;                                                           
|
| |  | The adequacy of our manufacturing and other
    facilities to meet demand for our products and services;                                                  
|
| |  | The size and complexity of, and the progress in,
    our research and development programs;                                                               
|
| |  | The costs of filing and prosecuting patent
    applications, and maintaining, defending and enforcing our
    patents; and                                
|
| |  | The timing, scope and results of market testing
    by food processors.                                                                                   



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our revenues from operations do not meet
    our expectations, we may have a heightened need for additional
    capital from a source other than our current credit
    facility.

Titan has extended to us a $50.0 million
senior secured credit facility secured by substantially all of
our assets. It allows us to borrow up to a maximum of
$12.5 million per quarter beginning in the fourth quarter
of 2002 through the fourth quarter of 2003, subject to the
$50.0 million aggregate limitation on borrowing. The amount
available for borrowing in each of the second, third and fourth
quarters of 2003 is based upon our earnings before interest,
taxes, depreciation and amortization (EBITDA) for the prior
quarter as a percentage of the EBITDA target in our annual
operating plan. Additionally, we are subject to certain
limitations on our capital expenditures and our operating
expenses, based in part upon our actual revenues as compared to
our revenue targets. If our operating revenues do not meet our
expectations, it is likely that (i) our EBITDA will not
meet our EBITDA targets, which will limit the amount which we
can borrow under the Titan credit facility; and
(ii) because of the shortfall in revenues, we will have a
greater need to borrow funds to fulfill our current business
plan. Therefore, failure to meet our expected operating revenues
could have a compounded effect, which could require us to obtain
additional financing sooner than currently anticipated in order
to fulfill our current business plan. In such circumstance, no
assurance can be made that we would be able to obtain additional
financing on terms reasonable to us, or at all, which could have
a material adverse effect upon our results of operations and
financial condition.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Our current credit facility may not be
    sufficient for our capital requirements.

In the past, Titan financed a significant portion
of our working capital and other capital requirements and Titan
has extended to us a $50.0 million senior secured credit
facility secured by substantially all of our assets. This
facility is subject to limits in the amounts that can be drawn
each quarter, and subject to certain financial covenants and
affirmative and negative covenants. As of March 28, 2003,
we have borrowed $25.0 million under this senior secured
credit facility. We do not anticipate any additional borrowings.
We cannot give assurance that we will be able to obtain any
additional credit on as favorable terms or at all. We believe
our current liquidity will allow us to continue our operations
through 2003, however, if our capital requirements vary from our
current plans, we may require additional financing sooner than
we anticipate. We expect we will need to obtain additional debt
or equity financing in order to execute our business strategy.
Future equity financings would likely be dilutive to the
existing holders of our common stock. Future debt financings
would

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most likely involve restrictive covenants and
would need to be approved by Titan. Additional financing from
Titan or from third parties may be unavailable to us when
needed. If we are unable to obtain future equity financing or
debt financing or obtain additional funding from Titan or other
financing sources on terms acceptable to us or at all or if we
are unable to generate sufficient cash flow from operations, we
believe we would have sufficient funds to continue our
operations through 2003, but we would have to significantly
reduce our current business plan and delay, curtail or eliminate
some of our operations or capital expenditures in 2004 and
beyond, which could have a material adverse effect on our
results of operations and financial condition.




| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not achieve our financial goals in a
    timely manner, or at all, due to variability of timing and
    amounts of revenues obtained from sales of our
    systems.

Historically, a majority of our revenues have
been obtained through sales of our SureBeam electronic food
irradiation systems. We recognize the revenues from these sales
using the percentage-of-completion method of accounting, which
allows us to recognize revenue as our fulfillment of the
contract progresses. Under this method, delays in finalizing
anticipated sales contracts or even in construction of systems
we have sold can significantly reduce the amount of revenues,
which we recognize during any given quarter. Because many of our
expenses are relatively fixed, it is unlikely that a reduction
in revenues recognized in a particular quarter would result in a
corresponding reduction in our expenditure levels for the
quarter. Therefore, delays may have a material adverse effect on
our operating results for the quarter in which the delay occurs,
causing us to be unable to achieve our financial goals for the
quarter. If we do not meet our financial goals for a quarter, or
if our operating results for a quarter are below the
expectations of public market analysts and investors, the price
of our common stock may decrease significantly.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is at an early stage of
    development. We are subject to the risks of new enterprises and
    the commercialization of a technology that requires consumer
    acceptance.

Our early stage of development makes it difficult
to assess our prospects or predict our future operating results.
We are subject to risks and uncertainties frequently encountered
by early stage companies that involve the new application of an
existing technology. These risks include our inability to:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Build consumer confidence in the benefits of food
    irradiation and establish the acceptance of our SureBeam
    electronic irradiation technology;
|
| |  | Establish and maintain a sufficient number of
    food industry customers and strategic relationships; and                                           
|
| |  | Obtain substantial capital to support the further
    development of our technology and the commercialization of our
    systems and services.       

If we do not successfully address these risks, we
may not be able to increase revenues or commercialize our
SureBeam system.



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to successfully achieve
    broad market acceptance of our SureBeam system, we may not be
    able to generate enough revenues in the future to achieve or
    sustain profitability.

We are dependent on the successful
commercialization of our SureBeam system. The market for
electronically irradiated food is at an early stage of
development and has developed slower than we have expected. As
of December 31, 2002, thirteen food processors were selling
food electronically irradiated by us and the volume of food
being processed is still a very small percentage of the market
of ground beef. To date, no market has developed for chicken.
The FDA still has not approved the irradiation of processed food
and seafood, which represents two substantial potential markets.
We processed 14.8 million pounds of food products in 2002,
up from 11.1 million pounds processed in 2001. We are
projecting significant increases in the pounds to be processed
in 2003; however, no assurance can be made that we will meet our
projections. To date, the volume of food processing services has
not increased as rapidly as we have expected. Other food
processors are testing our technology and it is uncertain
whether or when they will begin commercial production, which in
some cases depends on obtaining regulatory approval. We also do
not know whether or when more fast food or other national chain
restaurants or food retailers will decide to offer irradiated
meat

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and create demand for our electronic irradiation
systems. We expect that some food processors will not irradiate
food unless industry leaders first commit to distribute
irradiated food.




| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | We have a history of significant losses and
    we may not achieve or sustain profitability.

We have incurred operating losses in each quarter
since we commenced operations. As of December 31, 2002, we
had an accumulated deficit of approximately $127.5 million,
and our net loss for the year ended December 31, 2002 was
$35.1 million. Our net loss for the year ended
December 31, 2001 was approximately $74.4 million,
including approximately $54.3 million of non-cash
stock-based compensation. At the time of our initial public
offering, March 16, 2001, we recorded deferred stock-based
compensation of approximately $78.6 million, of which
$53.5 million and $15.8 million was recognized as
stock-based compensation during the years ended
December 31, 2001 and 2002, respectively. We will recognize
this charge in accordance with the vesting provisions of the
related options through 2004. This charge will have a
significant adverse impact on our earnings in 2003 and 2004. We
expect to derive our future revenues from sales of our SureBeam
systems and related food processing services. However, these
revenues are highly uncertain. We expect to devote substantial
resources to continue our sales and marketing activities,
including our consumer branding efforts, further develop our
administrative infrastructure and expand our research and
development activities. As a result, we expect that our
operating losses will increase and that we will incur operating
losses through at least 2003. In addition, if we continue to
incur operating losses we may need to record impairment charges
on some of our long-lived and other assets.



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenues from system sales may decline in
    the future if we fail to make new system sales or the timing of
    expected contract execution is delayed.

Our system sales revenues are dependent on a few
large contracts and the recognition of revenues under these
long-term contracts is based upon work performed. Consequently,
the timing of the execution of these contracts and the timing of
work performed under them, which is partially outside of our
control, could cause us to generate lower than expected
revenues. To date, our revenues have been primarily attributable
to the design and construction of systems for a limited number
of customers, for which revenues are recognized under the
percentage-of-completion method of accounting. For example, for
the year ended December 31, 2000 revenue from three
customers represented approximately 79% of our total revenues,
for the year ended December 31, 2001 revenue from three
customers represented approximately 89% of our total revenues,
and for the year ended December 31, 2002 revenue from two
customers represented approximately 78% of our total revenues.
Most of these systems are not yet fully constructed, installed
or integrated and we expect to continue to derive system sales
revenue as we complete construction, installation and
integration of these systems. A reduction or delay of system
sales to one or more significant customers could significantly
reduce our revenues. Once the food irradiation systems become
operational, we will no longer derive revenue from these system
sales, but expect to derive income from food processing revenues
commensurate with our existing or potential equity ownership in
the entities that own and operate the third party service
centers. In addition, we expect to derive revenue from
processing by company-owned service centers and in-line systems.
There are no assurances that we will continue to derive revenues
from these customers, that revenues from these customers will
continue at current or historical levels, that we will be able
to derive revenue from new customers or that we will be able to
derive income from significant food processing revenues in the
future at anticipated levels.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We may be required to take impairment
    charges for receivables if a customer defaults on its payment
    obligations.

We account for our revenues derived from sales of
electronic food irradiation systems under fixed-price contracts
using the percentage-of-completion method of accounting. These
systems currently take a total of approximately 12 to
18 months to design, construct, install, integrate and
deliver. Our unbilled receivables from our contracts for systems
have increased over the past twelve months. If a customer
defaults on its payment obligations under a contract accounted
for using the percentage-of-completion method of accounting or
if we determine that the contract is otherwise impaired, we
would take an impairment charge to earnings for

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the receivable arising from previously recorded
revenues in respect of such contract at that time. We cannot
assure you that one or more of our customers will not default on
its payment obligations. For example, in December 1999, we
agreed to sell a SureBeam system to a new entity, Zero Mountain
SureBeam, to be formed by Zero Mountain Cold Storage. Under the
agreement, a facility was to be constructed and the entity would
operate an electronic food irradiation service center in
Arkansas. Management of Zero Mountain Cold Storage had not moved
forward with its obligation under the contract. Accordingly, in
December 2001, we recorded an allowance for doubtful accounts of
$1.2 million against our receivable from Zero Mountain Cold
Storage.




| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because a majority of our accounts
    receivable are related to only two customers, a default by
    either, or both, of these customers would have a severe impact
    on our operating results and financial condition.

As of December 31, 2002, we had total
accounts receivable of approximately $28.3 million, of
which approximately $17.3 million was related to RESAL
which was unbilled and approximately $10.1 million was
related to Titan. In January 2003, Titan paid approximately
$7.2 million related to its receivable, bringing our total
accounts receivable to approximately $21.1 million, of
which approximately 82% is related to RESAL and approximately
14% is related to Titan. Due to the concentration of our
accounts receivable in two customers, the default by either or
both of these customers would have a severe impact on our
operating results and financial condition.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have not generated positive cash flow
    from operations and our cash flow from operations may be
    insufficient to meet operating requirements for the foreseeable
    future.

We used net cash from operations of
$45.0 million in 2001 and $11.0 million in 2002. Also,
in connection with our agreements with our customers, we have
advanced funds aggregating $5.8 million to a strategic
alliance entity in Hawaii to be used primarily for land
acquisition, building construction, and for working capital
purposes. During the fourth quarter of 2002, Hawaii Prides
primary customer declared bankruptcy, which resulted in an
interruption in their normal business operations. As a result of
this deterioration of their business, we determined that it was
prudent to record a reserve of $4.4 million for the entire
receivable. The RESAL contract requires us to expend significant
cash to construct equipment prior to the receipt of the progress
payments. Through December 31, 2002 we have cost of goods
sold on the RESAL contract of approximately $13.0 million
and an unbilled receivable of $17.3 million. We received
progress payments of $5.3 million through March 28,
2003. We will continue to receive payments based on the payment
schedule in the contract. In addition, we have entered into a
number of commitments to lease land and facilities in connection
with construction of our four company-owned service centers, of
which three are operational and the fourth to be operational in
the second quarter of 2003. Based on our customer requirements,
we may expend funds to construct and install in-line systems
that we will own and operate. We have limited sources of
committed liquidity including our cash resources. Titan has
extended to us a new $50.0 million senior credit facility
secured by substantially all of our assets. As of March 28,
2003, we have obtained $25.0 million under this credit
facility. This facility will be subject to limits in the amounts
that can be drawn each quarter, subject to financial covenants
and affirmative and negative covenants. We do not anticipate
making any additional borrowings. No assurance can be given that
we will be able to generate sufficient positive cash flow from
operations to meet operating requirements for the foreseeable
future.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | International expansion will subject us to
    risks associated with international operations that could
    increase our costs and decrease our profit margins in both our
    domestic and our international operations.

Our success will depend in part on our ability to
expand internationally as we obtain regulatory approvals to
market and sell our SureBeam systems in other countries. We have
received orders to install systems in Saudi Arabia and in
Southeast Asia and we are building a service center in Brazil
for extending the shelf life of fruits and vegetables. Expansion
of our international operations could impose substantial burdens
on our resources, divert managements attention from
domestic operations and otherwise adversely affect our

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business. Furthermore, international operations
are subject to several inherent risks that could increase our
costs and decrease our profit margins including:




| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reduced protection of intellectual property
    rights;                                                                                                                                 
|
| |  | Changes in foreign currency exchange rates;                                                                                                                                             
|
| |  | Changes in a specific countrys or
    regions political or economic conditions, including
    military action or war in or near countries containing our
    international operations;
|
| |  | Trade protective measures and import or export
    licensing requirements or other restrictive actions by foreign
    governments;                                                      
|
| |  | Laws affecting the enforceability of our
    contracts and our ability to collect accounts receivable; and                                                                              
|
| |  | Changes in tax laws.                                                                                                                                                                    



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Public concerns over the irradiation of
    food could negatively impact market acceptance of our SureBeam
    process and SureBeam branded food products.

Irradiation of food by any technology, whether
using an electron beam or radioactive isotopes, is opposed by
several organized and vocal consumer groups who claim that
irradiated food products are unsafe for consumption or pose a
danger to the environment. These groups attempt to influence
public policy and promote consumer opposition to irradiated food
through activities such as picketing stores that offer
irradiated food and by lobbying politicians. Because irradiation
of foods by electron beam technology is a new process, consumers
need to be informed about the benefits and safety of food
irradiation. Since irradiation of food by any method, whether
using electron beam or radioactive isotopes, must be disclosed
under the same label Treated with Radiation or
Treated by Irradiation, consumers may fear that our
process makes food unsafe for consumption, has unknown future
health effects or poses a danger to the environment. We risk not
being able to overcome these fears through our educational
efforts or to distinguish our process from gamma irradiation. If
the public or our potential customers perceive our systems and
services as unsafe or undesirable, our systems and services may
not gain market acceptance, which would severely limit our
ability to market and sell our products. In addition, negative
public attitudes may prompt state legislatures to prohibit the
sale of irradiated food. Further, consumers may be unwilling to
pay for the higher cost of food products processed by our
SureBeam system, which could negatively impact the market
acceptance of our process.



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our customer contracts for processing can
    be cancelled on short notice with little penalty and these
    contracts allow the customers to use other electronic
    irradiation providers in limited circumstances.

While our customer contracts for processing
generally provide for a term of more than one year, the
customers may terminate such contracts with a nominal
termination fee and upon short notice, typically one month. If
one or more customers that are processing a significant volume
of products decide to terminate their contracts, our results of
operations would be adversely affected. While a termination of a
contract by a customer would not generally release a customer
from the exclusive provider arrangement in the customers
contract, we generally must release a customer from the
exclusive provider arrangement if they can find an alternative
food irradiation source that can provide a comparable service at
a lower price, or if we cannot fully meet the customers
demand.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our customer contracts for processing do
    not obligate our customers to use a minimum amount of
    irradiation services; only to use us for their irradiation
    needs, if any.

Our customer contracts for processing generally
provide that the customer is obligated to use our irradiation
services for their food irradiation needs, if any. No assurance
can be made, however, that our customers will require a
significant amount, or any food irradiation services during the
term of their respective contracts.

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If
we cannot establish and maintain relationships with food
processors, distributors, retailers and food service operators,
we may not be able to increase revenues or commercialize our
SureBeam system.

In order to increase our revenues and
successfully commercialize our SureBeam system, we must
establish and maintain relationships with our existing and
potential customers and strategic partners. A reduction, delay
or cancellation of orders from one or more significant customers
or the loss of one or more key customers could significantly
reduce our revenues and could damage our reputation among our
current and potential customers as well as with consumers. We
cannot assure you that our current customers will continue to
place orders with us, that our current customers evaluating the
technology will elect to enter into commercial production, that
orders by existing commercial customers will increase, or that
we will be able to obtain orders from new customers or continue
to secure additional strategic relationships.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | If we experience quality control problems
    or supply shortages from component suppliers, our revenues and
    profit margins may suffer.

Our dependence on third party suppliers for
components of our systems involves several risks, including
limited control over pricing, availability of materials, quality
and delivery schedules. These components include the microwave
cavities of our linear accelerators, which we currently obtain
from a single source. We may experience quality control problems
or supply shortages with respect to these components in the
future. Any quality control problems or interruptions in supply
with respect to one or more components or increases in component
costs could materially adversely affect our customer
relationships, revenues and profit margins.



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The use of our systems to irradiate food is
    subject to significant government regulation that could prohibit
    the sale of irradiated food in various jurisdictions, increase
    the cost of using our products and delay or prevent the use of
    our systems and services by our customers.

Food irradiation is subject to significant
regulation as a food additive by the FDA. Use of our SureBeam
system, including product labeling, is also subject to
regulation by the U.S. Department of Agricultures
Food Safety and Inspection Service and by health and
environmental safety departments within various states. The FDA
has approved the use of irradiation for beef, poultry, pork,
fruits and vegetables. The FDA has not yet approved the use of
irradiation for two of the primary food markets we expect to
target: processed foods and seafood. The failure of the FDA to
approve irradiation of processed foods and seafood would prevent
us from generating revenues from the application of our
technology in these significant markets. Furthermore, the FDA
could remove or restrict its approval of the use of irradiation
for currently approved food products, which would severely limit
our ability to provide services and systems.

In addition, FDA regulations require that all
food that has been irradiated must carry the Radura symbol, an
international symbol for irradiation, and state that the product
has been Treated with Radiation or Treated by
Irradiation on the label or packaging. States such as
Vermont have similar labeling requirements. These labeling
regulations may increase the risk that consumers will not
purchase goods that have been treated by our products or
services, which could negatively impact our revenues.

FDA regulations also require approval for
packaging materials used by our customers. While the FDA has
approved a number of packaging materials, many other materials
commonly used for packaging food have not been approved. Failure
or delay in receiving such approvals could have a material
adverse effect on our customer relationships and revenues.

We also are required to obtain regulatory
approval from foreign regulatory authorities before we can offer
our systems and services in those jurisdictions. These
jurisdictions may apply different criteria than the
U.S. regulatory agencies in connection with their approval
processes. Monitoring changes in, and our compliance with,
diverse and numerous foreign regulatory requirements may
increase our costs. Regulatory approvals in foreign countries
that regulate irradiation are subject to similar risks and
uncertainties as are regulatory approvals in the United States.
If we are unable to obtain approval to sell our products and
services in these markets, our ability to generate revenues from
these markets would be adversely affected.

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Our service centers also are subject to various
other federal, state and municipal regulations regarding health,
safety and environmental issues. Our service centers are subject
to continuous supervision, in the case of the USDA, or periodic
inspection by other regulators.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | If we cannot effectively manage our
    anticipated growth, our business prospects, revenues and profit
    margins may suffer.

If we fail to effectively manage our anticipated
growth in a manner that minimizes strains on our resources, we
could experience disruptions in our operations and ultimately be
unable to generate revenues or profits. We expect that we will
need to significantly expand our operations to successfully
implement our business strategy. As we add manufacturing,
marketing, sales, and other personnel, both domestically and
internationally, and expand our manufacturing, irradiation
processing and research and development capabilities, we expect
that our operating expenses and capital requirements will
increase. To effectively manage our anticipated growth, we must
continue to expend funds to improve our operational, financial
and management controls, and our reporting systems and
procedures. In addition, we must effectively expand, train and
manage our employee base. If we fail in our efforts to manage
our internal growth, our business prospects, revenues and profit
margins may suffer.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We intend to continue to pursue strategic
    transactions, which could disrupt our operations, increase our
    costs and negatively impact our earnings.

We intend to continue to pursue strategic
transactions that provide access to new technologies, products
or markets. These transactions could include acquisitions,
partnerships, joint ventures, business combinations and
investments. Any transaction may require us to incur
non-recurring or ongoing charges and may pose significant
integration challenges and/or management and business
disruptions, any of which could increase our costs and
negatively impact our earnings. In addition, we may not succeed
in retaining key employees of any business that we acquire. We
may not consummate these transactions on favorable terms or
obtain the benefits we anticipate from a transaction.



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our technology competes against other food
    irradiation technologies. Competition in our market may result
    in pricing pressures, reduced margins or the inability of our
    products and services to achieve market
    acceptance.

We compete against several companies seeking to
address the food safety market. Our electronic food irradiation
technology competes against gamma ray technology and
alternatives to irradiation, such as thermal sterilization,
fumigation, lactoferrin and chemical washes. We may be unable to
compete successfully against our current and potential
competitors, which may result in price reductions, reduced
margins and the inability to achieve market acceptance for our
products.

The current level of market penetration for food
irradiation products is relatively low when compared to the
overall size of the food markets to which we are targeting our
food irradiation services and products. If food irradiation
gains consumer acceptance and the market increases, we expect
competition to grow significantly. Our competitors include Flow
International Corporation, Ion Beam Applications, S.A.,
MDS/Nordion Food Technologies Service, Inc. and STERIS
Corporation. These organizations may have significantly more
capital, research and development, regulatory, manufacturing,
marketing, human and other resources than we do. As a result,
they may be able to devote greater resources to the manufacture,
promotion and sale of their products, initiate or withstand
substantial price competition, or take advantage of acquisition
or other opportunities more readily.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our inability to protect our patents and
    proprietary rights in the United States and foreign countries
    could materially adversely affect our business prospects and
    competitive position.

Our success depends on our ability to obtain and
maintain patent and other proprietary-right protection for our
technology and systems and services in the United States and
other countries. The laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the
United States, and many

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companies have encountered significant problems
and costs in protecting their proprietary rights in these
foreign countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from
using our proprietary rights. In addition, we may incur
significant expense in protecting our intellectual property and
defending or assessing claims with respect to intellectual
property owned by others.


We periodically assess the strength of our patent
and intellectual property protection for our technologies and
products. Our electronic food irradiation system combines our
patented conveyor and shielding systems and proprietary software
with publicly available electron beam, x-ray and linear
accelerator technology. Despite our assessments and our belief
in the strength of our patent protection for particular
technologies or products, our patents may not provide effective
barriers to entry against competitors because our competitors
may develop competing technologies and products that do not
infringe upon our patents. Further, our patents do not cover
electron beam, x-ray or linear accelerator technology, which are
publicly available. We also could choose to modify or abandon
one or more planned or current products because of these
assessments or actual or threatened claims by other companies.
Our patents or pending patent applications may be challenged,
narrowed or invalidated. In addition, we are not certain that
our pending patent applications will be issued.

We also rely on trade secrets, proprietary
know-how and continuing technological innovation to remain
competitive. We have taken measures to protect our trade secrets
and know-how, including the use of confidentiality agreements
with our employees, consultants and advisors. It is possible
that these agreements may be breached and that any remedies for
a breach will not be sufficient to compensate us for damages
incurred. We generally control and limit access to, and the
distribution of, our product documentation and other proprietary
information. Despite our efforts to protect these proprietary
rights, unauthorized parties may copy aspects of our products
and obtain and use information that we regard as proprietary. We
also cannot guarantee that other parties will not independently
develop our know-how or otherwise obtain access to our
technology.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Companies may claim that we infringe their
    intellectual property or proprietary rights, which could cause
    us to incur significant expenses or prevent us from selling our
    products.

Our success depends on our ability to operate
without infringing the patents and proprietary rights of third
parties. Product development is inherently uncertain in a
rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies.
Future patents issued to third parties may contain claims that
conflict with our patents. Although we believe that our current
product does not infringe the proprietary rights of any third
parties, third parties could assert infringement claims against
us in the future. Any litigation or interference proceedings,
regardless of their outcome, would probably be costly and
require significant time and attention of our key management and
technical personnel. Litigation or interference proceedings
could also force us to:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | Stop or delay selling, manufacturing or using
    products that incorporate the challenged intellectual property;
|
| |  | Pay damages; or                                                                                                  
|
| |  | Enter into licensing or royalty agreements that
    may be unavailable on acceptable terms.                      



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Product liability claims could materially
    adversely affect our customer relationships and
    costs.

Our involvement in the processing of food results
in a significant risk that we will be subject to product
liability claims resulting from the consumption of contaminated
food. We may be held liable or incur costs to settle or defend
liability claims if any of our systems cause, or are claimed to
cause, injury or are found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks exist even
with respect to products that have received, or may in the
future receive, regulatory approval, registration or clearance
for commercial use. Also, we may be liable to our customers for
the costs they incur from product recalls. We cannot guarantee
that we will be able to avoid product liability exposure.

While we currently maintain product liability
insurance at levels that we believe are sufficient and
consistent with industry standards for companies at our stage of
development, we cannot guarantee that our

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product liability insurance is adequate. It is
also possible that at any time our insurance coverage may become
unavailable on commercially reasonable terms or at all. A
product liability claim or product recall could result in
liability to us greater than our assets and/or insurance
coverage. Moreover, product liability claims, recalls and
expenses associated with defending against claims or recalls
could have an adverse impact on us even if we have adequate
insurance coverage. Further, a product liability claim against
us, whether merited or not, or a product recall claim against us
would damage our reputation and severely undermine our branding
campaign and our efforts to gain consumer acceptance.




| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot retain key personnel or
    attract qualified personnel, our customer relationships,
    competitive position and revenues could suffer.

Our success depends to a significant extent upon
the efforts of our key management, sales and marketing,
technical support and research and development personnel, none
of whom have entered into agreements not to compete with us. The
loss of any key personnel could adversely affect us. We believe
that our future success will depend in large part upon our
continuing ability to attract and retain highly skilled
managerial, sales and marketing, technical support and research
and development personnel. Like other emerging growth companies,
we face intense competition for our personnel needs, and we have
at times experienced and continue to experience difficulty in
recruiting qualified personnel. We face the additional challenge
of carefully balancing the growth of our employees commensurate
with our anticipated revenue growth. If our revenue growth or
attrition levels vary significantly, our results of operations
or financial condition could be adversely affected. Further, our
common stock price has been, and may continue to be extremely
volatile. When our common stock price is less than the exercise
price of stock options granted to employees, turnover is likely
to increase, which could adversely affect our results of
operations or financial condition. Additionally, there are
several proposals in the United States Congress and in the
accounting industry to require corporations to include a
compensation expense in their statement of operations relating
to the issuance of employee stock options. If such a measure is
approved, we may decide to issue fewer stock options. As a
result, we may be impaired in our efforts to attract and retain
necessary personnel. We cannot assure you that we will be
successful in attracting, assimilating and retaining additional
qualified personnel in the future. If we were to lose the
services of one or more of our key personnel, or if we failed to
attract and retain additional qualified personnel, it could
materially and adversely affect our customer relationships,
competitive position and revenues.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Delays in the construction and installation
    of our systems could negatively affect our
    revenues.

Our business model depends on the successful
deployment of our systems, whether the systems are constructed
and installed in our company-owned service centers or in a
customers production line. A number of factors beyond our
control can slow or delay the deployment of our systems such as
site preparation, zoning and permitting requirements, the
availability of skilled construction personnel and construction
equipment, and adverse weather conditions. For example, due to
these factors, our service center in Brazil opening has been
delayed approximately one year from our original estimates.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Recently enacted and proposed changes in
    securities laws and regulations are likely to increase our
    costs.

The Sarbanes-Oxley Act of 2002 that became law in
July 2002 requires changes in some of our corporate governance,
public disclosure and compliance practices. The Act also
requires the SEC to promulgate new rules on a variety of
subjects. In addition to final rules and rule proposals already
made, the NASDAQ has proposed revisions to its requirements for
companies, such as us, that are listed on the NASDAQ. We expect
these developments to increase our legal and financial
compliance costs, and to make some activities more difficult,
such as stockholder approval of new option plans. We expect
these developments to make it more difficult and more expensive
for us to obtain director and officer liability insurance, and
we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These
developments could make it more difficult for us to attract and
retain qualified members of our board of directors, particularly
to serve on our audit committee, and qualified executive
officers. We are presently evaluating and monitoring regulatory
developments and cannot estimate the timing or magnitude of
additional costs we may incur as a result.

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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | The war with Iraq and other events of
    global instability are likely to have a continuing negative
    impact on our international operations.

We have various facilities and projects in
countries other than the United States, including Saudi Arabia.
Due to the war with Iraq, certain shipments of equipment to
Saudi Arabia have been delayed. Continuing war with Iraq or
other global instability could cause further delays in Saudi
Arabia or otherwise have a negative impact upon our
international operations. While the war and other political
unrest has not yet posed a direct security risk to our
international facilities in Saudi Arabia, or elsewhere, it may
cause unforeseen delays in the construction or development of
our facilities and may in the future pose such a direct security
risk. Our business plan also requires us to enter into new
contracts for construction and integration of systems in
facilities in other international countries. War and other
global instability may cause delays or failures in signing these
contracts.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | The spread of Severe Acute Respiratory
    Syndrome may have a continuing negative impact on our operations
    in Vietnam.

We have current and anticipated projects in
countries in Asia, including Vietnam. Due to the outbreak of
Severe Acute Respiratory Syndrome (SARS) in Asia,
the U.S. State Department has warned U.S. citizens not
to travel to Vietnam because of the lack of adequate medical
facilities for proper treatment of SARS. Therefore, our
personnel who are constructing the system in Vietnam have
departed from Vietnam pending resolution of this medical crisis.
The departure of our personnel is delaying construction of the
systems in Vietnam and we anticipate that these delays will
continue until such personnel return to Vietnam to complete the
system construction. We can provide no assurance as to when the
medical crisis in Vietnam will be resolved or when our personnel
will be able to return to Vietnam to complete the system
installations. Failure to complete the construction of the
systems in Vietnam as scheduled will result in a delay in our
receipt of approximately $1.5 million to be paid following
such completion. A delay could have a material affect upon our
operating results and financial condition.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If our stock price becomes less than $1.00
    per share for an extended period, we could be delisted from the
    NASDAQ.

Maintaining the listing of our common stock on
the NASDAQ National Market is important to us. The delisting of
our common stock from the NASDAQ would have a material adverse
effect upon the marketability of our common stock and could,
among other things, materially and adversely affect our ability
to raise additional equity capital or to obtain financing
through other sources. The NASDAQ has numerous requirements
which must be complied with for a company to maintain its
securitys listing on the NASDAQ, one of which is that the
minimum bid price of the security must be $1.00 or greater per
share. If the price of our common stock were below $1.00 per
share for a period of 30 or more consecutive business days, the
NASDAQ could take action to delist our common stock from the
NASDAQ. While the price of our common stock on the NASDAQ has
not traded below $1.00 since our initial public offering, we
cannot assure you that the price of our common stock will not
fall below $1.00 in the future. On March 20, 2003, the
closing price per share of our common stock was $4.01.

If our common stock were delisted from the
NASDAQ, trading would thereafter be reported in the National
Association of Securities Dealers Over the Counter Bulletin
Board or in the pink sheets. The investing in
securities traded in the Bulletin Board or in the pink sheets is
generally considered to be subject to more risk than comparable
investing in securities, which are traded on one of the major
national securities exchanges such as the NASDAQ or the New York
Stock Exchange. In the event of delisting from the NASDAQ, our
common stock may be classified as a penny stock by
the SEC and would become subject to rules adopted by the SEC
regulating broker-dealer practices in connection with
transactions in penny stocks. Broker-dealers
recommending a penny stock must, among other things, document
the suitability of the investment for the specific customer,
obtain a written agreement of the customer to purchase the penny
stock, identify such broker-dealers role, if any, as a
market maker in the particular stock, and provide information
with respect to market prices of the common stock and the amount
of compensation that the broker-dealer will earn in the proposed
transaction. These disclosure requirements may have the effect of

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reducing the level of trading activity in the
market for our common stock. If our common stock became subject
to the penny stock rules, many broker-dealers may be unwilling
to engage in transactions in our securities because of the added
disclosure requirements, thereby making it more difficult for
purchasers of our common stock to dispose of their shares of our
common stock. The ownership of penny stock is generally
considered to subject the owner to greater risks than the
ownership of common stock as a whole due, among other things, to
the smaller trading volume in such stocks and to the substantial
impact upon the stocks overall value which results from
small stock price variations.


Risks Related to our Past Relationship with
Titan



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business may suffer because we entered
    into affiliate agreements with Titan that may not have been
    based on arms length negotiations.

We have entered into various agreements with
Titan including a tax allocation agreement, tax sharing and
disaffiliation agreement, license agreement, and credit
agreement. Because we were a majority-owned subsidiary of Titan
at the time these agreements were entered into, these agreements
were negotiated between related parties, and the results may
differ from results obtained from arms-length negotiations.
Under the license agreement, Titan purchased a perpetual and
exclusive, non-royalty bearing license to use our intellectual
property on all applications other than the food (excluding
water), animal hide and flower markets in return for the
following: 1) to make available to us a $50.0 million
line of credit, 2) to convert the then current
$75.0 million debt owed by us to Titan into equity via an
exchange for our stock, and 3) a cash payment of
$8.0 million.

Under the tax allocation agreement, Titan will
determine the amount of separate taxable income and tax
liability that we would realize if we filed a separate tax
return. In addition, because we have filed a consolidated tax
return with Titan, we may be obligated to pay taxes for the
entire group of Titan companies if those companies defaulted in
the payment of their taxes. If Titan offsets taxable gains with
our losses, Titan will have to compensate us in cash for the
benefit it receives for its use of our losses when we
demonstrate we are able to utilize those losses or they would
have otherwise expired. In addition, any benefit from our losses
used to offset Titan profits resulting in a tax savings, is
subject to Titans position at that time.



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We entered into a license agreement with
    Titan that prevents us from capitalizing on newly discovered
    uses of our technology in applications that are not related to
    food (excluding water), animal hides and flowers except through
    a manufacturing contract.

Titan purchased from us a perpetual and exclusive
non-royalty bearing license to use our intellectual property in
all applications and fields other than in the fields of food
(excluding water), animal hides and flowers. Because
Titans license is an exclusive license, we cannot use our
intellectual property in applications other than food (excluding
water), animal hides and flowers. Applications which we believe
are reserved for Titans use include medical equipment
sterilization and sterilization of mail to eliminate the threat
of anthrax contamination.

Under the terms of the license agreement with
Titan, future sales of electronic irradiation equipment to
Titan, if any, will be sold on a cost-plus 20% markup basis,
unless otherwise negotiated. Titan is obligated to purchase
electronic irradiation equipment it requires, if any, from
SureBeam until December 31, 2003, after which it may
purchase equipment from any source. Therefore, we anticipate we
will receive no further revenue from any commercialization of
our licensed technology by Titan or any new applications for our
licensed technology developed by Titan, unless Titan chooses to
purchase equipment from us or enter into other arrangements with
us under which we would receive revenue. Titan is not obligated
to purchase any electronic irradiation equipment from us in the
future, and should Titan not purchase any electronic irradiation
equipment from us, it could have a material adverse effect upon
our financial condition and results of operations.

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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Maintaining the tax-free status of the
    distribution of our common stock by Titan to its stockholders
    restricts certain of our activities.

For the distribution of our stock by Titan to
continue to qualify as tax-free, there must not be a change in
ownership of 50% or more in either the voting power or value of
either our stock or Titans stock that is considered to be
part of a plan or a series of related transactions related to
Titans distribution of our stock to its stockholders.
Accordingly, we may be significantly limited in our ability to
raise additional equity financing, use our stock for
acquisitions and other similar strategic transactions or for
compensation of employees and others. Further, in connection
with our spin-off from Titan, we have entered into a tax sharing
and disaffiliation agreement that provides for, among other
things, an agreement with Titan that if we take any action that
causes Titans representations with respect to the letter
ruling to be untrue or engage in transactions after the
distribution that cause the spin-off to be taxable to Titan, we
would be required to indemnify Titan for any and all taxes
resulting from the failure of the spin-off to continue to
qualify as a tax-free transaction. In addition, we may be
required to indemnify Titan for half of any taxes incurred as a
result of the spin-off if the spin-off is taxable for reasons
that were not caused by actions taken by either Titan or us and
to share proportionately with Titan such taxes if they are
caused by actions by both us and Titan, in proportion to our
relative contribution to the imposition of these taxes. Any
indemnification payments by us would most likely be material.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales through Titan generally produce
    lower profit margins than our sales to other parties. A higher
    percentage of sales through Titan could reduce our overall
    profit margins.

Historically, Titan has purchased a substantial
amount of equipment from us as a subcontractor, in order to
allow Titan to fulfill various contracts. These sales have
typically been structured on a fixed price basis or cost-plus
basis. Therefore, sales to or through Titan have historically,
and likely will in the future, carry a lower profit margin than
comparable sales to other parties. A higher percentage of sales
through Titan could reduce our overall profit margins.

Risks related to the securities markets and
ownership of our common stock



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Our securities have not been publicly
    traded very long and our stock price may be subject to
    significant fluctuations and volatility.

The market price of our common stock has been
subject to significant fluctuations since the date of our
initial public offering on March 16, 2001. Our common stock
market price has ranged from a high of approximately $19.45 to a
low of approximately $1.46 since such time. These fluctuations
could continue. Among the factors that could affect our stock
price are:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Quarterly variations in our operating results;                                              
|
| |  | Changes in revenue or earnings estimates or
    publication of research reports by analysts;
|
| |  | Speculation in the press or investment community;                                           
|
| |  | Strategic actions by us such as new joint
    ventures, acquisitions or restructuring;      
|
| |  | Actions by institutional stockholders;                                                      
|
| |  | General market conditions; and                                                              
|
| |  | Domestic and international economic factors
    unrelated to our performance.               

The stock markets in general have experienced
extreme volatility that has often been unrelated to the
operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of
our common stock.

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| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our charter documents and
    Delaware law may delay or prevent acquisition of us, which could
    decrease the value of your shares.

Our certificate of incorporation and bylaws and
Delaware law contain provisions that could make it harder for a
third party to acquire us without the consent of our board of
directors. These provisions include a classified board of
directors and limitations on actions by our stockholders by
written consent. In addition, our board of directors has the
right to issue preferred stock without stockholder approval,
which could be used to dilute the stock ownership of a potential
hostile acquirer. Delaware law also imposes some restrictions on
mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. Although
we believe these provisions provide for an opportunity to
receive a higher bid by requiring potential acquirers to
negotiate with our board of directors, these provisions apply
even if the offer may be considered beneficial by some
stockholders.






|        |           
|------- | ----------
|Item 2. | Properties

Our principal executive offices are located in
San Diego, California. We also have a manufacturing facility and
service centers located in the United States, as well as a
service center in Brazil and a sales office in Saudi Arabia.
Information about these facilities is set forth below:

|                        |  |                             |  |             |        |              |  |  |        | 
|----------------------- |  | --------------------------- |  | ----------- | ------ | ------------ |  |  | ------ | 
|                        |  |                             |  | Approximate |        |             
|Location                |  | Principal Function          |  | Square Feet |        | Leased/Owned
|                        |  |                             |  |             |        |             
|Rio de Janeiro, Brazil  |  | Service Center              |  |             | 60,000 |              |  |  | Leased | 
|Chicago, Illinois       |  | Service Center/Sales Office |  |             | 56,000 |              |  |  | Leased | 
|Dublin, California      |  | Manufacturing               |  |             | 44,300 |              |  |  | Leased | 
|Sioux City, Iowa        |  | Service Center              |  |             | 31,900 |              |  |  | Leased | 
|Los Angeles, California |  | Service Center              |  |             | 31,200 |              |  |  | Leased | 
|San Diego, California   |  | Headquarters/Warehouse      |  |             | 28,600 |              |  |  | Leased | 
|Omaha, Nebraska         |  | Sales Office                |  |             | 3,900  |              |  |  | Leased | 
|Riyadh, Saudi Arabia    |  | Sales Office                |  |             | 3,000  |              |  |  | Leased | 

Leases for our facilities expire between May 2003
and January 2023. We currently expect to be able to extend the
terms of expiring leases or to find suitable replacement
facilities on reasonable terms. Our principal offices are
located in San Diego, California, and consist of approximately
14,400 square feet of office space that we are leasing from WCB
Thirty-One Limited Partnership through October 31, 2007.
The lease has an option to extend the lease term for an
additional five years. We lease approximately 31,900 square feet
to operate our company-owned service center located in Sioux
City, Iowa. We lease the Sioux City facility pursuant to a
sub-lease that expires on February 1, 2020, but which
provides us with an option to reduce the term of the lease to a
ten-year period. We lease 44,300 square feet of space for our
manufacturing facility located in Dublin, California. Our lease
for the manufacturing space is on a monthly basis with an option
to extend the lease term to five years. We lease approximately
31,200 square feet of space for our service center in Los
Angeles, California. Our lease for this company-owned service
center expires on January 1, 2014, with an option to extend
the lease for an additional eight years. We lease this facility
from a customer, which has agreed, to use the facility at a
discounted rate, to irradiate its food products that have been
tested by us and approved for irradiation by the FDA. In
connection with the lease, this customer will receive a portion
of the processing revenue generated at this facility. We lease
approximately 56,000 square feet to operate our company-owned
service center in Chicago, Illinois. Our lease for this
processing facility expires on January 31, 2023, with an
option to terminate the lease after 12 years. We lease
additional space for sales offices in Omaha, Nebraska.

It is our policy to maintain our properties and
equipment in good condition. Existing facilities are considered
to be generally suitable and adequate for our present needs.

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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are involved in legal actions in the normal
course of our business. Our subsidiaries and we may be named as
defendants in legal proceedings from time to time and our
subsidiaries or we may assert claims from time to time. Based
upon current information and review, we believe the ultimate
liability or recovery with respect to pending actions would not
materially affect our consolidated financial position or our
results of operations. However, our evaluation of the likely
impact of these actions could change in the future and an
unfavorable outcome, depending upon the amount and timing, could
have a material adverse effect on our results of operations or
our cash flows in a future period.






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

No matters were submitted to a vote of our
stockholders during the fourth quarter of the year ended
December 31, 2002.

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PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our common stock has traded on The NASDAQ
National Market under the symbol SURE since our
initial public offering on March 16, 2001. As of
March 4, 2003, there were approximately 56,800 holders of
record of our common stock, excluding beneficial owners of
shares held in the names of brokers or other nominees.

The following table sets forth for the period
indicated the high and low closing prices for our common stock
as reported by The NASDAQ National Market:

|               |  |             |       |             |  |      |      |     |  |   |       |  |  |   |      | 
|-------------- |  | ----------- | ----- | ----------- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|               |  |             |       |            
|               |  | Fiscal 2002 |       | Fiscal 2001
|               |  |             |       |            
|               |  | High        |       | Low         |  | High |      | Low
|               |  |             |       |             |  |      |      |    
|First Quarter  |  | $           | 10.55 |             |  | $    | 5.45 |     |  | $ | 10.19 |  |  | $ | 7.81 | 
|Second Quarter |  |             | 6.82  |             |  |      | 4.80 |     |  |   | 19.45 |  |  |   | 6.92 | 
|Third Quarter  |  |             | 5.70  |             |  |      | 1.49 |     |  |   | 17.19 |  |  |   | 5.45 | 
|Fourth Quarter |  |             | 5.99  |             |  |      | 1.48 |     |  |   | 16.75 |  |  |   | 4.69 | 

No cash dividends were declared or paid in fiscal
2002. We anticipate that in the foreseeable future we will not
pay dividends, but instead retain all available funds to finance
internal growth and product development.

Issuance of Securities

On December 2, 2002, we entered into
agreements with investors to sell an aggregate of 5,276,314
shares of our common stock for $4.75 per share, or an aggregate
purchase price of approximately $25.1 million. In addition,
we issued warrants to purchase 1,319,075 shares of our common
stock at an exercise price of $6.00 per share. We issued these
shares and warrants to the investors on December 3, 2002.
The warrants are exercisable from the date of issuance until
December 2, 2007. The shares issued under the agreements
were offered through a placement agent, for which services we
paid to the placement agent a fee of approximately
$1.8 million. After the placement agent fee and before
deducting related legal and accounting expenses, we realized net
proceeds of approximately $23.3 million. We intend to use
the proceeds for working capital needs and general corporate
purposes. We issued all of the securities under an exemption
from the registration requirements of the Securities Act of
1933, as amended (the Securities Act) pursuant to
Section 4(2) of the Securities Act and/or Rule 506 of
Regulation D under the Securities Act. All of the shares of
common stock issued to the investors or to be issued upon
exercise of the warrants issued to the investors were registered
for resale on a registration statement on Form S-3,
Registration No. 333-101971, which was declared effective
on February 12, 2003. Our agreement with the investors
requires us to cause the S-3 registration statement to remain
effective until the earlier of (a) two years after it is
declared effective by the SEC, (b) the date on which each
selling stockholders shares could be sold in a single
three-month period under Rule 144 of the Securities Act, or
(c) such time as all the common stock offered by the
S-3 registration statement have been sold. We also agreed
to indemnify each selling stockholder for claims made against
them arising out of, among other things, statements made in the
registration statement.

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|        |                                                                                   
|------- | ----------------------------------------------------------------------------------
|Item 6. | Selected Consolidated Financial Data (in
    thousands, except for per share data)

The following data summarizes certain financial
data for each of the prior five years ended December 31.
The information presented should be read in conjunction with the
consolidated financial statements and related notes included
elsewhere in this report.

|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |        |       |  
|----------------------------------------------------------- | ---------------------- | ----------------------- | ------- | ------ | ----- | ---- | ------- | ------ | ----- | ---- | ------- | ------ | ----- | - | ------ | ------ | ---- | - | ------ | ------ | ----- | -
|                                                            |                        |                        
|                                                            |                        | Year Ended December 31,
|                                                            |                        |                        
|                                                            |                        | 2002                    |         | 2001   |       | 2000 |         | 1999   |       | 1998
|                                                            |                        |                         |         |        |       |      |         |        |       |     
|Revenues:                                                   |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|                                                            | Non-affiliated parties |                         | $       | 8,147  |       |      | $       | 10,849 |       |      | $       | 29,448 |       |   | $      | 14,339 |      |   | $      | 11,184 |      
|                                                            | Investee               |                         |         | 9,161  |       |      |         | 12,151 |       |      |         |       |       |   |        |       |      |   |        |       |      
|                                                            | The Titan Corporation  |                         |         | 19,568 |       |      |         | 18,267 |       |      |         |       |       |   |        |       |      |   |        |       |      
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Total revenues                                              |                        |                         | 36,876  |        |       |      | 41,267  |        |       |      | 29,448  |        |       |   | 14,339 |        |      |   | 11,184 |       
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Cost of revenues:                                           |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|                                                            | Non-affiliated parties |                         |         | 12,390 |       |      |         | 8,725  |       |      |         | 19,602 |       |   |        | 8,576  |      |   |        | 8,909  |      
|                                                            | Investee               |                         |         | 6,753  |       |      |         | 6,263  |       |      |         |       |       |   |        |       |      |   |        |       |      
|                                                            | The Titan Corporation  |                         |         | 11,996 |       |      |         | 12,115 |       |      |         |       |       |   |        |       |      |   |        |       |      
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Total cost of revenues                                      |                        |                         | 31,139  |        |       |      | 27,103  |        |       |      | 19,602  |        |       |   | 8,576  |        |      |   | 8,909  |       
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Gross profit                                                |                        |                         | 5,737   |        |       |      | 14,164  |        |       |      | 9,846   |        |       |   | 5,763  |        |      |   | 2,275  |       
|Selling, general and administrative expense                 |                        |                         | 26,306  |        |       |      | 29,554  |        |       |      | 7,992   |        |       |   | 4,138  |        |      |   | 2,067  |       
|Stock-based compensation                                    |                        |                         | 16,568  |        |       |      | 54,270  |        |       |      | 648     |        |       |   |       |        |      |   |       |       
|Research and development                                    |                        |                         | 817     |        |       |      | 2,153   |        |       |      | 524     |        |       |   |       |        |      |   |       |       
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Income (loss) from operations                               |                        |                         | (37,954 | )      |       |      | (71,813 | )      |       |      | 682     |        |       |   | 1,625  |        |      |   | 208    |       
|Interest income                                             |                        |                         | 209     |        |       |      | 1,267   |        |       |      | 230     |        |       |   |       |        |      |   |       |       
|Interest expense                                            |                        |                         | (1,282  | )      |       |      | (7,022  | )      |       |      | (3,841  | )      |       |   | (1,299 | )      |      |   | (1,154 | )     
|Other income, net                                           |                        |                         | 3,939   |        |       |      | 874     |        |       |      |        |        |       |   |       |        |      |   |       |       
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Income (loss) before income tax provision
    (benefit)     |                        |                         | (35,088 | )      |       |      | (76,694 | )      |       |      | (2,929  | )      |       |   | 326    |        |      |   | (946   | )     
|Income tax provision (benefit)                              |                        |                         |        |        |       |      | (2,319  | )      |       |      | (1,130  | )      |       |   | 121    |        |      |   | (284   | )     
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Net income (loss)                                           |                        | $                       | (35,088 | )      |       | $    | (74,375 | )      |       | $    | (1,799  | )      |       | $ | 205    |        |      | $ | (662   | )     
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Basic earnings (loss) per common share:                     |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|                                                            |                        | Net income (loss)       |         | $      | (0.53 | )    |         | $      | (1.36 | )    |         | $      | (0.04 | ) |        | $      | 0.00 |   |        | $      | (0.01 | )
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Weighted average shares  basic                             |                        |                         | 66,741  |        |       |      | 54,534  |        |       |      | 46,817  |        |       |   | 46,630 |        |      |   | 46,584 |       
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Diluted earnings (loss) per common share:                   |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|                                                            |                        | Net income (loss)       |         | $      | (0.53 | )    |         | $      | (1.36 | )    |         | $      | (0.04 | ) |        | $      | 0.00 |   |        | $      | (0.01 | )
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Weighted average shares  diluted                           |                        |                         | 66,741  |        |       |      | 54,534  |        |       |      | 46,817  |        |       |   | 53,082 |        |      |   | 46,584 |       
|                                                            |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Financial Position                                          |                        |                         |         |        |       |      |         |        |       |      |         |        |       |   |        |        |      |   |        |       
|Cash and cash equivalents                                   |                        | $                       | 27,336  |        |       | $    | 4,131   |        |       | $    |        |        |       | $ |       |        |      | $ |       |       
|Total assets                                                |                        |                         | 151,997 |        |       |      | 117,784 |        |       |      | 53,181  |        |       |   | 23,924 |        |      |   | 14,192 |       
|Subordinated promissory note with The Titan
    Corporation |                        |                         |        |        |       |      | 72,208  |        |       |      | 58,072  |        |       |   |       |        |      |   |       |       
|Senior credit facility with The Titan Corporation           |                        |                         | 25,000  |        |       |      |        |        |       |      |        |        |       |   |       |        |      |   |       |       
|Total stockholders equity (deficit)                        |                        |                         | 106,633 |        |       |      | 28,352  |        |       |      | (14,875 | )      |       |   | 18,287 |        |      |   | 11,792 |       

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion of the financial
condition and results of operations of SureBeam Corporation
should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included
elsewhere in this Form 10-K. This discussion contains
forward-looking statements and involves numerous risks and
uncertainties, including but not limited to, those discussed in
the Factors Which May Affect Future Performance
section of Item 1 of this Form 10-K. Our actual
results may differ materially from those contained in any
forward-looking statements.

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

Introduction

SureBeam Corporation was formed in August 2000,
in connection with the contribution by The Titan Corporation, or
Titan, of the assets, liabilities and operations related to its
electronic food irradiation business. Titans electronic
food irradiation business had previously been operated as part
of a division of Titan, together with Titans medical
equipment sterilization business and its linear electron beam
accelerator business. The historical financial information
included in this 10-K for 2000 relates to the three businesses
of Titan that comprised this division and not just the
electronic food irradiation business. References to SureBeam,
the Company or us in this discussion and analysis section and in
the historical financial statements refer to this division of
Titan prior to the date of the contribution of the electronic
food irradiation business to us by Titan.

Titan developed its electron beam process from
technology developed under contracts with the federal government
related to strategic defense initiatives during the 1980s.
Titan accounted for its electron beam technology business as a
separate business segment since 1993. Prior to 1999,
substantially all of the revenues of this segment were derived
from selling medical equipment sterilization systems and from
providing medical equipment sterilization services and, to a
lesser extent, from selling linear electron beam accelerator
systems for use by the federal government.

The historical financial information contained
herein, except for the historical results as of and for the year
ended December 31, 2000, reflects the results of operations
and financial condition of the electronic food irradiation
business on a stand-alone basis. This discussion and analysis
section for the year ended December 31, 2000 is based upon
the historical results of operations of Titans entire
linear electron beam accelerator business, including the medical
equipment sterilization business and the linear electron beam
accelerator business for government use. The historical results
of operations and financial condition of SureBeam are presented
as a combination of entities under common control on a
historical cost basis in a manner similar to a pooling of
interests for all periods presented.

Prior to August 4, 2000, we derived our
revenues from the manufacturing of medical equipment
sterilization and electronic food irradiation systems, providing
medical equipment sterilization services and the manufacturing
of linear electron beam accelerators for use by government
agencies. After August 4, 2000 our revenues consist of
electronic food irradiation system sales, food processing
revenue and revenues to Titan. We have three classifications of
revenues on our consolidated statements of operations: revenues
from non-affiliated parties, revenues from investee and revenues
from Titan. Revenues from non-affiliated parties represent all
revenue generated from food processing and all electronic food
irradiation system sales not associated with RESAL or Titan. All
of the revenues from investee relate to our $53.0 million
purchase order contract with RESAL. Revenues from Titan
represents sales of our electronic irradiation systems and
services

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related to Titan Scan Technologies medical
sterilization business, Titans government linear
accelerator business and revenues in support of Titans
United States Postal Service contracts. Although Titan has not
been an affiliate of SureBeam since August 5, 2002, we
classify revenues from Titan separately to provide comparability
for earlier periods and to reflect their significant influence
over us resulting from our $50.0 million credit facility
with them.


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

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

Strategic Alliance

In June 2001, we received a purchase order
contract in the aggregate amount of $50.0 million from
RESAL for ten electronic food irradiation systems for the
operation of multiple service centers in the Saudi Arabia region
for irradiating poultry and disinfesting dates. In May 2002, the
purchase order contract for these systems was modified to
$53.0 million to construct systems for three large service
centers with a combination of high power x-ray and electron beam
technology. We commenced the construction of these systems for
RESAL and recognized and recorded, under the
percentage-of-completion method of accounting,
$21.3 million in revenue on this contract through
December 31, 2002, of which $12.1 million and
$9.2 million was recognized during the years ended
December 31, 2001 and 2002, respectively. Revenues derived
from this purchase order contract are classified as revenues
from investee in the accompanying consolidated statements of
operations. Certain shipments of equipment to Saudi Arabia that
were scheduled to take place in March 2003 have been
delayed due to the war in Iraq and we anticipate that our other
scheduled shipments to Saudi Arabia will be similarly delayed,
pending resolution of the war. We had anticipated milestone
payments during 2003 of $24.9 million. We anticipate
shipping upon resolution of the war in the Middle East. The
remaining systems are scheduled to be shipped within the next 15
to 18 months thereafter. We received payments aggregating
$5.3 million through March 25, 2003 based on milestone
payments and expect to continue to receive additional milestone
payments as they become due and payable until the contract is
complete.

In April 2002, we formed a joint venture under
the name SureBeam Middle East, LLC. with RESAL. SureBeam Middle
East, LLC. will provide, among other things, food irradiation
services through the three planned service centers in the Saudi
Arabia region. As of December 31 2002, we owned a 19.9%
interest in SureBeam Middle East, LLC. and RESAL and other Saudi
nationals own the remaining 80.1%. We account for our ownership
interest in SureBeam Middle East, LLC. using the equity method
of accounting under APB Opinion No. 18 The Equity
Method of Accounting for Investments in Common Stock. In
accordance with the joint venture agreement, RESALs
amended purchase order contract may be assigned to SureBeam
Middle East, LLC. at such time as the joint venture receives
sufficient funds from the third party investors. As

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of December 31, 2002, a portion of the
purchase order contract has been assigned to SureBeam Middle
East, LLC. As a result, revenue recognized under the contract is
presented in the consolidated statements of operations as
revenue from investee and we have eliminated our 19.9% interest
in the gross profit recognized under the
percentage-of-completion method of accounting in connection with
the current purchase order. We estimate that the total profit
under the current purchase order contract that will be
eliminated as a result of our equity interest in SureBeam Middle
East, LLC. will be approximately $4.5 million to
$5.5 million. Pursuant to the joint venture agreement, for
five years following the date of SureBeam Middle East,
LLC.s commercial registration, SureBeam Middle East, LLC.
has an exclusive right of first negotiation to negotiate and
enter into agreements to provide irradiation services for the
treatment of food products (excluding water), animal hides and
flowers in Saudi Arabia, Egypt, Lebanon, Syria, Iraq, Iran,
Libya, Tunisia and Algeria. The joint venture will govern our
strategic relationship with the operator of these systems,
including royalty and management fees and a minority equity
ownership of the operator that will operate the service centers.


Acquisition

In May 2000, Tech Ion Industrial Brasil S.A., or
Tech Ion, placed purchase orders with us for eleven electronic
food irradiation systems, which we expected to result in
approximately $55.0 million in revenue over the next three
years, including $22.4 million that was recognized through
September 30, 2001. SureBeam Brasil Ltda., or SureBeam
Brasil, which was jointly established by Tech Ion, and Titan
SureBeam Brazil Inc., our wholly owned subsidiary, was to
provide, among other things, food irradiation services through
four planned service centers. In October 2001, in order to
ensure the completion of the project with Tech Ion to build
service centers in Brazil that were under construction, we
entered into a stock purchase agreement with Tech Ion to
purchase an additional 60.1% of SureBeam Brasil, bringing our
total equity ownership in SureBeam Brasil to 80.1%. In
connection with the additional equity interest, we paid Tech Ion
$750,000 upon the execution of the agreement and will pay an
additional $250,000 upon the nationalization of the linear
accelerators and material handling systems for the Rio de
Janeiro service center from Tech Ion to SureBeam Brasil. We also
exchanged our trade receivables of $22.4 million due from
Tech Ion and forgave $3.5 million of a loan we had
previously made to Tech Ion for building improvements and
equipment. We have recorded an intangible asset of
$2.5 million that represents the total consideration amount
of the agreement that exceeds the fair value of the assets
purchased. The intangible asset represents a favorable land
lease and location next to the Rio de Janeiro CEASA, the depot
for fresh food distribution in Rio de Janeiro, and the license
granted by CNEN, Brazils Nuclear Regulatory Commission,
for the use of our technology in Brazil, the only electronic
food irradiation license granted to date by CNEN. Tech Ion
obtained these items for SureBeam Brasil and they are being
amortized on a straight-line basis over five years, the free
rent period of the ten-year lease. On April 1, 2002, the
remaining $1.5 million owed us by Tech Ion was exchanged
for its remaining 20.0% interest in SureBeam Brasil. The
$1.5 million was included in prepaid expense and other
current assets in the accompanying balance sheet at
December 31, 2001. Due to the exchange we recorded an
additional $700,000 as an intangible asset that will be
amortized over the remaining 54-month life of the existing
intangible asset. The remaining $800,000 was recorded as part of
the service center building cost. We estimate that the first
service center in Brazil will become operational in the second
quarter of 2003 and we will be obligated to provide additional
working capital to fund its operations through its startup phase
and until it can generate its own cash needs.

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Results of Operations (in thousands)

|                                            |  |                         |         |      |  |      |         |   |  |   |        |  
|------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                            |  |                        
|                                            |  | Year Ended December 31,
|                                            |  |                        
|                                            |  | 2002                    |         | 2001 |  | 2000
|                                            |  |                         |         |      |  |     
|Total revenues                              |  | $                       | 36,876  |      |  | $    | 41,267  |   |  | $ | 29,448 |  
|Total cost of revenues                      |  |                         | 31,139  |      |  |      | 27,103  |   |  |   | 19,602 |  
|                                            |  |                         |         |      |  |      |         |   |  |   |        |  
|Gross profit                                |  |                         | 5,737   |      |  |      | 14,164  |   |  |   | 9,846  |  
|Selling, general and administrative expense |  |                         | 26,306  |      |  |      | 29,554  |   |  |   | 7,992  |  
|Stock-based compensation                    |  |                         | 16,568  |      |  |      | 54,270  |   |  |   | 648    |  
|Research and development                    |  |                         | 817     |      |  |      | 2,153   |   |  |   | 524    |  
|                                            |  |                         |         |      |  |      |         |   |  |   |        |  
|Income (loss) from operations               |  |                         | (37,954 | )    |  |      | (71,813 | ) |  |   | 682    |  
|                                            |  |                         |         |      |  |      |         |   |  |   |        |  
|Interest expense, net                       |  |                         | (1,073  | )    |  |      | (5,755  | ) |  |   | (3,611 | )
|Other income, net                           |  |                         | 3,939   |      |  |      | 874     |   |  |   |       |  
|Income tax benefit                          |  |                         |        |      |  |      | (2,319  | ) |  |   | (1,130 | )
|                                            |  |                         |         |      |  |      |         |   |  |   |        |  
|Net loss                                    |  | $                       | (35,088 | )    |  | $    | (74,375 | ) |  | $ | (1,799 | )
|                                            |  |                         |         |      |  |      |         |   |  |   |        |  

As a Percentage of Revenues

|                                            |  |                         |        |      |  |      |        |    |  |  |       |   
|------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | -- |  |  | ----- | --
|                                            |  |                        
|                                            |  | Year Ended December 31,
|                                            |  |                        
|                                            |  | 2002                    |        | 2001 |  | 2000
|                                            |  |                         |        |      |  |     
|Total revenues                              |  |                         | 100.0  | %    |  |      | 100.0  | %  |  |  | 100.0 | % 
|Total cost of revenues                      |  |                         | 84.5   |      |  |      | 65.7   |    |  |  | 66.6  |   
|                                            |  |                         |        |      |  |      |        |    |  |  |       |   
|Gross profit                                |  |                         | 15.5   |      |  |      | 34.3   |    |  |  | 33.4  |   
|Selling, general and administrative expense |  |                         | 71.3   |      |  |      | 71.6   |    |  |  | 27.1  |   
|Stock-based compensation                    |  |                         | 44.9   |      |  |      | 131.5  |    |  |  | 2.2   |   
|Research and development                    |  |                         | 2.2    |      |  |      | 5.2    |    |  |  | 1.8   |   
|                                            |  |                         |        |      |  |      |        |    |  |  |       |   
|Income (loss) from operations               |  |                         | (102.9 | )    |  |      | (174.0 | )  |  |  | 2.3   |   
|                                            |  |                         |        |      |  |      |        |    |  |  |       |   
|Interest expense, net                       |  |                         | (2.9   | )    |  |      | (13.9  | )  |  |  | (12.3 | ) 
|Other income, net                           |  |                         | 10.7   |      |  |      | 2.1    |    |  |  |      |   
|Income tax benefit                          |  |                         |       |      |  |      | (5.6   | )  |  |  | (3.8  | ) 
|                                            |  |                         |        |      |  |      |        |    |  |  |       |   
|Net loss                                    |  |                         | (95.2  | )%   |  |      | (180.2 | )% |  |  | (6.1  | )%
|                                            |  |                         |        |      |  |      |        |    |  |  |       |   

Revenue Classifications

|                       |  |                         |        |      |  |      |        |  |  |   |        | 
|---------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                       |  |                        
|                       |  | Year Ended December 31,
|                       |  |                        
|                       |  | 2002                    |        | 2001 |  | 2000
|                       |  |                         |        |      |  |     
|Non-affiliated parties |  | $                       | 8,147  |      |  | $    | 10,849 |  |  | $ | 29,448 | 
|Investee               |  |                         | 9,161  |      |  |      | 12,151 |  |  |   |       | 
|The Titan Corporation  |  |                         | 19,568 |      |  |      | 18,267 |  |  |   |       | 
|                       |  |                         |        |      |  |      |        |  |  |   |        | 
|Total                  |  | $                       | 36,876 |      |  | $    | 41,267 |  |  | $ | 29,448 | 
|                       |  |                         |        |      |  |      |        |  |  |   |        | 

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Revenue Classifications as a Percentage of
Total Revenues

|                       |  |                         |       |      |  |      |       |   |  |  |       |  
|---------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                       |  |                        
|                       |  | Year Ended December 31,
|                       |  |                        
|                       |  | 2002                    |       | 2001 |  | 2000
|                       |  |                         |       |      |  |     
|Non-affiliated parties |  |                         | 22.1  | %    |  |      | 26.3  | % |  |  | 100.0 | %
|Investee               |  |                         | 24.8  |      |  |      | 29.4  |   |  |  |      |  
|The Titan Corporation  |  |                         | 53.1  |      |  |      | 44.3  |   |  |  |      |  
|                       |  |                         |       |      |  |      |       |   |  |  |       |  
|Total                  |  |                         | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                       |  |                         |       |      |  |      |       |   |  |  |       |  



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

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

Prior to August 4, 2000, we derived our
revenues from the manufacturing of medical equipment
sterilization and electronic food irradiation systems, providing
medical equipment sterilization services and the manufacturing
of linear electron beam accelerators for use by government
agencies. Our total revenues increased from $29.4 million
in 2000 to $41.3 million in 2001 and decreased from
$41.3 million to $36.9 million in 2002. Excluding the
effects of revenues derived from the government linear
accelerator business and medical equipment sterilization, which
are no longer part of our business, our revenues increased from
$25.2 million in 2000 to $41.3 million in 2001 and
decreased from $41.3 million in 2001 to $36.9 million.

Revenues from non-affiliated parties.Revenues from non-affiliated parties
decreased from $29.4 million in 2000 to $10.8 million
in 2001 and from $10.8 million in 2001 to $8.1 million
in 2002. Prior to August 4, 2000, we derived our revenues
from the manufacturing of medical equipment sterilization and
electronic food irradiation systems, providing medical equipment
sterilization services and the manufacturing of linear electron
beam accelerators for use by government agencies. Subsequent to
August 4, 2000, revenues from non-affiliated parties
represents electronic food irradiation system sales and food
processing revenues. Excluding the effects of revenues derived
from the government linear accelerator business and medical
equipment sterilization, which are no longer part of our
business, our revenues decreased from $25.2 million in 2000
to $10.8 million in 2001 and from $10.8 million in
2001 to $8.1 million in 2002.

For the year ended December 31, 2000, we had
electronic food irradiation system sales and food processing
revenues of $25.2 million or 86% of total revenues. Of this
$25.2 million, 97%, or $24.5 million, was derived from
sales of electronic food irradiation systems primarily from
three customers and 3%, or $700,000, was derived from food
processing services. Revenues derived from medical sterilization
systems sales were $449,000 or 1% of total revenues. Revenues
derived from medical equipment sterilization services were
$2.8 million or 10% of total revenues and revenues derived
from the sale of linear electron beam accelerators sold to the
federal government were $941,000 or 3% of total revenues. The
sales of electronic food irradiation systems for 2000 were
recorded in connection with our contracts with Hawaii Pride LLC,
or Hawaii Pride, Tech Ion and Texas A&M University.

For the year ended December 31, 2001, we had
electronic food irradiation system sales and food processing
revenues of $10.8 million or 26% of total revenues. Of this
$10.8 million, 91%, or $9.8 million, was derived from
sales of electronic food irradiation systems primarily from two
customers and 9%, or $1.0 million, was derived from food
processing services. The 2001 sales of electronic food
irradiation systems decreased due

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to the completion of our Hawaii Pride contract
during 2000, reduced revenue on our Texas A&M University
contract as well reduced revenue from our contract with Tech Ion
prior to the execution of the stock purchase agreement with Tech
Ion.


For the year ended December 31, 2002, we had
electronic food irradiation system sales and food processing
revenues of $8.1 million or 22% of total revenues. Of this
$8.1 million, 87%, or $7.0 million, was derived from
sales of electronic food irradiation systems primarily from
three customers and 13%, or $1.1 million, was derived from
food processing services. The reduced sales of electronic food
irradiation systems was related to lower revenue from our
contract with Texas A&M University that was completed
in the third quarter of 2002, plus lower revenue from the two
new contracts, Vietnam and Salubris, versus revenue recorded on
Tech Ion in 2001. In the future we expect to sign additional
electronic food irradiation systems sales contracts and process
additional pounds in our service centers, which we expect will
increase revenues from non-affiliated parties.

Revenue from food irradiation system sales have
declined in each of the last two years. This reduction is the
result of the completion of the Hawaii Pride and
Texas A&M University contracts and the acquisition of
the Tech Ion contract while new contracts have not
generated the same level of revenue.

During 2002 we made significant advances in
implementing our strategy. The volume of food products processed
at our service centers in 2002 increased by 33% from 2001
increasing from 11.1 million pounds to 14.8 million
pounds. In addition, we have experienced a significant increase
in the number of customers testing products at our Sioux City,
Chicago, and Los Angeles service centers and in the number of
potential customers, which are currently in discussions with us
regarding the use of our electronic food irradiation technology.
Many of these discussions are preliminary and no assurance can
be made that we will enter into agreements with these potential
customers, or that any agreements we enter into with these
customers will prove to be profitable to us. We have expanded
the types of packaging configurations that we can process using
our patented technology and our customers have increased the
kinds of products we are processing for them. We believe the
increased level of processing by our customers and the agreement
to construct and install in-line systems indicate an increasing
level of consumer acceptance of electronically irradiated food
products. This acceptance is further evidenced by the recent
introduction of electronically irradiated food products by
several restaurants, as well as major retail grocery stores, in
the United States. For 2002, food processing services
represented a small portion, or 3%, of our total revenues versus
system sales.

Revenues from Investee.Revenues from investee represent
electronic food irradiation system sales generated from RESAL.
To date, all of the revenues from investee relate to our
$53.0 million RESAL purchase order contract. Revenues from
investee decreased from $12.1 million in 2001 to
$9.2 million in 2002. In the fourth quarter 2001 and the
first quarter of 2002, we reduced our activities on this
contract to focus our efforts on the United States Postal
Service contract in which we were the prime sub-contractor for
Titan. We expect the revenues from investee to increase over the
next year as we continue to progress on this purchase order
contract.

Revenues from The Titan Corporation.Revenues from Titan represents sales
of our electronic irradiation systems and services related to
Titan Scan Technologies medical sterilization business,
Titans government linear accelerator business and revenues
in support of Titans United States Postal Service
contracts. Although Titan has not been an affiliate of SureBeam
since August 5, 2002, we classify revenues from Titan
separately to provide easier comparability to earlier periods
and reflect their significant influence which results from our
$50.0 million credit facility from them. Revenues for Titan
increased from $18.3 million in 2001 to $19.6 million in
2002. Included in the revenues from Titan for the years ended
December 31, 2001 and 2002, is $12.5 million and
$8.1 million, respectively, of revenue recognized in
support of Titans United States Postal Service contract
for which we are the main sub-contractor. The remaining revenues
were primarily related to revenues recognized from the sale of
medical equipment sterilization systems using the
percentage-of-completion method of accounting. We entered into
an exclusive contract for the sale of systems and integration
services to Titan and its affiliates. Titan will be obligated to
purchase its requirements for linear accelerators and systems
from us through December 31, 2003 and was required to
purchase integration services through December 31, 2002,
subject to some limited exceptions. Equipment and

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services will be provided at our cost-plus a 20%
mark-up unless both parties agree to other terms with respect to
any purchase order. Titan has no guaranteed purchases under this
agreement and we cannot predict the number of systems or amount
of services that will be purchased; however, we expect revenue
from Titan to decrease from 2001 and 2002 levels.




| |             
| | ------------
| | Gross Profit

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

Our gross profit margin was flat from 2000 to
2001 and decreased from 34% in 2001 to 16% in 2002. The decrease
is due to a negative gross profit on food processing,
underutilization of the service centers, opening of new
facilities during late 2001 and 2002 and higher percentage of
revenues from Titan, which have a lower gross profit than
systems sales from non-affiliated parties and systems sales to
the investee. We are projecting that our gross profit will
improve and eventually increase significantly as the service
centers become fully utilized. Our pounds processed increased by
71% from 2000 to 2001, increasing from 5.9 million pounds
to 11.1 million pounds. Our pounds processed increased 33%
from 2001 to 2002, increasing from 11.1 million pounds to
14.8 million pounds. The service centers are highly capital
intensive and increased volumes are the key to our
profitability. If significant increased in volumes are not
realized, our gross profit will continue to suffer.



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

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

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

Prior to August 4, 2000, all of our revenues
were derived from the manufacturing of medical equipment
sterilization and electronic food irradiation systems, providing
medical equipment sterilization services and the manufacturing
of linear electron beam accelerators for use by government
agencies. After August 4, 2000 our revenues consist of
electronic irradiation system sales and food processing revenue.

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

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

The medical sterilization services segment
represents all irradiation services performed at Titan owned
service centers for medical sterilization. This segment
terminated on August 4, 2000.

The following tables summarize segment data for
2002, 2001 and 2000 (in thousands):

|          |                                |      |        |        |  |      |        |        |  |   |        |        | 
|--------- | ------------------------------ | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|          |                                | 2002 |        | 2001   |  | 2000
|          |                                |      |        |        |  |     
|Revenues: |                                |      |        |        |  |      |        |        |  |   |        |       
|          | Food processing services       |      | $      | 1,079  |  |      | $      | 1,014  |  |   | $      | 700    | 
|          | System sales and support       |      |        | 35,797 |  |      |        | 40,253 |  |   |        | 25,921 | 
|          | Medical sterilization services |      |        |       |  |      |        |       |  |   |        | 2,827  | 
|          |                                |      |        |        |  |      |        |        |  |   |        |       
|          |                                | $    | 36,876 |        |  | $    | 41,267 |        |  | $ | 29,448 |       
|          |                                |      |        |        |  |      |        |        |  |   |        |       

|                     |                                |      |       |        |   |      |        |        |   |   |       |        |  
|-------------------- | ------------------------------ | ---- | ----- | ------ | - | ---- | ------ | ------ | - | - | ----- | ------ | -
|                     |                                | 2002 |       | 2001   |   | 2000
|                     |                                |      |       |        |   |     
|Gross profit (loss): |                                |      |       |        |   |      |        |        |   |   |       |       
|                     | Food processing services       |      | $     | (6,000 | ) |      | $      | (1,729 | ) |   | $     | (1,373 | )
|                     | System sales and support       |      |       | 11,737 |   |      |        | 15,893 |   |   |       | 11,372 |  
|                     | Medical sterilization services |      |       |       |   |      |        |       |   |   |       | (153   | )
|                     |                                |      |       |        |   |      |        |        |   |   |       |       
|                     |                                | $    | 5,737 |        |   | $    | 14,164 |        |   | $ | 9,846 |       
|                     |                                |      |       |        |   |      |        |        |   |   |       |       

Revenues

Food processing services.Revenues food processing services
increased from $700,000 in 2000 to $1.0 million in 2001 and
from $1.0 million in 2001 to $1.1 million in 2002. The
increase was due to the increased number of pounds being
processed at our service centers. We began processing food at
our Sioux City, Iowa service center in April 2000. Food
processing services performed at our Sioux City service center
accounted for all of our food processing services revenue for
2000 and 2001. We began processing in our Chicago, Illinois
service center in the first quarter of 2002 while we began
processing in our Los Angeles, California service center in the
first quarter 2003. We expect to begin processing in our Rio de
Janeiro, Brazil service center in the second quarter of 2003.

The volume of food products processed at our
service centers in 2001 increased by 88% from 2000 increasing
from 5.9 million pounds to 11.1 million pounds. During
2002, we made significant advances in implementing our strategy
as electronically irradiated fresh ground beef was introduced
into the marketplace. The volume of food products processed at
our service centers in 2002 increased by 33% from 2001
increasing from 11.1 million pounds to 14.8 million
pounds. Revenues from food products processed increased 6% or 27
percentage points less than the increase in pounds due to a
lower average per pound processing fee as a result of an
increase in commercial processing versus product testing which
is at a higher fee. In addition, we have experienced a
significant increase in the number of customers testing products
at our Sioux City, Chicago, and Los Angeles service centers and
in the number of potential customers, which are currently in
discussions with us regarding the use of our electronic food
irradiation technology. Many of these discussions are
preliminary and no assurance can be made that we will enter into
agreements with these potential customers, or that any
agreements we enter into with these customers will prove to be
profitable to us. We have expanded the types of packaging
configurations that we can process using our patented technology
and our customers have increased the kinds of products we are
processing for them. We believe the increased level of
processing by our customers indicate an increasing level of
consumer acceptance of electronically irradiated food products.
This

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acceptance is further evidenced by the recent
introduction of electronically irradiated food products by
several restaurants, as well as major retail grocery stores, in
the United States. Electronically irradiated fresh ground beef
was first introduced into a test market of 13 grocery stores
in January 2002. As of December 31, 2002, this
irradiated fresh ground beef was in approximately 1,500 grocery
stores and sales were approximately 45 pounds per store per
week. As of March 24, 2003 SureBeam processed fresh ground
beef is sold in approximately 4,600 stores. For 2002, 2001 and
2000, food-processing services represented a small portion, or
3%, 2%, and 2%, respectively, of our total revenues.


System sales and support.Systems sales and support revenues
increased from $25.9 in 2000 to $40.3 million in 2001 and
decreased from $40.3 million in 2001 to $35.8 million
in 2002. The system sales and support segment consists of sales
of electronic irradiation systems for food services, medical
sterilization services, mail sanitation services and sales to
the federal government. For the year ended December 31,
2000, we had electronic food irradiation system sales of
$24.5 million primarily to three customers. Revenues
derived from medical sterilization systems sales were $449,000
and revenues derived from the sale of linear electron beam
accelerators sold to the federal government were $941,000 for
the year ended December 31, 2000. The sales of electronic
food irradiation systems for 2000 were recorded in connection
with our contracts with Hawaii Pride LLC, or Hawaii Pride, Tech
Ion and Texas A&M University.

For the year ended December 31, 2001, we had
electronic food irradiation system sales of $22.0 million
primarily from three customers. Revenues derived from medical
sterilization systems sales were $5.8 million and revenues
derived from mail sanitation systems sales were
$12.5 million. The 2001 sales of electronic food
irradiation systems decreased due to the completion of our
Hawaii Pride contract during 2000, reduced revenue on our Texas
A&M University contract and reduced revenue from our
contract with Tech Ion prior to the execution of the stock
purchase agreement with Tech Ion which was offset by the new
RESAL purchase order contract.

For the year ended December 31, 2002, we had
electronic food irradiation system sales of $16.2 million
primarily from four customers. Revenues derived from medical
sterilization systems sales were $11.5 million and revenues
derived from mail sanitation systems sales were
$8.1 million. The reduced sales of electronic food
irradiation systems was related to lower revenue from our
contract with Texas A&M University that was completed in the
third quarter of 2002, plus lower revenue from the two new
contracts, Vietnam and Salubris, when compared to revenue
recorded on Tech Ion and RESAL in 2001. The mail sanitation
revenue was down due to the closeout of the initial United
States Postal Service contract. In the future we expect to sign
additional electronic food irradiation systems sales contracts
and we believe that we will experience a decrease in the
revenues from medical sterilization system sales and mail
sanitation system sales.

Medical sterilization service.Medical sterilization service revenue
decreased from $2.8 million in 2000 to zero in the future
years. In 2000, the medical sterilization business was
incorporated in our revenues through August. SureBeam
Corporation was formed in August 2000, in connection with
the contribution by Titan, of the assets, liabilities and
operations related to its electronic food irradiation business.
Titans electronic food irradiation business had previously
been operated as part of a division of Titan, together with
Titans medical equipment sterilization business and its
linear electron beam accelerator business. The medical
sterilization services segment became part of Titan as of August
2000.

Gross Profit
or Loss

Food processing services.The gross loss on the food processing
services segment increased from $1.4 in 2000 to
$1.7 million in 2001 and from $1.7 million in 2001 to
$6.0 million in 2002. Our service centers are very capital
intensive and have high fixed costs associated with their
operations and this along with their underutilization results in
losses. We began operations in our Sioux City service center in
April 2000. The increased gross loss from 2000 to 2001 was
a result of an entire year of costs for our Sioux City service
center for 2001 as compared to nine months in 2000. The
increased gross loss from 2001 to 2002 was a direct result of
our Chicago service center becoming operational in the first
quarter of 2002 and our Los Angeles service center becoming
operational in the fourth quarter of 2002 which added costs but
minimal revenue. We expect

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the utilization in our service centers to
increase in the future enabling us to cover both our fixed and
variable costs of operating the service centers.


System sales and support.Gross profit on the system sales and
support segment increased from $11.4 in 2000 to
$15.9 million in 2001 and decreased from $15.9 million
in 2001 to $11.7 million in 2002. As a percentage of
systems sales and support revenue the gross margin decreased
from 44% in 2000 to 39% in 2001 and from 39% in 2001 to 33% in
2002. The reduction is due primarily to the increased percentage
of medical sterilization systems sales, which have a lower gross
margin than our food irradiation system sales and our mail
sanitation system sales. Our medical sterilization system sales
are with Titan which historically been priced as cost-plus 20%
fixed fee contracts. We believe that as our food irradiation
system sales become a greater percentage of our revenue our
gross margins will increase.

Medical sterilization service.The gross margin on the medical
sterilization service segment was low due to the
underutilization of the existing service centers.



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

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

Our selling, general and administrative expense
increased from $8.0 million in 2000 to $29.6 million
in 2001 and decreased from $29.6 million in 2001 to
$26.3 million in 2002. As a percentage of total revenues,
selling, general and administrative expenses increased from 27%
in 2000 to 72% in 2001 and decreased from 72% in 2001 to 71% in
2002. The increase in 2001 was a result of increased sales and
marketing expenses of $7.2 million related to brand
awareness campaigns and advertising, increased legal expense of
$3.0 million related to patent litigation, increased bonus
expense of $2.5 million, increased impairment charge of
$1.4 million related to the Hawaii Pride receivable and
other increased expenses, such as personnel cost and added
travel, to build our current infrastructure. The decrease of
$3.2 million from 2001 to 2002 resulted from decreased
legal fees of $1.7 million resulting from the settlement of
the patent infringement case, decreased bonus expense of
$1.6 million, decreased amortization of $2.7 million
related to the intangible asset that was fully amortized in the
first quarter of 2002, which was offset by a $3.0 million
increase in impairment charges related to the Hawaii Pride
receivable. Sales and marketing as well as personnel costs
remained relatively flat over 2001 to 2002. We expect the
selling, general and administrative expenses to increase in
total but reduce as a percentage of revenue in the future, as we
continue to increase sales and marketing expenses as we expand
our processing and brand awareness and continue build our
infrastructure based on our expected growth.



| |                         
| | ------------------------
| | Stock-Based Compensation

Our stock-based compensation increased from
$648,000 in 2000 to $54.3 million in 2001 and decreased from
$54.3 million in 2001 to $16.6 million in 2002. During
2000, we granted options under the 2000 Stock Option and
Incentive Plan and recorded deferred stock-based compensation of
$3.2 million for which the fair market value on the date of
grant exceeded the exercise price. We recognized stock-based
compensation on these options of $648,000, $808,000 and $808,000
for the years ended December 31, 2000, 2001 and 2002,
respectively. Unamortized deferred stock-based compensation for
these options at December 31, 2002 was $967,000. During
2001, in connection with the completion of our initial public
offering, stock options granted under the Nonstatutory Stock
Option Plan were converted from variable plan options to fixed
plan options. Accordingly, deferred stock-based compensation of
$78.6 million was recorded, representing the extent to
which the $10.00 per share offering price exceeded the exercise
price of the options. Additionally, since substantial portions
of these options were vested at the time of completion of the
public offering, stock-based compensation of approximately
$38.7 million was immediately expensed at that time. The
remaining deferred stock-based compensation balance related to
these options will be recognized as compensation expense over

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the remaining four-year vesting period of these
options. There was no stock-based compensation for these options
during 2000 and we recorded a total of $53.5 million and
$15.8 million of stock-based compensation related to these
options during 2001 and 2002, respectively. In conjunction with
the completion of our spin-off from Titan on August 5,
2002, all options held by Titan employees and directors under
this plan became fully vested, which resulted in increased
amortization of the deferred stock-based compensation charges
for this plan for the three months ended September 30, 2002
by $2.9 million. Unamortized deferred stock-based
compensation for these options at December 31, 2002 was
$9.4 million. We expect the stock-based compensation to
decrease over the next two years due to options becoming fully
vested and the Titan employees and directors accelerated vesting
in 2002 related to our spin-off.




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

Our research and development expenses increased
from $524,000 in 2000 to $2.2 million in 2001 and decreased
from $2.2 million in 2001 to $817,000 in 2002. Research and
development expenses, as a percentage of total revenues
increased from 2% in 2000 to 5% in 2001 and decreased from 5% in
2001 to 2% in 2002. Excluding the impact from the medical
equipment sterilization business and the government linear
accelerator business, research and development expenses
increased from $499,000 in 2000 to $2.2 million in 2001 and
decreased from $2.2 million in 2001 to $817,000 in 2002.
The increased research and development expense in 2001 related
to the development of our high power x-ray linear accelerator
and our split-beam linear accelerator. Extensive work was
performed on the projects causing higher research and
development expenses in 2001. Our current research and
development activities are focused on increasing the capability
and efficiency of our existing technology, minimizing the space
occupied by our SureBeam systems, and developing new food
product applications. We have assembled a team of experts in our
industry to enhance and drive our research and development
efforts. Our research and development experts have many years of
experience in the area of enhancing food safety and extending
shelf life using irradiation in addition to their broad
experience with linear accelerators and charged particle beams.
In addition, we have an agreement with Texas A&M
University and the Texas Agricultural Experiment Station for the
purpose of researching and developing product applications for
our technology. We are currently working with Texas A&M
University on several research projects, which include studies
on flavor profiles, viral destruction, food products
applications and consumers willingness to pay more for
irradiated foods. In addition, we often benefit from the
research and development efforts of our component suppliers.
Historically, our research and development activities were
incidental to work being performed under government contracts
and were in the form of our right to retain any technologies
developed as a result of our efforts on those contracts. We
expect future research and development expense to increase as we
utilize the Texas A&M University facility as well as
develop the next generation of equipment.



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

Our interest income increased from $230,000 in
2000 to $1.3 million in 2001 and decreased from
$1.3 million in 2001 to $209,000 in 2002. There was no
impact on interest income from the medical sterilization
business or the government linear accelerator business in 2000.
During 2001, our investments and cash generated
$1.3 million of interest income that was directly related
to the investment of proceeds we received from our initial
public offering on March 16, 2001. Our cash, cash
equivalents and investments were reduced to $7.9 million as
of December 31, 2001. The decrease from 2001 was a direct
result of the reduced cash, cash equivalents and investment
balance that we had during 2002. We expect our interest income
to increase in 2003 based on our cash and cash equivalents
position of $27.3 million at December 31, 2002. These
funds were received in conjunction with our private placement in
the fourth quarter of 2002. We also expect to receive additional
funds from food processing services and system sales.



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

Our interest expense increased from
$3.8 million in 2000 to $7.0 million in 2001 and
decreased from $7.0 million in 2001 to $1.3 million in
2002. There was no impact on interest expense from the medical
sterilization business or the government linear accelerator
business 2000. The increased interest expense is due

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to the increased borrowing on the subordinated
note payable to Titan in 2001. Titan agreed to lend us a maximum
amount of $75.0 million including accrued interest to fund
working capital requirements. In 2001, Titan agreed to exchange
up to $75.0 million of our debt for additional Class B
and Class A shares of our common stock and
$2.0 million and $73.0 million was exchanged during
2001 and 2002, respectively. The decrease in interest expense
from 2001 was a direct result of the conversion of the
subordinated note payable to Titan. Additionally, Titan has
extended a $50.0 million senior secured credit facility to
us that allows us to borrow, in addition to our previous
borrowing, up to $12.5 million per quarter during in the
fourth quarter of 2002 through the fourth quarter of 2003,
subject to the $50.0 million limitation on borrowing. We
have borrowed $25.0 million against this senior credit
facility at December 31, 2002. Based on this balance
outstanding, we expect interest expense to increase in the
future until the balance is repaid to Titan.




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

Our other income, net increased from $874,000 in
2001 to $3.9 million in 2002. The increase is a result of
recording $4.0 million of licensee fee income in 2002 as
compared to $1.0 million in 2001. During the fourth quarter
of 2001, Titan agreed to purchase a perpetual and exclusive,
non-royalty bearing license to use our intellectual property for
all applications and fields other than food (excluding water),
animal hide and flower markets for $8.0 million. Cash
received from this agreement has been deferred and is being
recognized ratably over two years. As such, $1.0 million of
license fee income is recorded in each quarter for eight
quarters, beginning in the fourth quarter of 2001. The license
fee income was offset by realized losses of $30,000 and $126,000
for the years ended December 31, 2002 and 2001,
respectively, associated with the investments available for
sale. Additionally, we recorded a loss on the disposal of assets
in 2002 of $46,000. We expect our other income, net to decrease
in 2003 based on the completion of the recognition of the
license fee income in the third quarter of 2003.



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

Income taxes reflect effective benefit rates of
39% in 2000, 3% in 2001 and 0% in 2002. Prior to the spin-off,
we were included in the consolidated federal income tax return
of Titan. Pursuant to our tax sharing agreement, Titan will
compensate us for any tax benefit received by Titan from the use
of our net operating losses in their consolidated federal income
tax return. The amount is payable on the earlier of when we
could have used the loss ourselves or when the losses expire
(20 years). We had an operating loss for the years ended
December 31, 2001 and 2002, and expect to continue to incur
losses for the remainder of 2003. Our tax benefit is dependent
upon the usage of our losses by Titan. To date, a receivable of
$2.3 million has been recognized in connection with the use
of our losses by Titan. An additional amount may be recognized
depending upon our future profitability. In conjunction with the
spin-off, we have been subsequently deconsolidated from Titan
and the tax sharing agreement between us and Titan will no
longer apply to tax years beginning on or after August 6,
2002.



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

Our net loss increased from $1.8 million in
2000 to $74.4 million in 2001 and decreased from
$74.4 million in 2001 to $35.1 million in 2002.
Excluding the impact of the stock-based compensation, our net
loss increased from $1.2 million in 2000 to $20.1 million
in 2001 and decreased from $20.1 million in 2001 to
$18.5 million in 2002. We expect that our net loss will
continue to decrease as we increase our gross profit by adding
capacity through our company owned service centers and reduce
the percentage of revenues derived through sales to Titan, which
historically have lower gross margins than our systems sales to
other parties and we continue to monitor our expenses.

Liquidity and Capital Resources

We have used cash principally to construct
systems for our strategic alliances and fund working capital
advances for these strategic alliances, to construct
company-owned service centers and systems, to construct systems
for Texas A&M, to expand our manufacturing capacity,
and to fund our working capital requirements. We spend
significant funds to construct systems for our strategic
alliances in advance of payment. We also are

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spending significant funds to construct new
company-owned service centers and systems in anticipation of
future demand. These service centers have operated at losses
using significant funds. At December 31, 2002, we had
available cash and cash equivalents of $27.3 million.


Since our initial public offering on
March 16, 2001, our cash requirements have been met through
proceeds of approximately $59.8 million, net of
underwriting commissions, fees and other offering costs, from
our initial public offering, approximately $3.0 million in
advances under the $75.0 million credit facility,
$25.0 million in advances on the $50.0 million senior
secured credit facility with Titan discussed below, payments
from contracts for work performed both from Titan and other
outside parties on system sales, payments totaling
$8.0 million from Titan associated with the perpetual
license related to non-food items and approximately
$23.3 million net of underwriting commissions, fees and
other offering costs, from our private placement transaction in
the fourth quarter of 2002. In connection with the contribution
by Titan to SureBeam in August 2000, we assumed the cumulative
advances of approximately $39.0 million, as evidenced by a
subordinated, unsecured promissory note payable to Titan. Under
this note, Titan agreed to lend us a maximum amount of
$75.0 million, including accrued interest, and we borrowed
$75.0 million. The promissory note was due in August 2005
and bore interest at the greater of the rate of 10% per annum or
Titans effective weighted average interest rate under its
senior credit facility. On December 31, 2001,
$2.0 million of the subordinated note payable to Titan was
exchanged for 190,385 shares of our Class B common
stock. Additionally, the remaining $73.0 million of the
subordinated note payable to Titan was exchanged on
February 13, 2002 for 4,441,496 shares of our
Class A common stock and 3,225,765 shares of our
Class B common stock.



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

During 2002, Titan extended a $50.0 million
senior secured credit facility to us. As of March 28, 2003,
we have borrowed $25.0 million on this credit facility and
we have up to a maximum of $25.0 million available. The
credit facility allows us to borrow, in addition to our previous
borrowings, up to $12.5 million per quarter through the
fourth quarter of 2003, subject to the $50.0 million
cumulative limitation on borrowing. We have not borrowed
additional amounts on the credit facility since October 30,
2002. We do not anticipate borrowing additional amounts on the
credit facility during 2003 or during the remaining period that
the credit facility is outstanding. As of December 31,
2002, we were in compliance with all covenants of the credit
facility.

Under our credit facility we are obligated to
make minimum quarterly principal payments as follows: 13.75% of
the outstanding principal balance as of December 31, 2003
during each quarter in 2004; 25% of the outstanding principal
balance as of December 31, 2004 during each quarter in
2005; and, all remaining principal by December 31, 2005. In
addition, with some exceptions, we are obligated to use net
proceeds from the sale of assets and securities to repay amounts
advanced under the credit facility. The interest rate is
Titans effective weighted average term debt rate under
Titans credit agreement plus three percent. As of
December 31, 2002, the interest rate on the credit facility
was 8.08%. Interest is payable monthly beginning in January
2003. In January 2003, we paid $914,000 to Titan for 2002
interest under the credit facility. The credit facility is
secured by a first priority lien on all of our assets.



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

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

If actual EBITDA is negative $2.4 million or
higher for the quarter ending March 31, 2003, then up to
100% of the quarterly maximum or $12.5 million will be
available for borrowing during the quarter ending June 30,
2003. If our actual EBITDA is negative $3.0 million during
the quarter ending March 31, 2003, then up to 50% of the
quarterly maximum or $6.3 million will be available for
borrowing during the quarter ending June 30, 2003. If our
actual EBITDA is between negative $2.4 million and negative
$3.0 million during the quarter ending March 31, 2003,
then the maximum amount available for borrowing during the
quarter ending

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June 30, 2003 shall be determined by linear
interpolation between $6.3 million and $12.5 million.
If our actual EBITDA is lower than negative $3.0 million
for the quarter ending March 31, 2003, no amounts will be
available for borrowing through the credit facility during the
quarter ending June 30, 2003.


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

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



| |                                                       
| | ------------------------------------------------------
| | Credit Facility Limitation on Capital
    Expenditures

The Titan credit facility contains certain
covenants, which act to limit our capital expenditures. If our
revenue for any quarter in 2002 is greater than 85% of the
quarterly revenue target set forth in our annual operating plan
for such quarter, we have agreed that we will not incur
cumulative capital expenditures during the next quarter
(including capital expenditures incurred during such quarter and
all prior quarters during 2002) greater than $500,000 in excess
of the capital expenditure budget for that next quarter and all
prior quarters during 2002, set forth in our annual operating
plan.

Our quarterly revenue target for the quarter
ended December 31, 2002, was $12.5 million. Our
revenues for the quarter ended December 31, 2002 were
$12.1 million, which were in excess of $10.6 million
or 85% of our quarterly revenue target for such fiscal quarter.
Therefore, we could have capital expenditures in the quarter
ending March 31, 2003 of up to approximately
$19.6 million. There is no capital expenditure covenant
subsequent to March 31, 2003.



| |                                                     
| | ----------------------------------------------------
| | Credit Facility Limitation on Operating
    Expenses

The Titan credit facility contains certain
covenants, which act to limit the amount of operating expenses
which we may incur.

If our revenue for any quarter in 2002 is greater
than 85% of the quarterly revenue target set forth in the annual
operating plan for such quarter, then for the following quarter,
we may not incur operating expenses in excess of $500,000 more
than the operating expenses, (excluding amortization and
depreciation included in operating expenses), for such quarter
as set forth in the annual operating plan. Under certain
circumstances we may incur additional operating expenses if we
had unutilized availability from previous quarters.

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As noted above, our revenue for the quarter ended
December 31, 2002, was greater than $10.6 million, or
85% of our quarterly revenue target of $12.5 million in our
annual operating plan for the quarter, then during the quarter
ending March 31, 2003, we may not incur operating expenses
in excess of $7.9 million or $500,000 more than the
operating expenses set forth in our annual operating plan. There
is no operating expense covenant subsequent to March 31,
2003.

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

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

On December 2, 2002, we entered into
agreements with investors to sell an aggregate of 5,276,314
shares of our common stock for $4.75 per share, or an aggregate
purchase price of approximately $25.1 million. In addition,
we issued warrants to purchase 1,319,075 shares of our common
stock at an exercise price of $6.00 per share. We issued these
shares and warrants to the investors on December 3, 2002.
The warrants are exercisable from the date of issuance until
December 2, 2007. The shares issued under the agreements
were offered through a placement agent, for which services we
paid to the placement agent a fee of approximately
$1.8 million. After the placement agent fee and before
deducting related legal and accounting expenses, we realized net
proceeds of approximately $23.3 million. We intend to use
the proceeds for working capital needs and general corporate
purposes. We issued all of the securities under an exemption
from the registration requirements of the Securities Act of
1933, as amended (the Securities Act) pursuant to
Section 4(2) of the Securities Act and/or Rule 506 of
Regulation D under the Securities Act. All of the shares of
common stock issued to the investors or to be issued upon
exercise of the warrants issued to the investors are restricted
until we register them. We agreed to file a registration
statement with the SEC covering the resale of the shares issued
or issuable to each selling stockholder. Our agreement requires
us to cause the S-3 registration statement to remain
effective until the earlier of (a) two years after it is
declared effective by the SEC, (b) the date on which each
selling stockholders shares could be sold in a single
three-month period under Rule 144 of the Securities Act, or
(c) such time as all the common stock offered by the
registration statement have been sold. We also agreed to
indemnify each selling stockholder for claims made against them
arising out of, among other things, statements made in the filed
S-3 registration statement, Registration
No. 333  101971.

Our operating activities used cash of
$11.0 million for the year ended December 31, 2002,
primarily due to an increase in accounts receivable of
$5.5 million primarily related to the unbilled receivable
of on our Saudi contract, a decrease of $2.4 million from
the receivable from Titan and an increase of $3.6 million
payable to Titan. A decrease in inventories of
$1.2 million, as well as personnel costs and other
expenditures associated with the development of the electronic
food irradiation business.

Our investing activities used cash of
$15.5 million for the year ended December 31, 2002,
primarily due to capital expenditures of $18.4 million
related to our service centers under construction and completed
in 2002 offset by the sale of available-for-sale investments of
$3.7 million. Also included in cash used for investing
activities for the year ended December 31, 2002 were
advances to the Hawaii Pride LLC, or Hawaii Pride, of $745,000
for working capital requirements.

In November 1999, we entered into an agreement
with Hawaii Pride and affiliated parties, whereby Hawaii Pride
would acquire a SureBeam system and construct a facility in
Hilo, Hawaii for the purpose of disinfesting fruit and other
products. This system was delivered and paid for in June 2000.
In addition, we advanced $5.1 million to Hawaii Pride as of
December 31, 2001. The monies advanced were utilized for
costs relating to the acquisition of land, construction of the
building and infrastructure, equipment (excluding the SureBeam
system), other start-up costs and working capital purposes.
During the fourth quarter of 2001, we

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recorded an impairment charge of
$1.4 million against the outstanding receivable balance and
reserved 50% of all additional advances made to Hawaii Pride.
During 2002, we loaned Hawaii Pride an additional $745,000 and
took an additional $373,000 impairment charge. We have advanced
$5.8 million to Hawaii Pride through December 31,
2002. As we continued to monitor Hawaii Prides progress
throughout 2002, SureBeam continued to be encouraged with the
demand that existed for the product and believed that as the new
papaya tree plantings matured supply would be abundant, Hawaii
Pride would achieve profitability in the spring of 2003. During
the fourth quarter of 2002, Hawaii Prides primary
distributor went bankrupt. This resulted in a several month
disruption in Hawaii Prides distribution, a significant
amount of fruit spoilage and an uncollectible receivable of
approximately $250,000. Based on these events, we reassessed the
probability of collecting the loan in the ordinary course of
business from the cash flows of Hawaii Pride and recorded an
additional impairment charge of $4.0 million in the fourth
quarter, the remaining unreserved amount. We can forgive
$1.0 million of the amount advanced for the exercise of our
option for 19.9% of the equity of Hawaii Pride. Although we have
the ability to convert an additional $1.9 million of the
advance into 50% ownership of Hawaii Pride, this conversion
feature may only be exercised upon Hawaii Prides default
of its loan obligations, mismanagement of the operating
facility, a liquidity event or if Hawaii Pride fails to operate
the business in a prudent and reasonable manner. The remaining
balance of the advance represents a note receivable bearing
interest at 8%, with interest payments due to us monthly. In
June 2000, Hawaii Pride obtained a 15-year loan of approximately
$6.8 million from the USDA. If Hawaii Pride defaults on its USDA
loan obligations, or fails to comply with USDA requirements, we
have the right to acquire 100% of the equity of Hawaii Pride for
a nominal amount. Under the terms of the agreement, we will
receive a management fee based on the facilitys net
revenues over the term of the USDA loan.


In June 2001, we received a purchase order
contract in the aggregate amount of $50.0 million from
RESAL for ten electronic food irradiation systems to
operate in multiple service centers in the Saudi Arabia region
for irradiating poultry and disinfesting dates. In 2002, the
purchase order contract for these systems was modified to
$53.0 million to construct systems for three large service
centers with a combination of high power x-ray and electron beam
technology. We commenced construction on these systems for RESAL
and have recognized, under the percentage-of-completion method
of accounting, $21.3 million in revenue, which has been
recorded on this contract through December 31, 2002, of
which $9.2 million was recognized during the year ended
December 31, 2002. Revenues derived from this order are
classified as revenues from investee in the accompanying
consolidated statements of operations. Certain shipments of
equipment to Saudi Arabia that were scheduled to take place in
March 2003 have been delayed due to the war in Iraq and we
anticipate that our other scheduled shipments to Saudi Arabia
will be similarly delayed, pending resolution of the war. We had
anticipated milestone payments during 2003 of
$24.9 million. We anticipate shipping upon resolution of
the war in the Middle East. The remaining systems are scheduled
to be shipped within the next 15 to 18 months thereafter.
We received payments aggregating $5.3 million through
March 25, 2003 based on milestone payments and expect to
continue to receive additional milestone payments as they become
due and payable until the contract is complete.

In April 2002, we formed a joint venture under
the name SureBeam Middle East, LLC. with RESAL. SureBeam Middle
East, LLC. will provide, among other things, food irradiation
services through planned service centers in the Saudi Arabian
region. As of December 31, 2002, we own a 19.9% interest in
SureBeam Middle East, LLC. and RESAL and other Saudi nationals
own the remaining 80.1%. We account for our ownership interest
in SureBeam Middle East, LLC. using the equity method of
accounting under APB Opinion No. 18 The Equity Method
of Accounting for Investments in Common Stock. In
accordance with the joint venture agreement, RESALs
purchase order contract dated June 2001 may be assigned to
SureBeam Middle East, LLC. at such time as the joint venture
receives sufficient funds from the third party investors. As of
December 31, 2002, a portion of the purchase order contract
has been assigned to SureBeam Middle East, LLC. As a result,
revenue recognized under the contract is presented in the
consolidated statements of operations as revenue from investee
and we have eliminated our 19.9% interest in the profit
recognized under the percentage-of-completion method of
accounting in connection with the original purchase order
contract. We estimate that the total profit under the original
contract that will be eliminated as a result of our equity
interest in SureBeam Middle East, LLC. will be approximately
$4.5 million to $5.5 million. Pursuant to the joint
venture agreement, for five years following the date of SureBeam
Middle East, LLC.s

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commercial registration, SureBeam Middle East,
LLC. has an exclusive right of first negotiation to negotiate
and enter into agreements to provide irradiation services for
the treatment of food products (excluding water), animal hides
and flowers in Saudi Arabia, Egypt, Lebanon, Syria, Iraq, Iran,
Libya, Tunisia and Algeria. The joint venture will govern our
strategic relationship with the operator of these systems,
including royalty and management fees and a minority equity
ownership of the operator that will operate the service centers.


In October 2001, we contracted to manufacture
eight SureBeam systems for $26.0 million for Titan in
connection with Titans agreement with the United States
Postal Service, or USPS. During 2002, our purchase order from
Titan related to the USPS was closed out at $19.5 million
dollars. Under this agreement, Titan arranged to provide
electron beam systems and services to sanitize mail by
eliminating the threat of anthrax. We worked with Titan and
Titans business units in providing the systems to the
USPS. We were a principal subcontractor to Titan under its prime
contract. In accordance with the milestone payments of the
contract, we received $19.5 million in cash from Titan
during 2002.

In September 2002, we received an order from
Titan for $6.0 million in connection with a new contract
with the USPS. Under this agreement, we are to provide two
linear accelerators to sanitize the mail. During 2002, we
recorded revenue of $1.1 million. We expect to receive
milestone payments as they become due and payable on this
contract.

In June 2002, we received an order in the
aggregate amount of approximately $5.3 million from Son Son
Company, a private food-processing corporation headquartered in
Vietnam, for one electronic food irradiation system to operate
in Vietnam for irradiating shrimp, seafood, and frog legs and
prolonging shelf life of foods. We commenced construction on the
system and have recognized, under the percentage-of-completion
method of accounting, $3.3 million in revenues from
non-affiliated parties, which has been recorded on this contract
through December 31, 2002, all of which was recognized
during the twelve months, ended December 31, 2002. We
received an aggregate of $3.8 million in milestone payments
on this contract through December 31, 2002 and have
recorded deferred revenue of $609,000 at December 31, 2002.
We expect to receive milestone payments as they become due and
payable until the contract is complete.

In November 2002, we entered into an equipment
purchase agreement with Salubris Limited Partnership, or
Salubris, to sell a SureBeam system for $8.9 million. The
purchase of this system will allow Salubris to build and operate
a new service center in the Forth Worth, Texas area. We will
receive per pound processing royalties once the service center
is operational. This agreement allows Fort Worth-San Diego
Investments, LLC, the general partner in Salubris, the right of
first negotiation on certain future opportunities in the
five-state area of Texas, New Mexico, Oklahoma, Arkansas and
Louisiana to purchase our systems and to provide SureBeam
processing. We have commenced construction on this system and
have recognized, under the percentage-of-completion method of
accounting, $1.9 million in revenues from non-affiliated
parties, which has been recorded on this contract through
December 31, 2002. Through March 28, 2003 we have
received payments of $2.8 million and we expect to receive
milestone payments as they become due and payable on this
contract.

The accompanying consolidated financial
statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business.
During the twelve months ended December 31, 2002, we have
incurred substantial losses from operations and investments in
infrastructure. Management believes that as we continue to make
significant investments in infrastructure, sales and marketing,
it is not anticipated that our revenues will sufficiently offset
these investments until at least 2004. Additionally, our
construction and implementation period for systems sales to
strategic alliances as well as our service centers and systems
require a substantial use of cash for at least 12 to
18 months. Our arrangements to sell food irradiation
systems to strategic alliances typically contain milestone
provisions for payment, which are typically based upon time,
stage of completion, and other factors. As a result, our
unbilled receivables from our customers have increased
$4.2 million for the year ended December 31, 2002.
Also in connection with our agreements with our customers, we
have advanced funds aggregating $5.8 million to Hawaii
Pride, which were used primarily for land acquisition, for
facility construction and for working capital purposes. We have
reassessed the probability of collecting the loan in the
ordinary course of business from the cash flows of Hawaii Pride
and took an additional impairment charge of $4.4 million
during 2002, the remaining unreserved

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amount. We also have entered into a number of
commitments to lease land and facilities in connection with
construction of our four company-owned service centers of which
three are operational with the fourth expected to be operational
in the second quarter of 2003. In addition, based on our
customer requirements, we may expend funds to construct and
install in-line systems that we will own and operate.


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

On October 16, 2001, Titan adopted a
definitive plan to spin-off its ownership interest in SureBeam
in the form of a tax-free dividend to Titans stockholders.
Effective August 5, 2002, Titan distributed all of its
shares of our common stock to its stockholders. We have
negotiated other agreements with Titan in connection with our
spin-off including a tax sharing and disaffiliation agreement
that will subject us to liability if we sell our equity or
equity linked securities in a manner that causes a change in our
ownership of voting power greater than that allowed by IRS rules
within a two year period following the spin. This risk could
limit our ability to access public equity markets. In addition,
the recent downturn in the capital markets may limit our ability
to raise capital through public equity or debt offerings. If
existing funds and/or other sources are not sufficient to us
and/or if we are unable to generate sufficient cash flow from
operations, we may need to consider additional actions,
including reducing or deferring capital expenditures, reducing
or deferring research and development projects, reducing
construction of systems for customers in advance of payment and
reducing marketing expenditures. The deferral or cancellation of
these projects may have a material adverse impact on our ability
to meet our short-term business objectives. In order to borrow
funds under our senior secured credit facility, we must be in
compliance with our operating expense and capital expenditure
covenants and we may have to curtail these activities to be in
compliance with these covenants. At December 31, 2002, we
had $27.3 million of cash and cash equivalents. We believe
that this balance will be sufficient to meet our cash needs
through 2003. However, a variety of currently unanticipated
events could require additional capital resources such as the
acquisition of complementary businesses or technologies or
increased working capital requirements to fund, among other
things, construction of systems for our strategic alliances in
advance of payment. Additionally, if our requirements vary from
our current plans, we may require additional financing sooner
than we anticipate. An inability in such circumstance to obtain
additional financing on terms reasonable to us, or at all, could
have a material adverse effect on our results of operations and
financial condition.

Contractual Obligations and Commercial
Commitments

The following summarizes our contractual
obligations and other commitments at December 31, 2002, and
the effect such obligations could have on our liquidity and cash
flows in future periods:

|                                   |  |           |       |        |  |        |        |            |  |       |       |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | --------- | ----- | ------ |  | ------ | ------ | ---------- |  | ----- | ----- |  |  | - | ------ |  |  | - | ------ | 
|                                   |  | Less than |       | Years  |  | Years  |        |            |  |      
|                                   |  | 1 year    |       | 2 to 3 |  | 4 to 5 |        | Thereafter |  | Total
|                                   |  |           |       |        |  |        |        |            |  |      
|Long-term debt                     |  | $         |      |        |  | $      | 25,000 |            |  | $     |      |  |  | $ |       |  |  | $ | 25,000 | 
|Operating leases                   |  |           | 2,621 |        |  |        | 4,881  |            |  |       | 4,292 |  |  |   | 17,039 |  |  |   | 28,833 | 
|                                   |  |           |       |        |  |        |        |            |  |       |       |  |  |   |        |  |  |   |        | 
|Total contractual cash obligations |  | $         | 2,621 |        |  | $      | 29,881 |            |  | $     | 4,292 |  |  | $ | 17,039 |  |  | $ | 53,833 | 
|                                   |  |           |       |        |  |        |        |            |  |       |       |  |  |   |        |  |  |   |        | 

Critical Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of

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assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. Specifically, management must make estimates in
the following areas:




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Allowance for doubtful accounts.We provide a reserve against our
    receivables for estimated losses that may result from our
    customers inability to pay. These reserves are based on
    potential uncollectible accounts, aged receivables, historical
    losses, and our customers credit-worthiness.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Our accounts receivable balances include unbilled
    receivables, which are comprised of work-in-process which will
    be billed in accordance with contract terms and delivery
    schedules, as well as amounts billable upon final execution of
    contracts, contract completion or milestones. We continually
    monitor the contracts and bill based on the milestone payments.
    At December 31, 2002, 93% of our unbilled balance relates
    to our Saudi contract. We believe the likelihood of a material
    loss to us on an uncollectible account in our unbilled account
    would be substantially increased if the political conditions in
    Saudi Arabia deteriorate due to the war in Iraq.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Valuation of inventory.Inventories include the cost of
    material, labor and overhead, and are stated at the lower of
    cost or market. We review the components of our inventory on a
    regular basis for excess, obsolete and impaired inventory based
    on estimated future usage and sales. The likelihood of any
    material inventory write-downs is dependent on changes in
    competitive conditions, new product introductions by us or our
    competitors or customer demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Valuation of intangible and other long-lived
    assets.We use assumptions in
    establishing the carrying value and estimated lives of our
    intangible and other long-lived assets. We evaluate long-lived
    assets for impairment in accordance with SFAS 144. The
    criteria used for these evaluations include our determination of
    whether a triggering event has occurred which would require
    long-lived assets to be tested for recoverability. If we
    determine that a triggering event has occurred and a long-lived
    asset needs to be tested for recoverability, then we must
    estimate future cash flows of the related long-lived asset over
    its remaining useful life. Our primary long-lived assets, which
    could be subject to impairment in the near term, are
    approximately $59.0 million of assets used in the operation
    of our food processing centers located in Brazil, Los Angeles,
    Chicago and Sioux City. As of December 31, 2002, the Brazil
    facility has not opened, the Los Angeles facility has been open
    for three months, the Chicago facility has been open for
    12 months, and the Sioux City facility has been open for
    33 months. Our primary indicator of a triggering event is a
    shortfall in actual operating results of the processing
    facilities when compared to budgeted amounts. As of
    December 31, 2002, none of the four processing facilities
    have generated positive cash flows. Accordingly, we were
    required to perform cash flow recoverability tests to assess
    impairment of each processing facility. Based on our projections
    of future cash flows to be generated from the operation of the
    processing facilities over their remaining useful life, we
    determined that no impairment was required to be recorded. In
    estimating the future cash flows, we have projected that we will
    continue to receive processing revenue from our existing
    customers, and we will be successful in securing new customers
    which will result in the facilities operating at processing
    capacities of from 35% to 50% by 2005 compared with actual
    capacities at December 31, 2002, ranging from 0% to 13%. If
    our projected processing capacities are not achieved by our
    estimated dates, then projected cash flows used in the
    recoverability test will be adjusted downward and may indicate a
    fair value that is lower than the carrying value of the
    long-lived asset. If assets are considered to be impaired, the
    impairment recognized is the amount by which the carrying value
    of the asset exceeds the fair value of the assets. Useful lives
    and related amortization or depreciation expense are based on
    our estimate of the period that the assets will generate
    revenues or otherwise be used by us. Factors that would
    influence the likelihood of a material change in our reported
    results include significant changes in the assets ability
    to generate a positive cash flow, a significant decline in the
    economic and competitive environment on which the asset depends,
    significant changes in our strategic business objectives,
    utilization of the asset, and a significant change in the
    political and or economic conditions in certain countries,
    particularly Brazil and Saudi Arabia, in which we have
    investments or assets.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Valuation of deferred income taxes.Valuation allowances are established,
    when necessary, to reduce deferred tax assets to the amount
    expected to be realized. The likelihood of a material change in
    our expected realization of these assets is dependent on future
    taxable income, our ability to deduct tax loss carryforwards
    against future taxable income, the effectiveness of our tax
    planning and strategies among the various tax jurisdictions that
    we operate in, and any significant changes in the tax treatment
    received on our business combinations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Revenue recognition.We recognize a portion of our revenue
    using the percentage-of-completion method, which includes
    revenues recognized in accordance with Statement of Position
    (SOP) 81-1, Accounting for Performance of
    Construction-Type and Certain Production Type Contracts.
    Total estimated costs are based on managements assessment
    of costs to complete the project based upon evaluation of the
    level of work achieved and costs expended to date. To the extent
    that our estimated costs materially change, due to added costs
    of performing under the contract in a foreign country, our
    revenues recorded under such contracts could materially be
    affected and could have a material adverse effect on our
    operations in the future periods. In 2002, approximately 72% of
    revenues were generated by fixed price contracts, which are
    recognized using the percentage-of-completion method of
    accounting. In 2002 approximately 28% of total revenues were
    generated by cost-plus fixed fee contracts and time and material
    contracts for which percentage-of-completion is not used, and
    revenues are generally recognized as work is performed and
    billed to the customer. We contract with our customers using
    cost-plus fixed fee and fixed-price contracts. Revenues and
    profits are recognized in accordance with Accounting Research
    Bulletin No. 45, Long-Term Construction-Type
    Contracts and SOP 81-1. Revenues are recognized under
    fixed price contracts based on the percentage-of-completion
    basis, using the cost-to-cost method.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One of the three criteria necessary to use the
    percentage-of-completion method of accounting is that the seller
    believes that the buyer can be expected to satisfy his
    obligations under the contract. At the inception of a new
    contract, we perform an evaluation of the buyers ability
    to perform and make payments in accordance with contractual
    terms. Based on an evaluation of the buyers credit
    worthiness and wherewithal to pay, we consider the need to
    obtain a third party letter of credit or initial payment prior
    to commencing construction and recognizing revenue. Our largest
    contract in which revenue is recognized using the
    percentage-of-completion method of accounting is with RESAL. We
    did not obtain an initial payment or a third party letter of
    credit prior to commencing construction on the contract in 2001.
    However, we made an initial assessment in 2001 and have made
    periodic assessments through December 31, 2002, as to
    RESALs ability to perform under the contract and concluded
    that collection was probable at inception of the contract and as
    of December 31, 2002. We made this determination without
    regard to RESALs ability to transfer its obligation, as
    allowed under the contract, to SureBeam Middle East, LLC. In
    assessing the probability of collection, we performed financial
    due diligence on RESAL and its principals, which included
    discussions with Saudi banking officials, prominent Saudi
    business professionals, Saudi government agencies and review of
    available RESAL financial information. Through December 31,
    2002, we have recognized $21.3 million of revenue, have
    collected $4.0 million and have an unbilled receivable of
    $17.3 million.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Principles of consolidation.Management evaluates its investment in
    SureBeam Middle East, LLC. and any other potential investments
    on an individual basis for purposes of determining whether
    consolidation or the cost or equity method is appropriate, based
    upon managements evaluation of our ability to retain
    control through decision-making ability and exercise significant
    influence, as well as our equity ownership interest. In the
    event that our ability to obtain control and exercise
    significant influence changes materially from managements
    evaluation in determining whether consolidation should occur, or
    whether or not the cost or equity method is appropriate, then
    our operating results could be materially impacted, either
    positively or negatively.

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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We currently are exposed to market risks related
to changes in interest rates. Some of the proceeds from our
initial public offering have been invested in short-term,
interest-bearing, investment grade securities. The value of
these securities is subject to interest rate risk and could fall
in value if interest rates rise. We currently have an unsecured
subordinated promissory note payable to Titan that bears
interest, payable quarterly, at the greater of the rate of 10%
per annum or Titans effective weighted average interest
rate based on floating rates under Titans senior credit
facility. Additionally, our future borrowings will have a
variable component that will fluctuate as interest rates change.
If market interest rates were to increase immediately and
uniformly by 10%, there would not be a material impact on our
financial condition or results of operations.

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|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE


|                                                                                                          |                                                                                                            |      |    |    | 
|--------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                                                                          |                                                                                                            | Page
|                                                                                                          |                                                                                                            |     
|Independent Auditors Reports                                                                             |                                                                                                            |      | 53 |   
|Consolidated Statements of Operations for the
    three years ended December 31, 2002                     |                                                                                                            |      | 55 |   
|Consolidated Balance Sheets as of
    December 31, 2002 and December 31, 2001                             |                                                                                                            |      | 56 |   
|Consolidated Statements of Cash Flows for three
    years ended December 31, 2002                         |                                                                                                            |      | 57 |   
|Consolidated Statements of Stockholders
    Equity (Deficit) for the three years ended December 31, 2002 |                                                                                                            |      | 58 |   
|Notes to Consolidated Financial Statements                                                                |                                                                                                            |      | 59 |   
|Financial Statement Schedule                                                                              |                                                                                                            |      |    |   
|                                                                                                          | Schedule II Valuation and Qualifying
    Accounts for the years ended December 31, 2002, 2001 and
    2000 |      |    | 93 | 

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INDEPENDENT AUDITORS REPORT

The Board of Directors

SureBeam Corporation:


We have audited the 2002 consolidated financial
statements of SureBeam Corporation and subsidiaries as listed in
the accompanying index. In connection with our audit of the 2002
consolidated financial statements, we also have audited the 2002
financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement
schedule based on our audit. The 2001 and 2000 consolidated
financial statements and financial statement schedules of the
Company as listed in the accompanying index were audited by
other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial
statements and financial statement schedules in their report
dated February 11, 2002, except with respect to the matters
discussed in Note (16), as to which the date is
March 29, 2002.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the 2002 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of SureBeam Corporation and
subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related 2002
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.



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

San Diego, California

March 25, 2003


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This is a copy of the audit report previously
issued by Arthur Andersen LLP in connection with the filing by
SureBeam Corporation on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued
by Arthur Andersen LLP in connection with this filing on
Form 10-K. See Exhibit 23.2 for further discussion.
The balance sheet as of December 31, 2000, referred to in
this report has not been included in the accompanying financial
statements.

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To SureBeam Corporation:

We have audited the accompanying consolidated
balance sheets of SureBeam Corporation (a Delaware Corporation
and a majority-owned subsidiary of The Titan Corporation) and
subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of SureBeam Corporation and subsidiaries as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole.
Schedule II, Valuation and Qualifying Accounts, is
presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic
financial statements. The schedule has been subjected to the
auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

San Diego, California

February 11, 2002, except with respect


to the matters discussed in Note (16), as


to which the date is March 29, 2002


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SUREBEAM CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |        |  
|-------------------------------------------- | ---------------------- | ------------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------ | ------ | -
|                                             |                        |                                      
|                                             |                        | Year Ended December 31,              
|                                             |                        |                                      
|                                             |                        | 2002                                  |         | 2001   |   | 2000
|                                             |                        |                                       |         |        |   |     
|                                             |                        |                                      
|                                             |                        | (In thousands, except per share data)
|Revenues:                                    |                        |                                       |         |        |   |      |         |        |   |   |        |       
|                                             | Non-affiliated parties |                                       | $       | 8,147  |   |      | $       | 10,849 |   |   | $      | 29,448 |  
|                                             | Investee               |                                       |         | 9,161  |   |      |         | 12,151 |   |   |        |       |  
|                                             | The Titan Corporation  |                                       |         | 19,568 |   |      |         | 18,267 |   |   |        |       |  
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Total revenues                               |                        |                                       | 36,876  |        |   |      | 41,267  |        |   |   | 29,448 |       
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Cost of revenues:                            |                        |                                       |         |        |   |      |         |        |   |   |        |       
|                                             | Non-affiliated parties |                                       |         | 12,390 |   |      |         | 8,725  |   |   |        | 19,602 |  
|                                             | Investee               |                                       |         | 6,753  |   |      |         | 6,263  |   |   |        |       |  
|                                             | The Titan Corporation  |                                       |         | 11,996 |   |      |         | 12,115 |   |   |        |       |  
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Total cost of revenues                       |                        |                                       | 31,139  |        |   |      | 27,103  |        |   |   | 19,602 |       
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Gross profit                                 |                        |                                       | 5,737   |        |   |      | 14,164  |        |   |   | 9,846  |       
|Selling, general and administrative expenses |                        |                                       | 26,306  |        |   |      | 29,554  |        |   |   | 7,992  |       
|Stock-based compensation                     |                        |                                       | 16,568  |        |   |      | 54,270  |        |   |   | 648    |       
|Research and development                     |                        |                                       | 817     |        |   |      | 2,153   |        |   |   | 524    |       
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Income (loss) from operations                |                        |                                       | (37,954 | )      |   |      | (71,813 | )      |   |   | 682    |       
|Interest income                              |                        |                                       | 209     |        |   |      | 1,267   |        |   |   | 230    |       
|Interest expense                             |                        |                                       | (1,282  | )      |   |      | (7,022  | )      |   |   | (3,841 | )     
|Other income, net                            |                        |                                       | 3,939   |        |   |      | 874     |        |   |   |       |       
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Loss before income tax benefit               |                        |                                       | (35,088 | )      |   |      | (76,694 | )      |   |   | (2,929 | )     
|Income tax benefit                           |                        |                                       |        |        |   |      | (2,319  | )      |   |   | (1,130 | )     
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Net Loss                                     |                        | $                                     | (35,088 | )      |   | $    | (74,375 | )      |   | $ | (1,799 | )     
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Basic loss per share:                        |                        |                                       |         |        |   |      |         |        |   |   |        |       
|                                             | Net loss               |                                       | $       | (0.53  | ) |      | $       | (1.36  | ) |   | $      | (0.04  | )
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Weighted average shares  basic              |                        |                                       | 66,741  |        |   |      | 54,534  |        |   |   | 46,817 |       
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Diluted loss per share:                      |                        |                                       |         |        |   |      |         |        |   |   |        |       
|                                             | Net loss               |                                       | $       | (0.53  | ) |      | $       | (1.36  | ) |   | $      | (0.04  | )
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       
|Weighted average shares  diluted            |                        |                                       | 66,741  |        |   |      | 54,534  |        |   |   | 46,817 |       
|                                             |                        |                                       |         |        |   |      |         |        |   |   |        |       

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

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SUREBEAM CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |         |         | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- |  | ------ | ------- | ------- | 
|                                                          |                                                                                                                                                                                                                           |                                           
|                                                          |                                                                                                                                                                                                                           | December 31,                              
|                                                          |                                                                                                                                                                                                                           |                                           
|                                                          |                                                                                                                                                                                                                           | 2002                                       |        | 2001    
|                                                          |                                                                                                                                                                                                                           |                                            |        |         
|                                                          |                                                                                                                                                                                                                           |                                           
|                                                          |                                                                                                                                                                                                                           | (In thousands, except                     
|                                                          |                                                                                                                                                                                                                           | share information)                        
|Assets (Pledged)                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|Current Assets:                                           |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          | Cash and cash equivalents                                                                                                                                                                                                 |                                            | $      | 27,336   |         |  | $      | 4,131   |        
|                                                          | Investments, available-for-sale                                                                                                                                                                                           |                                            |        |         |         |  |        | 3,766   |        
|                                                          | Accounts receivable, net of allowances of $250 in
    2002 and $1,428 in 2001                                                                                                                                             |                                            |        | 18,143   |         |  |        | 12,645  |        
|                                                          | Receivable from The Titan Corporation                                                                                                                                                                                     |                                            |        | 10,123   |         |  |        | 12,503  |        
|                                                          | Inventories                                                                                                                                                                                                               |                                            |        | 16,670   |         |  |        | 19,764  |        
|                                                          | Prepaid expenses and other                                                                                                                                                                                                |                                            |        | 4,859    |         |  |        | 5,172   |        
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          |                                                                                                                                                                                                                           | Total current assets                       |        |          | 77,131  |  |        |         | 57,981  | 
|Property and equipment, net                               |                                                                                                                                                                                                                           |                                            | 60,132 |          |         |  | 41,903 |        
|Due from The Titan Corporation                            |                                                                                                                                                                                                                           |                                            | 2,319  |          |         |  | 2,319  |        
|Intangible assets, net                                    |                                                                                                                                                                                                                           |                                            | 3,164  |          |         |  | 3,549  |        
|Other assets                                              |                                                                                                                                                                                                                           |                                            | 9,251  |          |         |  | 12,032 |        
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          |                                                                                                                                                                                                                           | Total assets                               |        | $        | 151,997 |  |        | $       | 117,784 | 
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|Liabilities and Stockholders
    Equity                  |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|Current Liabilities:                                      |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          | Accounts payable                                                                                                                                                                                                          |                                            | $      | 6,064    |         |  | $      | 9,191   |        
|                                                          | Accrued compensation and benefits                                                                                                                                                                                         |                                            |        | 2,050    |         |  |        | 2,664   |        
|                                                          | Deferred revenue and other income                                                                                                                                                                                         |                                            |        | 4,324    |         |  |        | 3,000   |        
|                                                          | Due to The Titan Corporation                                                                                                                                                                                              |                                            |        | 3,591    |         |  |        |        |        
|                                                          | Other current liabilities                                                                                                                                                                                                 |                                            |        | 1,383    |         |  |        | 1,756   |        
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          |                                                                                                                                                                                                                           | Total current liabilities                  |        |          | 17,412  |  |        |         | 16,611  | 
|Subordinated promissory note to The Titan
    Corporation |                                                                                                                                                                                                                           |                                            |       |          |         |  | 72,208 |        
|Senior credit facility with The Titan Corporation         |                                                                                                                                                                                                                           |                                            | 25,000 |          |         |  |       |        
|Other long-term liabilities                               |                                                                                                                                                                                                                           |                                            | 2,952  |          |         |  | 613    |        
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          |                                                                                                                                                                                                                           | Total liabilities                          |        |          | 45,364  |  |        |         | 89,432  | 
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|Commitments and Contingencies                             |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|Stockholders Equity:                                     |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          | Preferred stock, $.001 par value,
    5,000,000 shares authorized, none issued and outstanding                                                                                                                            |                                            |        |         |         |  |        |        |        
|                                                          | Class A common stock, $.001 par value,
    200,000,000 shares authorized, 73,736,873 issued and
    73,733,344 outstanding at December 31, 2002 and 11,605,440
    issued and 11,601,911 outstanding at December 31, 2001 |                                            |        | 73       |         |  |        | 11      |        
|                                                          | Class B common stock, $.001 par value,
    50,000,000 shares authorized, 50,000,000 issued and none
    outstanding at December 31, 2002 and 46,774,235 issued and
    outstanding at December 31, 2001                   |                                            |        |         |         |  |        | 47      |        
|                                                          | Additional paid-in capital                                                                                                                                                                                                |                                            |        | 244,440  |         |  |        | 147,607 |        
|                                                          | Deferred stock-based compensation                                                                                                                                                                                         |                                            |        | (10,350  | )       |  |        | (26,918 | )      
|                                                          | Accumulated other comprehensive income (loss)                                                                                                                                                                             |                                            |        |         |         |  |        | 47      |        
|                                                          | Treasury stock, at cost: 3,529 shares in
    2002 and 2001                                                                                                                                                                |                                            |        | (42      | )       |  |        | (42     | )      
|                                                          | Accumulated deficit                                                                                                                                                                                                       |                                            |        | (127,488 | )       |  |        | (92,400 | )      
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          |                                                                                                                                                                                                                           | Total stockholders equity                 |        |          | 106,633 |  |        |         | 28,352  | 
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        
|                                                          |                                                                                                                                                                                                                           | Total liabilities and stockholders equity |        | $        | 151,997 |  |        | $       | 117,784 | 
|                                                          |                                                                                                                                                                                                                           |                                            |        |          |         |  |        |        

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

56



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |         |         |  
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------- | ------- | - | ------ | ------- | ------- | -
|                                                                                     |                                                                      |                                               
|                                                                                     |                                                                      | Year Ended December 31,                       
|                                                                                     |                                                                      |                                               
|                                                                                     |                                                                      | 2002                                           |         | 2001   |         | 2000
|                                                                                     |                                                                      |                                                |         |        |         |     
|                                                                                     |                                                                      |                                               
|                                                                                     |                                                                      | (In thousands)                                
|Cash Flows from Operating
    Activities:                                            |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Net loss                                                                             |                                                                      | $                                              | (35,088 | )      |         | $    | (74,375 | )       |         | $ | (1,799 | )      
|Adjustments to reconcile net loss to net cash
    used in operating activities:      |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|                                                                                     | Nonmonetary research consideration                                   |                                                |         | (1,519 | )       |      |         | (3,391  | )       |   |        | (4,701  | )      
|                                                                                     | Depreciation and amortization                                        |                                                |         | 4,829  |         |      |         | 4,216   |         |   |        | 3,059   |        
|                                                                                     | Asset impairment and provision for losses on
    accounts receivable |                                                |         | 4,419  |         |      |         | 2,559   |         |   |        |        |        
|                                                                                     | Deferred tax liability from The Titan Corporation                    |                                                |         |       |         |      |         | (3,114  | )       |   |        | (1,303  | )      
|                                                                                     | Amortization of deferred stock-based compensation                    |                                                |         | 16,568 |         |      |         | 54,270  |         |   |        | 648     |        
|                                                                                     | Loss on disposal of assets                                           |                                                |         | 46     |         |      |         |        |         |   |        |        |        
|Change in operating assets and liabilities, net
    of effects of business acquired: |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|                                                                                     | Accounts receivable                                                  |                                                |         | (5,498 | )       |      |         | (18,507 | )       |   |        | (12,577 | )      
|                                                                                     | Inventories                                                          |                                                |         | 1,184  |         |      |         | (3,308  | )       |   |        | (3,528  | )      
|                                                                                     | Prepaid expenses and other                                           |                                                |         | (488   | )       |      |         | 980     |         |   |        | (1,767  | )      
|                                                                                     | Other assets                                                         |                                                |         | (952   | )       |      |         | 142     |         |   |        | (1,235  | )      
|                                                                                     | Accounts payable                                                     |                                                |         | (3,127 | )       |      |         | 5,060   |         |   |        | 1,387   |        
|                                                                                     | Accrued compensation and benefits                                    |                                                |         | (614   | )       |      |         | 2,080   |         |   |        | 217     |        
|                                                                                     | Other accrued liabilities                                            |                                                |         | 2,035  |         |      |         | (2,105  | )       |   |        | 3,775   |        
|                                                                                     | Due to (from) The Titan Corporation                                  |                                                |         | 5,971  |         |      |         | (12,503 | )       |   |        |        |        
|                                                                                     | Deferred revenue and other income                                    |                                                |         | 1,255  |         |      |         | 3,000   |         |   |        |        |        
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|                                                                                     |                                                                      | Net cash used in operating activities          |         |        | (10,979 | )    |         |         | (44,996 | ) |        |         | (17,824 | )
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Cash Flows from Investing
    Activities:                                            |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Proceeds (payment) from sale (purchase) of
    available-for-sale investments        |                                                                      |                                                | 3,719   |        |         |      | (3,719  | )       |         |   |       |        
|Capital expenditures                                                                 |                                                                      |                                                | (18,430 | )      |         |      | (19,894 | )       |         |   | (4,297 | )      
|Payment for purchase of business, net of cash
    acquired                           |                                                                      |                                                |        |        |         |      | (750    | )       |         |   |       |        
|Advances to Tech Ion                                                                 |                                                                      |                                                |        |        |         |      | (2,775  | )       |         |   | (2,225 | )      
|Advances to Hawaii Pride                                                             |                                                                      |                                                | (745    | )      |         |      | (1,156  | )       |         |   | (3,700 | )      
|Cash paid for purchase of linear accelerator                                         |                                                                      |                                                |        |        |         |      |        |         |         |   | (2,500 | )      
|Cash paid for purchase of intangible assets                                          |                                                                      |                                                |        |        |         |      |        |         |         |   | (5,000 | )      
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|                                                                                     |                                                                      | Net cash used in investing activities          |         |        | (15,456 | )    |         |         | (28,294 | ) |        |         | (17,722 | )
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Cash Flows from Financing
    Activities:                                            |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Borrowings on senior credit facility with The
    Titan Corporation                  |                                                                      |                                                | 25,000  |        |         |      |        |         |         |   |       |        
|Net proceeds from issuance of common stock                                           |                                                                      |                                                | 23,210  |        |         |      | 59,777  |         |         |   |       |        
|Borrowings on subordinated promissory note with
    The Titan Corporation            |                                                                      |                                                | 792     |        |         |      | 16,136  |         |         |   |       |        
|Proceeds from exercise of stock options and
    warrants                             |                                                                      |                                                | 332     |        |         |      | 1,403   |         |         |   |       |        
|Issuance of common stock under employee stock
    purchase plan                      |                                                                      |                                                | 306     |        |         |      | 147     |         |         |   |       |        
|Purchase of treasury stock                                                           |                                                                      |                                                |        |        |         |      | (42     | )       |         |   |       |        
|Titan investment, net                                                                |                                                                      |                                                |        |        |         |      |        |         |         |   | 23,642 |        
|Net effect of reorganization                                                         |                                                                      |                                                |        |        |         |      |        |         |         |   | 11,904 |        
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Net cash provided by financing activities                                            |                                                                      |                                                | 49,640  |        |         |      | 77,421  |         |         |   | 35,546 |        
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Net change in cash and cash equivalents                                              |                                                                      |                                                | 23,205  |        |         |      | 4,131   |         |         |   |       |        
|                                                                                     |                                                                      | Cash and cash equivalents at beginning of year |         |        | 4,131   |      |         |         |        |   |        |         |        |  
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|                                                                                     |                                                                      | Cash and cash equivalents at end of year       |         | $      | 27,336  |      |         | $       | 4,131   |   |        | $       |        |  
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Supplemental Cash Flow Information:                                                  |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Non-Cash Investing and Financing
    Activities:                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        
|Conversion of subordinated promissory note to
    equity                             |                                                                      | $                                              | 73,000  |        |         | $    | 2,000   |         |         | $ |       |        
|Increase in fair value of investments,
    available-for-sale                        |                                                                      |                                                | (47     | )      |         |      | 47      |         |         |   |       |        
|Conversion of parent company investment into
    subordinated promissory note        |                                                                      |                                                |        |        |         |      |        |         |         |   | 58,072 |        
|                                                                                     |                                                                      |                                                |         |        |         |      |         |         |         |   |        |        

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

57



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |          |         |             |  |       |         |         |   |   |    |     |   |   |        |         |   |   |     |     |   |   |          |         |   |   |         |         |  
|----------------------------- | --------------------------------------------------------------------------------------------------------------- | -------------- | ------ | ------ |  | ---------- | ------ | -------- | - | ----------- | -- | ------------ |  | ------------- | -- | ---------- | - | -------- | ------- | ----------- |  | ----- | ------- | ------- | - | - | -- | --- | - | - | ------ | ------- | - | - | --- | --- | - | - | -------- | ------- | - | - | ------- | ------- | -
|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |         
|                              |                                                                                                                 | Shares of      |        | Common |  |            |        |          |   |             |    |              |  |               |    |            |   |         
|                              |                                                                                                                 | Common Stock   |        | Stock  |  |            |        |          |   | Accumulated |    |              |  |               |    |            |   |         
|                              |                                                                                                                 |                |        |        |  | Additional |        | Deferred |   | Other       |    | Parent       |  |               |    |            |   |         
|                              |                                                                                                                 | Class          |        | Class  |  | Class      |        | Class    |   | Paid-in     |    | Stock-Based  |  | Comprehensive |    | Company    |   | Treasury |         | Accumulated |  |      
|                              |                                                                                                                 | A              |        | B      |  | A          |        | B        |   | Capital     |    | Compensation |  | Income (Loss) |    | Investment |   | Stock    |         | Deficit     |  | Total
|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |          |         |             |  |      
|                              |                                                                                                                 |               
|                              |                                                                                                                 | (In thousands)
|Balances at December 31, 1999 |                                                                                                                 |                | 233    |        |  |            | 46,584 |          |   | $           |   |              |  | $             | 47 |            |   | $        | 51      |             |  | $     | (15     | )       |   | $ |   |     |   | $ | 22,526 |         |   | $ |    |     |   | $ | (4,322   | )       |   | $ | 18,287  |        
|                              | Net loss                                                                                                        |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          | (1,799  | ) |   |         | (1,799  | )
|                              | Titan investment, net                                                                                           |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    |    |   |   |        | 23,642  |   |   |     |    |   |   |          |        |   |   |         | 23,642  |  
|                              | Issuance of warrants                                                                                            |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         | 2,419       |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 2,419   |  
|                              | Deferred stock- based compensation related to the
    issuance of stock options                                 |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         | 3,217       |  |       |         | (3,217  | ) |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         |        |  
|                              | Amortization of deferred stock-based compensation                                                               |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         | 648     |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 648     |  
|                              | Impact of reorganization                                                                                        |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    |    |   |   |        | 11,904  |   |   |     |    |   |   |          | (11,904 | ) |   |         |        |  
|                              | Conversion of parent company investment into
    subordinate promissory note                                    |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    |    |   |   |        | (58,072 | ) |   |     |    |   |   |          |        |   |   |         | (58,072 | )
|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |          |         |             |  |       |         |         |   |   |    |     |   |   |        |         |   |   |     |     |   |   |          |         |   |   |         |        
|Balances at December 31, 2000 |                                                                                                                 |                | 233    |        |  |            | 46,584 |          |   |             |   |              |  |               | 47 |            |   |          | 5,687   |             |  |       | (2,584  | )       |   |   |   |     |   |   |       |         |   |   |    |     |   |   | (18,025  | )       |   |   | (14,875 | )      
|                              | Net loss                                                                                                        |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          | (74,375 | ) |   |         | (74,375 | )
|                              | Issuance of common stock in IPO, net of issuance
    costs                                                      |                |        | 6,700  |  |            |        |         |   |             |    | 7            |  |               |    |           |   |          |         | 59,770      |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 59,777  |  
|                              | Issuance of warrants                                                                                            |                |        | 2,236  |  |            |        |         |   |             |    | 2            |  |               |    |           |   |          |         | 1,052       |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 1,054   |  
|                              | Proceeds from issuance of common stock in
    conjunction with exercise of stock options                        |                |        | 2,412  |  |            |        |         |   |             |    | 2            |  |               |    |           |   |          |         | 347         |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     | (42 | ) |   |          |        |   |   |         | 307     |  
|                              | Shares issued under employee stock purchase plan                                                                |                |        | 21     |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         | 147         |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 147     |  
|                              | Issuance of common stock in conjunction with
    conversion of subordinated promissory note to equity           |                |        |       |  |            |        | 190      |   |             |    |             |  |               |    |           |   |          |         | 2,000       |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 2,000   |  
|                              | Deferred stock- based compensation for stock
    options issued                                                 |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         | 78,604      |  |       |         | (78,604 | ) |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         |        |  
|                              | Amortization of deferred stock-based compensation                                                               |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         | 54,270  |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 54,270  |  
|                              | Unrealized gain on investments                                                                                  |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    | 47  |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 47      |  
|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |          |         |             |  |       |         |         |   |   |    |     |   |   |        |         |   |   |     |     |   |   |          |         |   |   |         |        
|Balances at December 31, 2001 |                                                                                                                 |                | 11,602 |        |  |            | 46,774 |          |   |             | 11 |              |  |               | 47 |            |   |          | 147,607 |             |  |       | (26,918 | )       |   |   | 47 |     |   |   |       |         |   |   | (42 | )   |   |   | (92,400  | )       |   |   | 28,352  |        
|                              | Net loss                                                                                                        |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          | (35,088 | ) |   |         | (35,088 | )
|                              | Proceeds from issuance of common stock in
    conjunction with private placement                                |                |        | 5,276  |  |            |        |         |   |             |    | 5            |  |               |    |           |   |          |         | 23,205      |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 23,210  |  
|                              | Shares issued under employee stock purchase plan                                                                |                |        | 119    |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         | 306         |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 306     |  
|                              | Issuance of common stock in conjunction with
    conversion of subordinated promissory note to equity           |                |        | 4,441  |  |            |        | 3,226    |   |             |    | 4            |  |               |    | 3          |   |          |         | 72,993      |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 73,000  |  
|                              | Proceeds from issuance of common stock in
    conjunction with exercise of stock options and other stock grants |                |        | 2,295  |  |            |        |         |   |             |    | 3            |  |               |    |           |   |          |         | 329         |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 332     |  
|                              | Amortization of deferred stock-based compensation                                                               |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         | 16,568  |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         | 16,568  |  
|                              | Unrealized gain on investments                                                                                  |                |        |       |  |            |        |         |   |             |    |             |  |               |    |           |   |          |         |            |  |       |         |        |   |   |    | (47 | ) |   |        |        |   |   |     |    |   |   |          |        |   |   |         | (47     | )
|                              | Conversion of stock associated with the spin-off
    from Titan                                                 |                |        | 50,000 |  |            |        | (50,000  | ) |             |    | 50           |  |               |    | (50        | ) |          |         |            |  |       |         |        |   |   |    |    |   |   |        |        |   |   |     |    |   |   |          |        |   |   |         |        |  
|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |          |         |             |  |       |         |         |   |   |    |     |   |   |        |         |   |   |     |     |   |   |          |         |   |   |         |        
|Balances at December 31, 2002 |                                                                                                                 |                | 73,733 |        |  |            |       |          |   | $           | 73 |              |  | $             |   |            |   | $        | 244,440 |             |  | $     | (10,350 | )       |   | $ |   |     |   | $ |       |         |   | $ | (42 | )   |   | $ | (127,488 | )       |   | $ | 106,633 |        
|                              |                                                                                                                 |                |        |        |  |            |        |          |   |             |    |              |  |               |    |            |   |          |         |             |  |       |         |         |   |   |    |     |   |   |        |         |   |   |     |     |   |   |          |         |   |   |         |        

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

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002


Note (1) Description of the Business and
Basis of Financial Statement Presentation

SureBeam Corporation, or SureBeam or the Company,
was formed in August 2000 in connection with the contribution by
The Titan Corporation, or Titan, of specified assets,
liabilities and operations related to its electronic food
irradiation business. Also at the time of the contribution, the
Company licensed to Titan on a royalty-free basis the patent
rights for the SureBeam technology to be used solely for the
medical equipment sterilization business, which was retained by
Titan. In 1997, a predecessor business to SureBeam had been
established by Titan as a wholly owned subsidiary. Titan
developed its proprietary electron beam process from technology
developed under contracts with the federal government during the
1980s. Titan has accounted for its electron beam
technology business as a separate business segment since 1993.
Prior to 1999, substantially all of the revenues of this segment
were derived from selling medical equipment sterilization
systems and from providing medical equipment sterilization
services and, to a lesser extent, from selling electron beam
accelerator systems for use by the federal government.

The historical results of operations and
financial condition of this segment of Titans operations
are presented herein as the historical results of operations and
financial condition of SureBeam and are presented as a
combination of entities under common control on a historical
cost basis in a manner similar to a pooling-of-interests for all
periods presented. These historical results do not reflect the
results of operations and financial condition of the electronic
food irradiation business on a stand-alone basis, which business
was contributed by Titan to SureBeam in August 2000.
Accordingly, the historical results are not indicative of the
results that would have occurred had the contribution been
consummated prior to the beginning of each of the periods
presented. In connection with the reorganization in August 2000,
the Company distributed all the assets and liabilities of the
medical sterilization business to its parent. The net assets
distributed of $11.9 million are reflected as a charge to
accumulated deficit.

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

The accompanying consolidated financial
statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business.
Consistent with its business plan, the Company has incurred
substantial losses from operations primarily resulting from its
marketing and brand awareness campaign. Management believes it
will continue to incur losses for 2003, as the Company will
continue to make significant investments in infrastructure and
sales and marketing. Additionally, the Companys
construction and implementation period for systems sales to
strategic alliances as well as Company-owned service centers and
systems will require a substantial use of cash for at least
12 months. The Companys arrangements to sell food
irradiation systems to strategic alliances typically contain
milestone provisions for

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

payment, which are typically based upon time,
stage of completion, etc. where no material uncertainties exist.
Also, it has advanced funds aggregating $5.8 million to
Hawaii Pride, LLC, or Hawaii Pride. During 2002 and 2001,
management assessed that repayment of the advances to Hawaii
Pride were improbable and recorded a $4.4 million and
$1.4 million impairment charge, respectively. See
(Note 7). The Company has also entered into a number of
commitments to lease land and facilities in connection with
construction of its four company-owned service centers of which
three are operational with the fourth expected to be operational
in the second quarter of 2003. See Note (10). In addition,
based on the Companys customer requirements, the Company
may expend funds to construct and install in-line systems that
the Company will own and operate.

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

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

Note (2) Initial Public
Offering

On March 16, 2001, the Company consummated
its initial public offering and issued 6,700,000 shares of
Class A common stock at a price of $10.00 per share. The
Company received proceeds of approximately $59.8 million,
net of underwriting discounts, fees and other initial public
offering costs. Concurrent with the closing of the offering,
warrants aggregating 2,236,023 shares of the Companys
Class A common stock were exercised for proceeds of
approximately $1.1 million.

Also in connection with the completion of the
Companys initial public offering, stock options granted
under the Nonstatutory Stock Option Plan were converted from
variable plan options to fixed plan options. Accordingly,
deferred stock-based compensation of $78.6 million was
recorded, representing the extent to which the $10.00 per share
offering price exceeded the exercise price of the options.
Additionally, since a substantial portion of these options was
vested at the time of completion of the offering, approximately
$38.7 million was recognized as stock-based compensation at
that time. Included in selling, general and administrative
expense for the years ended December 31, 2002 and 2001, is
a total of $15.8 million and $53.5 million,
respectively, of stock-based compensation associated with these
options. In conjunction with the completion of the
Companys spin-off from Titan on August 5, 2002, all
options held by Titan employees and directors under this plan
became fully vested and as a result, the stock-based
compensation charges for this plan of $2.9 million were
recorded due to this acceleration of vesting and are included in
the $15.8 million as a stock-based compensation charge. The
remaining deferred stock-based compensation balance related to
these options will be recognized as stock-based compensation of
approximately $8.1 million and $1.3 million in 2003
and 2004, respectively, the remaining four-year vesting period
of the options. See Note (13).

Note (3) Summary of Significant
Accounting Policies

Principles of Consolidation.The accompanying consolidated
financial statements include SureBeams accounts and those
of its wholly owned subsidiaries, SB Operating Co., LLC. and
SureBeam Brasil Ltda. All

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

significant intercompany accounts and
transactions have been eliminated. Certain amounts from prior
years have reclassified to conform to the current year
presentation.

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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys accounts receivable balances
    include unbilled receivables, which are comprised of
    work-in-process which will be billed in accordance with contract
    terms and delivery schedules, as well as amounts billable upon
    final execution of contracts, contract completion or milestones.
    The Company continually monitors the contracts and bills based
    on the milestone payments. At December 31, 2002, 93% of its
    unbilled balance relates to its RESAL contract. The Company
    believes the likelihood of a material loss to us on an
    uncollectible account in its unbilled account would be
    substantially increased if the political conditions in Saudi
    Arabia deteriorate due to the war in Iraq.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Valuation of Inventory.Inventories include the cost of
    material, labor and overhead, and are stated at the lower of
    cost or market. The Company reviews the components of its
    inventory on a regular basis for excess, obsolete and impaired
    inventory based on estimated future usage and sales. The
    likelihood of any material inventory write-downs is dependent on
    changes in competitive conditions, new product introductions by
    the Company or its competitors or customer demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Valuation of intangible and other long-lived
    assets.The Company uses assumptions
    in establishing the carrying value and estimated lives of its
    intangible and other long-lived assets. Management evaluates
    long-lived assets for impairment in accordance with
    SFAS 144. The criteria used for these evaluations include
    managements determination of whether a triggering event
    has occurred which would require long-lived assets to be tested
    for recoverability. If management determines that a triggering
    event has occurred and a long-lived asset needs to be tested for
    recoverability, then the Company must estimate future cash flows
    of the related long-lived asset over its remaining useful life.
    The Companys primary long-lived assets, which could be
    subject to impairment in the near term, are approximately
    $59.0 million of assets used in the operation of its food
    processing centers located in Brazil, Los Angeles, Chicago
    and Sioux City. As of December 31, 2002, the Brazil
    facility has not opened, the Los Angeles facility has been
    open three months, the Chicago facility has been open for
    12 months, and the Sioux City facility has been open for
    33 months. Managements primary indicator of a
    triggering event is a shortfall in actual operating results of
    the processing facilities when compared to budgeted amounts. As
    of December 31, 2002, none of the four processing
    facilities have generated positive cash flows. Accordingly,
    management was required to perform cash flow recoverability
    tests to assess impairment of each processing facility. Based on
    managements projections of future cash flows to be
    generated from the operation of the processing facilities over
    their remaining useful life, the Company determined that no
    impairment was required to be recorded. In estimating the future
    cash flows, management has projected that the Company will
    continue to receive processing revenue from its existing
    customers, and the Company will be successful in securing new
    customers which will result in the facilities operating at
    processing capacities of from 35% to 50% by 2005 compared with
    actual

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | capacities at December 31, 2002, ranging
    from 0% to 13%. If managements projected processing
    capacities are not achieved by their estimated dates, then
    projected cash flows used in the recoverability test will be
    adjusted downward and may indicate a fair value that is lower
    than the carrying value of the long-lived asset. If assets are
    considered to be impaired, the impairment recognized is the
    amount by which the carrying value of the assets exceeds the
    fair value of the assets. Useful lives and related amortization
    or depreciation expense are based on the Companys estimate
    of the period that the assets will generate revenues or
    otherwise be used by the Company. Factors that would influence
    the likelihood of a material change in the Companys
    reported results include significant changes in the assets
    ability to generate a positive cash flow, a significant decline
    in the economic and competitive environment on which the asset
    depends, significant changes in the Companys strategic
    business objectives, utilization of the asset, and a significant
    change in the political and or economic conditions in certain
    countries, particularly Brazil and Saudi Arabia, in which the
    Company has investments or assets.                                                                                                                                                                                                                                                                                                                                                                         
|
| |   | In July 2001, the Financial Accounting Standards
    Board, or FASB, issued Statement of Financial Accounting
    Standards, or SFAS, SFAS No. 142, Goodwill and
    Other Intangible Assets, which supersede Accounting
    Principles Board Opinion 17, Intangible Assets.
    Under SFAS No. 142, goodwill and intangible assets
    with indefinite lives are no longer amortized but are tested at
    least annually for impairment. Separable intangible assets with
    defined lives will continue to be amortized over their useful
    lives. There was not an impact to the Companys
    consolidated financial statements related to adoption of this
    statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Valuation of deferred income taxes.Valuation allowances are established,
    when necessary, to reduce deferred tax assets to the amount
    expected to be realized. The likelihood of a material change in
    the Companys expected realization of these assets is
    dependent on future taxable income, its ability to deduct tax
    loss carryforwards against future taxable income, the
    effectiveness of its tax planning and strategies among the
    various tax jurisdictions that the Company operates in, and any
    significant changes in the tax treatment received on its
    business combinations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Revenue recognition.The Company recognizes a portion of
    its revenue using the percentage-of-completion method, which
    includes revenues recognized in accordance with Statement of
    Position 81-1, Accounting for Performance of
    Construction-Type and Certain Production-Type Contracts
    (SOP 81-1). Total estimated costs are based on
    managements assessment of costs to complete the project
    based upon evaluation of the level of work achieved and costs
    expended to date. To the extent that the Companys
    estimated costs materially change, due to added costs of
    performing under the contract in a foreign country, its revenues
    recorded under such contracts could materially be affected and
    could have a material adverse effect on its operations in the
    future periods. In 2002, approximately 72% of revenues were
    generated by fixed price contracts, which are recognized using
    the percentage-of-completion method of accounting. In 2002,
    approximately 28% of total revenues were generated by cost-plus
    fixed fee contracts, time and material contracts and units of
    delivery for which percentage-of-completion is not used, and
    revenues are generally recognized as work is performed and
    billed to the customer. The Company contracts with its customers
    using cost-plus fixed fee and fixed-price contracts. Revenues
    and profits are recognized in accordance with Accounting
    Research Bulletin No. 45, Long-term Construction-Type
    Contracts, and SOP 81-1. Revenues are recognized
    under fixed price contracts based on the
    percentage-of-completion basis, using the cost-to-cost.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One of the three criteria necessary to use the
    percentage-of-completion method of accounting is the Company
    believes that the buyer can be expected to satisfy his
    obligations under the contract. At the inception of a new
    contract, management performs an evaluation of the buyers
    ability to perform and make payments in accordance with
    contractual terms. Based on an evaluation of the buyers
    credit worthiness and wherewithal to pay, management considers
    the need to obtain a third party letter of

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | credit or initial payment prior to commencing
    construction and recognizing revenue. The Companys largest
    contract in which revenue is recognized using the
    percentage-of-completion method of accounting is with RESAL. The
    Company did not obtain an initial payment or a third party
    letter of credit prior to commencing construction on the
    contract in 2001. However, the Company made an initial
    assessment in 2001 and have made periodic assessments through
    December 31, 2002, as to RESALs ability to perform
    under the contract and concluded that collection was probable at
    inception of the contract and as of December 31, 2002. The
    Company made this determination without regard to RESALs
    ability to transfer its obligation, as allowed under the
    contract, to SureBeam Middle East, LLC. In assessing the
    probability of collection, the Company performed financial due
    diligence on RESAL and its principals, which included
    discussions with Saudi banking officials, prominent Saudi
    business professionals, Saudi government agencies and review of
    available RESAL financial information. Through December 31,
    2002, the Company has recognized $21.3 million of revenue,
    has collected $4.0 million and has an unbilled receivable
    of $17.3 million.

Revenue Recognition.Revenues derived from providing
medical equipment sterilization and electronic food irradiation
services are recorded at the time services are performed and
collectibility is reasonably assured. Revenues derived from
sales of electronic irradiation systems to Titan are recognized
under cost-plus 20% or fixed price contracts. Revenues derived
from sales of medical equipment sterilization and electronic
food irradiation systems under fixed-price contracts are
accounted for using the percentage-of-completion method of
accounting. The Company applies the percentage-of-completion
method of accounting using the cost-to-cost method whereby
revenues are recorded based on the percentage that total costs
incurred bears to the total estimated costs at completion. These
contracts to provide customized medical equipment sterilization
and electronic food irradiation systems also include the
installation and integration into its customers production
lines. Estimated losses on fixed-price contracts are recorded in
the period the losses are determinable. In determining the
applicability of the percentage-of-completion method of
accounting for fixed-price contracts, the Company considers the
risks associated with estimating its costs to complete a
contract and the buyers ability to perform under the
contract. If these estimates are deemed unreliable or contain a
significant degree of risk, the Company will seek to modify the
contract to time-and-materials or use the completed-contract
method. To date, the Company has not recorded any revenues under
the completed-contract method. See Note (4).

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

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

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

Capitalized Interest.Interest has been capitalized in
accordance with SFAS No. 34 on certain assets under
construction, including the facilities in Sioux City, Iowa,
Chicago, Illinois, Los Angeles, California, and Rio de Janeiro,
Brazil, as well as the expansion of the Companys testing
facility for its linear accelerators. See Note (7). During
2002, 2001 and 2000, total interest costs were
$1.8 million, $7.3 million and $4.1 million,
respectively, of which $528,000, $259,000 and $252,000 were
capitalized, respectively.

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

The following summarizes the Companys
warranty reserve at December 31, 2002, 2001 and 2000
(in thousands):

|                 |  |              |     |                      |  |        |     |             |  |   |      |   |  |   |     | 
|---------------- |  | ------------ | --- | -------------------- |  | ------ | --- | ----------- |  | - | ---- | - |  | - | --- | 
|                 |  | Balance at   |     |                      |  |        |     |            
|                 |  | Beginning of |     | Additions            |  |        |     | Balance at 
|                 |  | Year         |     | (charges to expense) |  | Claims |     | End of Year
|                 |  |              |     |                      |  |        |     |            
|2002:            |  |              |     |                      |  |        |     |             |  |   |      |   |  |   |     | 
|Warranty reserve |  | $            | 375 |                      |  | $      |    |             |  | $ | (28  | ) |  | $ | 347 | 
|2001:            |  |              |     |                      |  |        |     |             |  |   |      |   |  |   |     | 
|Warranty reserve |  |              | 400 |                      |  |        | 194 |             |  |   | (219 | ) |  |   | 375 | 
|2000:            |  |              |     |                      |  |        |     |             |  |   |      |   |  |   |     | 
|Warranty reserve |  |              | 166 |                      |  |        | 480 |             |  |   | (246 | ) |  |   | 400 | 

Impairment of Long-Lived Assets.Periodically, the Company reviews for
possible impairment its long-lived assets and certain
identifiable intangibles to be held and used. Whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable, asset values are adjusted
accordingly. In evaluating whether an impairment exists, the
Company compares the carrying value of the asset to the
estimated undiscounted future cash flows. If an impairment is
deemed to exist, the assets carrying value is adjusted to
the present value of its estimated future cash flows. See
Note (1).

On January 1, 2002, the Company adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long Lived
Asset and for Long-Lived Assets to be Disposed of, which
the Company followed in 2001 and prior. Under
SFAS No. 144, the Company periodically assesses
long-lived assets for impairment based on expectations of future
undiscounted cash flows from the related operations, and when
circumstances dictate, adjusts the asset to the extent carrying
value exceeds the fair value of the asset. These factors, along
with managements plans with respect to the operations, are
considered in assessing the recoverability of long-lived assets.
There were no assessments of long-lived assets resulting in
write-downs during 2002, 2001 and 2000.

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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As permitted, the Company has adopted the
disclosure only provisions of SFAS 123. Accordingly, no
compensation, except as specifically described in
Note (13), has been recognized for the stock option plans.
Had stock-based compensation been determined based on the fair
value at the date of the grant for the years ended
December 31, 2002, 2001, and 2000 consistent with the
provisions of SFAS 123, the Companys net loss and net
loss per common share would have been reported as the pro forma
amounts indicated below (in thousands, except share information):

|                                                      |         |      |         |        |   |      |         |        |   |   |        |        |  
|----------------------------------------------------- | ------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------ | ------ | -
|                                                      |         | 2002 |         | 2001   |   | 2000
|                                                      |         |      |         |        |   |     
|Net loss                                              |         | $    | (35,088 | )      |   | $    | (74,375 | )      |   | $ | (1,799 | )     
|Less APB No. 25 stock-based compensation
    expense  |         |      | 16,568  |        |   |      | 54,270  |        |   |   | 648    |       
|Add SFAS No. 123 stock-based compensation
    expense |         |      | (6,616  | )      |   |      | (5,873  | )      |   |   | (2,462 | )     
|                                                      |         |      |         |        |   |      |         |        |   |   |        |       
|Pro forma net loss                                    |         | $    | (25,136 | )      |   | $    | (25,978 | )      |   | $ | (3,613 | )     
|                                                      |         |      |         |        |   |      |         |        |   |   |        |       
|Pro forma loss per common share:                      |         |      |         |        |   |      |         |        |   |   |        |       
|                                                      | Basic   |      | $       | (0.38  | ) |      | $       | (0.48  | ) |   | $      | (0.08  | )
|                                                      | Diluted |      | $       | (0.38  | ) |      | $       | (0.48  | ) |   | $      | (0.08  | )
|Weighted average shares:                              |         |      |         |        |   |      |         |        |   |   |        |       
|                                                      | Basic   |      |         | 66,741 |   |      |         | 54,534 |   |   |        | 46,817 |  
|                                                      | Diluted |      |         | 66,741 |   |      |         | 54,534 |   |   |        | 46,817 |  

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

|              |  |      |          |      |  |      |          |   |  |  |          |  
|------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|              |  | 2002 |          | 2001 |  | 2000
|              |  |      |          |      |  |     
|Expected term |  |      | 5  years |      |  |      | 5  years |   |  |  | 5  years |  
|Interest rate |  |      | 5.15     | %    |  |      | 6.22     | % |  |  | 6.18     | %
|Volatility    |  |      | 115      | %    |  |      | 214      | % |  |  | 100      | %
|Dividends     |  |      |         |      |  |      |         |   |  |  |         |  

Income Taxes.The
Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes, (SFAS 109), which requires the use
of the asset and liability method of accounting for deferred
income taxes. Under this method, deferred income taxes are
recorded to reflect the tax consequences on future years of
temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts at each
year-end. If it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation
allowance is recognized.

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

Minority Equity Investments.The Company follows APB Opinion
No. 18 The Equity Method of Accounting for
Investments in Common Stock. As the Company owns less than
20% of SureBeam Middle East, LLC, but has significant influence,
the Company accounts for its ownership interest using the equity
method of accounting. The Company periodically reviews for
possible impairment of its investment in

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

investee. Whenever events or changes in
circumstances indicate that the carrying value of an investment
may not be fully recoverable, the investment value is adjusted
accordingly. See Note (4).

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

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

|                                     |                                              |                         |         |        |  |      |         |        |  |   |        |        | 
|------------------------------------ | -------------------------------------------- | ----------------------- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------ | ------ | 
|                                     |                                              |                        
|                                     |                                              | Year Ended December 31,
|                                     |                                              |                        
|                                     |                                              | 2002                    |         | 2001   |  | 2000
|                                     |                                              |                         |         |        |  |     
|Net loss                             |                                              | $                       | (35,088 | )      |  | $    | (74,375 | )      |  | $ | (1,799 | )     
|Weighted average shares outstanding: |                                              |                         |         |        |  |      |         |        |  |   |        |       
|                                     | Basic                                        |                         |         | 66,741 |  |      |         | 54,534 |  |   |        | 46,817 | 
|                                     | Effect of dilutive securities: stock options |                         |         |       |  |      |         |       |  |   |        |       | 
|                                     |                                              |                         |         |        |  |      |         |        |  |   |        |       
|                                     | Diluted                                      |                         |         | 66,741 |  |      |         | 54,534 |  |   |        | 46,817 | 
|                                     |                                              |                         |         |        |  |      |         |        |  |   |        |       
|Net loss per common share  basic    |                                              | $                       | (0.53   | )      |  | $    | (1.36   | )      |  | $ | (0.04  | )     
|                                     |                                              |                         |         |        |  |      |         |        |  |   |        |       
|Net loss per common share  diluted  |                                              | $                       | (0.53   | )      |  | $    | (1.36   | )      |  | $ | (0.04  | )     
|                                     |                                              |                         |         |        |  |      |         |        |  |   |        |       

During the years ended December 31, 2002,
2001 and 2000, the weighted average number of options and
warrants to purchase approximately 4,510,000, 7,116,000 and
7,491,000 shares of Class A common stock, respectively, at
prices ranging from $0.14 to $16.09, $0.14 to $16.09 and less
than $.01 to $0.72 per share, respectively, were not included in
the computation of diluted earnings per share, as the effect
would have been anti-dilutive due to the loss from continuing
operations.

Fair Value of Financial Instruments.The carrying amounts of the
Companys financial instruments, including accounts
receivable, accounts payable and accrued liabilities,
approximate their fair values due to their short-term nature,
except for the nonmonetary transaction with Texas A&M as
described in Note (4). Financial instruments, which
potentially subject the Company to concentrations of credit
risk, consist primarily of trade accounts receivable.

Comprehensive Income (Loss).The Company follows Statement of
Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130). This
statement establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The objective of the
statement is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic
events in the period other than transactions with owners.
Comprehensive income is the total of net income and all other
non-owner changes in equity.

The Company had no components of comprehensive
income for the years ended December 31, 2002 and 2000.
During the year ended December 31, 2001 the Companys
only element of accumulated other comprehensive income resulted
from unrealized gains on investments in available-for-sale
securities of approximately $47,000. See Note (7).

Research and Development Costs.Historically, the benefits of the
research and development realized by the Company were incidental
to the work being performed on Titans contracts with the
federal government and were in the form of Titans right to
retain any technologies developed as a result of its efforts on
those contracts. Since a significant portion of the research and
development efforts expended by the Company since inception have
been funded as a result of work performed under customer
contracts, and therefore included as

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

contract costs, these costs are not separately
identifiable in the consolidated statement of operations. Costs
associated with independent research and development activities
are expensed as incurred. The Company incurred $817,000,
$2.2 million and $524,000 of expenses related to such
independent research and development activities for the years
ended December 31, 2002, 2001 and 2000, respectively. Of
the $817,000 and $2.2 million of research and development
activities recorded in 2002 and 2001, respectively, $359,000 and
$150,000 was recognized in 2002 and 2001, respectively, related
to research and development services received from Texas A&M
University. See Note (4).

Start-Up Costs.Costs associated with the start-up of
the Companys service centers are expensed as incurred.

Contract Acquisition and Origination Costs.Costs associated with acquiring
contracts are expensed as incurred.

Business Segments.The Company reports its business
segment information in accordance with Statement of Financial
Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information
(SFAS 131). In the third quarter of 2000, the
Company formed a new business unit, food processing services.
The new business unit encompasses all of the Companys food
irradiation operations.

Parent Company Investment.The cash receipts and disbursements of
the Companys operations have historically been combined
with other Titan cash transactions and balances. The parent
company investment in the consolidated accompanying financial
statements for the year ended December 31, 2000 reflects
the accumulated net cash funded by Titan with respect to all of
SureBeams operations, including the medical equipment
sterilization business and the linear accelerator business from
the inception of such operations through the respective balance
sheet dates.

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

New Accounting Standards.On January 17, 2003, the FASB
issued Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. FIN
No. 46 expands upon and strengthens existing accounting
guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of
another entity. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. FIN No. 46 requires a
variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period
beginning after June 15, 2003. FIN No. 46 will also
affect leasing transactions where the lessor may constitute as
variable interest entities, or VIEs. The Company is
currently evaluating the impact of FIN No. 46 on its
financial statements and related disclosures, however does not
believe it has any VIEs existing at December 31, 2002
which would require consolidation upon adoption of FIN
No. 46. It is not anticipated that the financial impact of
this interpretation will have a material effect on the
Companys consolidated financial statements.

In November 2002, the FASB issued Interpretation
No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 expands on the accounting guidance
of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which
is being superseded. FIN No. 45 will affect leasing
transactions involving residual guarantees, vendor and
manufacturer guarantees, and tax and environmental indemnities.
All such guarantees, including accrued warranty for system
sales, will need to be disclosed in the notes to the financial
statements starting with the period ending after
December 15, 2002. For guarantees

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

issued after December 31, 2002, the fair
value of the obligation must be reported on the balance sheet.
Existing guarantees will be grand fathered and will not be
recognized on the balance sheet. It is not anticipated that the
recognition provisions of this interpretation will have a
material effect on the Companys financial statements.

In July 2002, SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities was
issued. SFAS 146 provides guidance on the recognition and
measurement of liabilities associated with exit and disposal
activities. Under SFAS 146, liabilities for costs associated
with exit or disposal activities should be recognized when the
liabilities are incurred and measured at fair value. This
statement is effective prospectively for exit or disposal
activities initiated after December 31, 2002. It is not
anticipated that the financial impact of this statement will
have a material effect on the Companys consolidated
financial statements.

In April 2002, SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections was issued. SFAS 145 provides guidance on
the classification of gains and losses from the extinguishment
of debt and on the accounting for certain specified lease
transactions. This statement is effective for fiscal years
beginning after May 31, 2002. It is not anticipated that
the financial impact of this statement will have a material
effect on the Companys consolidated financial statements.

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 143 (SFAS No. 143),
Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
for the associated asset retirement costs. The standard applies
to tangible long-lived assets that have a legal obligation
associated with their retirement that results from the
acquisition, construction or development or normal use of the
asset. SFAS 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value
can be made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional
carrying amount is depreciated over the remaining life of the
asset. The liability is accreted at the end of each period
through charges to operating expense. The provisions of
SFAS 143 are required to be applied during the quarter
ending March 31, 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations,
if any, and determine the fair value of these obligations on the
date of adoption. The determination of fair value is complex and
will require the Company to gather market information and
develop cash flow models. Additionally, the Company will be
required to develop processes to track and monitor these
obligations. This statement is effective for fiscal years
beginning after June 15, 2002. At this time, the Company
does not anticipate that the adoption of SFAS 143 will have a
material effect on the Companys consolidated financial
statements.

Note (4) Strategic Transactions

In connection with the Companys agreement
with Texas A&M University and the Agricultural Experiment
Station (collectively, Texas A&M), SureBeam
agreed to provide three electronic food irradiation systems
(collectively, the system) pursuant to a ten-year
lease with title passing to Texas A&M at the end of the
ten-year term. The sale of the system is manifested by the
passage of title to the system to Texas A&M, which occurs in
two stages under the arrangement. First, immediate conveyance of
title to the system shield and all connecting physical
structures (comprising approximately 15-20% of the complete
system) occurs upon completion. Second, the ultimate conveyance
of title to the remaining equipment (consisting primarily of the
linear accelerator, the material handling and conveyor system
and the overall integration of the system into the facility)
occurs at the end of the ten-year term of the arrangement. The
Companys rights to use the system also terminate at the
end of the ten-year term of the arrangement with Texas A&M.
The ultimate transfer of title to the complete system as well as
all responsibilities for the system

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STATEMENTS  (Continued)

at the end of the ten-year term was structured
primarily for tax planning purposes as discussed below.
Additionally, the passage of title at the end of the ten-year
term serves as a protective measure to provide a mechanism by
which the Company receives value in the exchange and ensures its
ability to realize the benefits resulting from the sale of the
system. The Companys right to repossess any aspect of the
system delivered to Texas A&M extends only to circumstances
in which Texas A&M breaches the agreement, such as in the
remote event that the university is not funded by the Texas
state legislature throughout the term of the arrangement.

The agreement provides the Company access to
Texas A&M employees for research and consulting services at
below-market rates and access to research performed
independently by Texas A&M at no cost. Also, under the
agreement, the Company retains certain benefits related to the
system, including the rights to use the system for performing
irradiation services for its customers for at least ten hours
per day subject to an overall maximum of 25% of the
systems capacity. Lastly, Texas A&M will provide and
maintain the facilities at no cost to the Company. These items
represent all of the consideration the Company will receive in
exchange for the system it is providing to Texas A&M. Since
the Company retains the right to use the system through the end
of the term of the arrangement, it has accounted for this
transaction as a sale-leaseback.

As the consideration in this lease is
nonmonetary, it has accounted for this element of the agreement
in accordance with APB No. 29, Accounting for
Nonmonetary Transactions. Sales are recorded on a
percentage-of-completion basis at the fair market value of the
electronic food irradiation system sold to Texas A&M and
total system profits of approximately $524,000 will be deferred
and recognized ratably over the remaining term of the
arrangement commencing upon delivery of the system.

The fair value of the system of
$10.0 million was determined by employing the
Companys historical pricing methodology used for similar
systems sold under other customer contracts. The accompanying
balance sheet also reflects a short-term and a long-term asset
for the fair value received by the Company in this transaction.
The asset consists of the estimated discounted cash value of the
economic rights to the research services and the leaseback of
the systems capacity. As revenues are recorded under the
percentage-of-completion method of accounting, a long-term asset
is being recorded which will be realized over the ten-year term
of the arrangement. The percentage-of-completion method of
accounting has been applied using the cost-to-cost method
whereby revenues were recorded based on the percentage that
total costs incurred bears to the total estimated costs at
completion. The long-term asset will be realized through two
mechanisms. First, it will be realized through free rent to the
extent that it pertains to the Companys use of the system
as a provider of electronic food irradiation services to its
customers. Second, it will be realized as Texas A&M performs
free or discounted research and other consulting services for
the Company. Examples of these services include research,
product testing, taste testing and other test-marketing
activities, among other things, performed by Texas A&M at no
cost or significantly discounted rates. The free and discounted
research and other consulting costs will be recorded as research
and development expense as the services are performed and rent
expense will be recorded as a component of the cost of sales
associated with the electronic food irradiation services that
the Company will perform for its customers at the facility. The
long-term asset associated with the free and discounted research
will be realized over the remaining term of the arrangement on a
straight-line basis, or as the services are received, whichever
is greater.

The carrying amount of this short-term and
long-term asset will be reviewed annually or more frequently if
conditions warrant. An analysis of the research and development
services received as well as the prepaid rent amortization will
be conducted in order to determine the existence of asset
impairment. If an impairment is deemed to exist, the carrying
value of the asset will be adjusted to the present value of the
estimated free rent and free or discounted research and
consulting services to be received.

Under the percentage-of-completion method of
accounting, the Company recorded revenues of $1.9 million,
$3.4 million and $4.7 million during 2002, 2001 and
2000, respectively, on the Texas A&M contract. These amounts
have been recorded as a long-term asset and all profit has been
initially deferred. The

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asset arising from the total cumulative revenues
of $10.0 million, net of $614,000 of accumulated
amortization, has been recorded as a short-term and long-term
asset at December 31, 2002. As of December 31, 2002,
the Company had deferred profit amounting to $501,000, which is
included as other short-term and long-term liabilities in the
accompanying consolidated balance sheet. This deferred profit
will be amortized ratably to reduce cost of sales over the
remaining term of the ten-year term of the arrangement
commencing upon delivery of the system to Texas A&M. The
short-term and long-term assets arising from this transaction
represents the cumulative revenues recognized related to the
design, construction, installation, integration and delivery of
the system for Texas A&M, net of amortization. In August
2001, the Company agreed to purchase research and development
services from Texas A&M for approximately $200,000,
reflecting a discount of approximately $300,000. The discount
has been amortized against the long-term asset arising from the
cumulative revenues recorded under this agreement over a period
of approximately ten months. Additionally, the Company has
received free research and development performed independently
by Texas A&M. The Company has recorded $359,000 and $150,000
in 2002 and 2001, respectively, of amortization expense related
to the research and development services it has received during
these periods. The deferred profit of $501,000 as of
December 31, 2002, represents the difference between the
cumulative costs incurred and the cumulative revenues
recognized, net of amortization. As of December 31, 2002,
$23,000 of the deferred profit had been amortized.

With respect to the impact of the transaction
with Texas A&M on the Companys liquidity, the Company
has expended funds of approximately $9.5 million related to
the construction of the system through December 31, 2002.
These costs have been incurred primarily related to the design
of the system, construction of and modification to the physical
structure, which house the system, and for the manufacture of
the linear accelerators and x-ray components as well as the
material handling and conveyor systems. During the third quarter
of 2002, the Company completed the delivery of the system to
Texas A&M.

For income tax purposes, the use of the SureBeam
system by Texas A&M will be treated as a lease. The lease
income recognized in connection with the transaction will be
based upon the imputed value of the facilities and services
provided by Texas A&M to SureBeam. There will be a
corresponding tax deduction for rent expense and services
expense related to the use of the facilities and services
provided to the Company. For any aspect of the system in which
title transfers prior to use of the system, such as the
conveyance of title to the system shield and all connecting
physical structures upon completion of construction, SureBeam
will report taxable income related to the sale of such equipment
or other constructed assets.

In November 2002, the Company entered into an
equipment purchase agreement with Salubris Limited Partnership,
or Salubris, to sell a SureBeam system for $8.9 million.
The purchase of this system will allow Salubris to build and
operate a new service center in the Forth Worth, Texas area. The
Company will receive per pound processing royalties once the
service center is operational. This agreement allows Fort Worth-
San Diego Investments, LLC, the general partner in Salubris, the
right of first negotiation on certain future opportunities in
the five-state area of Texas, New Mexico, Oklahoma, Arkansas and
Louisiana to purchase the Companys systems and to provide
SureBeam processing. The Company has commenced construction on
this system and has recognized, under the
percentage-of-completion method of accounting, $1.9 million
in revenues from non-affiliated parties, which has been recorded
on this contract through December 31, 2002. Through January
2003, the Company has received payments of $1.8 million and
expects to receive milestone payments as they become due and
payable on this contract.

In October 2001, the Company contracted to
manufacture eight SureBeam systems for an aggregate of
$26.0 million for Titan in connection with Titans
agreement with the United States Postal Service, or USPS. During
2002, the Companys purchase order from Titan related to
the USPS was closed out at $19.5 million. Under this
agreement, Titan had arranged to provide electron beam systems
and services to sanitize mail by eliminating the threat of
anthrax. The Company worked with Titan and Titans business
units, in providing the systems to the USPS. The Company was the
principal subcontractor to build systems for Titan under
Titans

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prime contract. During the years ended
December 31, 2002 and 2001, the Company recognized
$7.0 million and $12.5 million, respectively, as
revenues from The Titan Corporation under this contract. In
accordance with the milestone payments of the contract, the
Company received $19.5 million in cash from Titan during
2002.

In September 2002, the Company received an order
from Titan for $6.0 million in connection with a new
contract with the USPS. Under this agreement, the Company is to
provide two linear accelerators to sanitize the mail. During the
year ended December 31, 2002, the Company recorded revenue
of $1.1 million. In January 2003, the Company received a
payment of $600,000 and expects to receive milestone payments as
they become due and payable on this contract.

In June 2001, the Company received a purchase
order contract with an aggregate value of $50.0 million
from RESAL Saudi Corp., or RESAL, for ten electronic food
irradiation systems to operate in multiple service centers in
the Saudi Arabia region for irradiating poultry and disinfesting
dates. In 2002, the purchase order contract for these systems
was modified to $53.0 million to construct systems for
three large service centers with a combination of high power
x-ray and electron beam technology. The Company commenced
construction of these systems for RESAL and has recognized,
under the percentage-of-completion method of accounting, $9.2
million and $12.1 million in sales revenue for the year
ended December 31, 2002 and 2001, respectively. Due to the
war in Iraq, certain shipments of equipment to Saudi Arabia that
were scheduled to take place in March 2003 have been delayed.
This delay and any future delays will cause delays in payments
due upon contractual milestones. The Company had anticipated
milestone payments during 2003 of $24.9 million. The Company
anticipates shipping upon resolution of the war in the Middle
East.

In April 2002, the Company formed a joint venture
under the name SureBeam Middle East, LLC. with RESAL. As of
December 31, 2002, SureBeam owns a 19.9% interest in
SureBeam Middle East, LLC. and RESAL and other Saudi nationals
own the remaining 80.1%. As the Company owns less than 20%, but
has significant influence, the Company accounts for its
ownership interest in SureBeam Middle East, LLC. using the
equity method of accounting under APB Opinion No. 18
The Equity Method of Accounting for Investments in Common
Stock. In accordance with the joint venture agreement,
RESALs purchase order contract dated June 2001 may be
assigned to SureBeam Middle East, LLC. at such time as the joint
venture receives sufficient funds from third party investors. As
of December 31, 2002, a portion of the purchase order
contract has been assigned to SureBeam Middle East, LLC. As a
result, revenue recognized under the contract is presented in
the consolidated statements of operations as revenues from
investee and the Company has eliminated its 19.9% interest in
the profit recognized under the percentage-of-completion method
of accounting in connection with the purchase order contract.
The Company has received payments of $5.3 million through
March 25, 2003 from SureBeam Middle East, LLC. based on
milestone payments and expects to continue to receive milestone
payments as they become due and payable until the contract is
complete. The joint venture will govern the strategic
relationship with the operator of these systems, including
royalty and management fees and a minority equity ownership of
the operator that will operate the service centers.

Note (5) Acquisitions

In May 2000, the Company received purchase orders
from Tech Ion Industrial Brasil S.A., or Tech Ion, for eleven
electronic food irradiation systems for $55.0 million which
the Company expected to result in approximately
$55.0 million in revenue over the next three years,
including $22.4 million that was recognized through
September 30, 2001. SureBeam Brasil Ltda., or SureBeam
Brasil, which was jointly established by Tech Ion, and Titan
SureBeam Brazil Inc., the Companys wholly owned
subsidiary, planned to provide, among other things, food
irradiation services through four planned service centers. In
October 2001, in order to ensure the completion of the project
with Tech Ion to build service centers in Brazil that were under
construction, the Company entered into a stock purchase
agreement with Tech Ion to purchase an additional

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

60.1% of SureBeam Brasil, bringing our total
equity ownership in SureBeam Brasil to 80.0%. In connection with
the additional equity interest, the Company paid Tech Ion
$750,000 upon the execution of the agreement and will pay an
additional $250,000 upon the nationalization of the linear
accelerators and material handling systems for the Rio de
Janeiro service center from Tech Ion to SureBeam Brasil. The
Company also exchanged its trade receivables of
$22.4 million due from Tech Ion and forgave
$3.5 million of a loan the Company had previously made to
Tech Ion for building improvements and equipment. SureBeam
recorded an intangible asset of $2.5 million that
represents the total consideration amount of the agreement that
exceeded the fair value of the assets purchased. The intangible
asset represents a favorable land lease and location next to the
Rio de Janeiro CEASA, the depot for fresh food distribution in
Rio de Janeiro, and the license granted by CNEN, Brazils
Nuclear Regulatory Commission, for the use of our technology in
Brazil, the only electronic food irradiation license granted to
date by CNEN. Tech Ion obtained these items for SureBeam Brasil
and they are being amortized on a straight-line basis over five
years, the free rent period of the ten-year lease. On
April 1, 2002, the remaining $1.5 million owed
SureBeam by Tech Ion was exchanged for its remaining 20.0%
interest in SureBeam Brasil. The $1.5 million was included
in prepaid expense and other current assets in the accompanying
balance sheet at December 31, 2001. Due to the exchange the
Company recorded an additional $700,000 as an intangible asset
that will be amortized over the remaining 54-month life of the
existing intangible asset. The remaining $800,000 was recorded
as part of the service center building cost. The Company
estimates that the first service center in Brazil will become
operational in the second quarter of 2003 and will be obligated
to provide additional working capital to fund its operations
through its startup phase and until it can generate its own cash
needs.

Note (6) Intangible Assets

On October 23, 2001, the Company purchased
an additional 60.1% of SureBeam Brasil from Tech Ion for
consideration of $1.0 million bringing the Companys
total equity ownership to 80.0% in SureBeam Brasil. In
connection with this purchase, the Company recorded an
intangible asset of $2.5 million, the amount by which the
purchase consideration exceeded the fair market value of the
assets purchased. The intangible asset represents a favorable
land lease and location next to the Rio de Janeiro CEASA, the
depot for fresh food distribution in Rio de Janeiro, and the
license granted by CNEN, Brazils Nuclear Regulatory
Commission, for the use of our technology in Brazil, the only
electronic food irradiation license granted to date by CNEN.
Tech Ion obtained these items for SureBeam Brasil and they are
being amortized on a straight-line basis over five years, the
free rent period of the ten-year lease. On April 1, 2002,
the remaining $1.5 million owed SureBeam by Tech Ion was
exchanged for the remaining 20.0% interest in SureBeam Brasil.
The $1.5 million was included in prepaid expense and other
current assets in the accompanying balance sheet at
December 31, 2001. Due to the exchange the Company recorded
an additional $700,000 as an intangible asset that will be
amortized over the remaining 54-month life of the existing
intangible asset. The remaining $800,000 was recorded as part of
the service center building cost. See Note (5). The net
book value of this intangible asset was $2.4 and
$2.3 million as of December 31, 2002 and 2001,
respectively.

In May 2000, the Company entered into a
non-compete agreement with Applied Power Associates, Inc., or
APA, and paid $5.0 million in cash and issued APA a warrant
to acquire 372,670 shares of SureBeam common stock at an
exercise price per share of $0.1438. The warrant was exercised
on March 16, 2001, the date of the Companys initial
public offering. The consideration of $5.5 million, which
includes $508,000 related to the fair market value of the
warrant, is being amortized on a straight-line basis over the
two-year term of the non-compete agreement included as part of
this transaction. The fair value of the warrant on the date the
non-compete agreement was entered into was computed using the
Black-Scholes option-pricing model. This intangible asset was
fully amortized at December 31, 2002, with a net book value
of $918,000 as of December 31, 2001.

The Company capitalizes certain costs related to
patent applications. Accumulated costs are amortized over seven
years using the straight-line method, commencing at the time the
patents are issued. As of

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2002 and 2001, the
Companys capitalized patent costs included in intangible
assets were $129,000 and $147,000, respectively, net of
amortization. Accumulated amortization related to all intangible
assets was $6.6 million and $4.8 million as of
December 31, 2002 and 2001, respectively.

The weighted average amortization period for all
intangible assets was 4.7 years and 4.2 years at
December 31, 2002 and 2001, respectively. During 2002, 2001
and 2000, the Company recorded $1.7 million,
$2.9 million and $1.8 million of amortization expense
related to intangible assets. The estimated amortization expense
of intangible assets for the next five years is as follows (in
thousands):

|                        |  |   |     | 
|----------------------- |  | - | --- | 
|Year Ended December 31, |  |  
|                        |  |  
|2003                    |  | $ | 905 | 
|2004                    |  |   | 905 | 
|2005                    |  |   | 740 | 
|2006                    |  |   | 603 | 
|2007                    |  |   | 11  | 

Note (7) Other Financial Data

Following are details concerning certain balance
sheet accounts as of December 31, 2002 and 2001:

|                                               |  |              |   |      |  |   |       | 
|---------------------------------------------- |  | ------------ | - | ---- |  | - | ----- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |   | 2001
|                                               |  |              |   |     
|Investments, available-for-sale (in thousands) |  | $            |  |      |  | $ | 3,766 | 
|                                               |  |              |   |      |  |   |       | 

The Company periodically invests its excess cash
in mortgage-backed securities and money market funds. The
Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. Cash
equivalents are short-term, highly liquid investments with
original maturities of less than three months. Cash and cash
equivalents of $27.3 million and $4.1 million at
December 31, 2002 and 2001, respectively, are primarily
invested in commercial paper and money market funds.

The Company classifies its marketable securities
as available-for-sale and records the unrealized holding gains
or losses as a separate component of stockholders equity.
Realized losses for the year ended December 31, 2002 and
2001 were $30,000 and $126,000. There were no marketable
securities at December 31, 2002.

At December 31, 2001, marketable securities
consisted of the following:

|                                          |  |           |       |        |  |            |       |  |  |   |    | 
|----------------------------------------- |  | --------- | ----- | ------ |  | ---------- | ----- |  |  | - | -- | 
|                                          |  | Amortized |       | Market |  | Unrealized
|                                          |  | Cost      |       | Value  |  | Gain      
|                                          |  |           |       |        |  |           
|Mortgage-backed securities (in thousands) |  | $         | 3,719 |        |  | $          | 3,766 |  |  | $ | 47 | 
|                                          |  |           |       |        |  |            |       |  |  |   |    | 

|                                    |                                      |              |        |        |   |   |        |        |  
|----------------------------------- | ------------------------------------ | ------------ | ------ | ------ | - | - | ------ | ------ | -
|                                    |                                      |             
|                                    |                                      | December 31,
|                                    |                                      |             
|                                    |                                      | 2002         |        | 2001  
|                                    |                                      |              |        |       
|Accounts receivable (in thousands): |                                      |              |        |        |   |   |        |       
|                                    | Billed                               |              | $      | 902    |   |   | $      | 53     |  
|                                    | Unbilled                             |              |        | 17,491 |   |   |        | 14,020 |  
|                                    | Less allowance for doubtful accounts |              |        | (250   | ) |   |        | (1,428 | )
|                                    |                                      |              |        |        |   |   |        |       
|                                    |                                      | $            | 18,143 |        |   | $ | 12,645 |       
|                                    |                                      |              |        |        |   |   |        |       

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                          |          |              |        |       |  |   |        |        | 
|--------------------------------------------------------- | -------- | ------------ | ------ | ----- |  | - | ------ | ------ | 
|                                                          |          |             
|                                                          |          | December 31,
|                                                          |          |             
|                                                          |          | 2002         |        | 2001 
|                                                          |          |              |        |      
|Receivable from The Titan Corporation (in
    thousands): |          |              |        |       |  |   |        |       
|                                                          | Billed   |              | $      | 8,973 |  |   | $      | 12,503 | 
|                                                          | Unbilled |              |        | 1,150 |  |   |        |       | 
|                                                          |          |              |        |       |  |   |        |       
|                                                          |          | $            | 10,123 |       |  | $ | 12,503 |       
|                                                          |          |              |        |       |  |   |        |       

Unbilled receivables primarily represent
work-in-process that will be billed in accordance with contract
terms and delivery schedules. Also included in unbilled
receivables are amounts billable upon final execution of
contracts, contract completion or milestones. Generally,
unbilled receivables are expected to be collected within one
year.

|                            |                 |              |        |        |  |   |        |        | 
|--------------------------- | --------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                            |                 |             
|                            |                 | December 31,
|                            |                 |             
|                            |                 | 2002         |        | 2001  
|                            |                 |              |        |       
|Inventories (in thousands): |                 |              |        |        |  |   |        |       
|                            | Materials, net  |              | $      | 12,126 |  |   | $      | 15,510 | 
|                            | Work-in-process |              |        | 4,544  |  |   |        | 4,254  | 
|                            |                 |              |        |        |  |   |        |       
|                            |                 | $            | 16,670 |        |  | $ | 19,764 |       
|                            |                 |              |        |        |  |   |        |       

|                                               |                                                |              |        |        |  |   |        |        | 
|---------------------------------------------- | ---------------------------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                               |                                                |             
|                                               |                                                | December 31,
|                                               |                                                |             
|                                               |                                                | 2002         |        | 2001  
|                                               |                                                |              |        |       
|Property and equipment (in thousands):         |                                                |              |        |        |  |   |        |       
|                                               | Machinery and equipment                        |              | $      | 28,755 |  |   | $      | 9,937  | 
|                                               | Furniture, fixtures and leasehold improvements |              |        | 12,926 |  |   |        | 1,252  | 
|                                               | Construction in progress                       |              |        | 23,270 |  |   |        | 33,390 | 
|                                               |                                                |              |        |        |  |   |        |       
|                                               |                                                |              | 64,951 |        |  |   | 44,579 |       
|Less accumulated depreciation and amortization |                                                |              | (4,819 | )      |  |   | (2,676 | )     
|                                               |                                                |              |        |        |  |   |        |       
|Property and equipment, net                    |                                                | $            | 60,132 |        |  | $ | 41,903 |       
|                                               |                                                |              |        |        |  |   |        |       

Construction in progress represents costs
incurred for the construction of the Companys food
irradiation service center facilities, in-line systems and the
expansion of the Companys testing facility for its linear
accelerators. Such costs remain in construction in progress
until the facilities are completed and placed in service.
Depreciation expense was $2.9 million, $814,000 and
$757,000 for the years ended 2002, 2001 and 2000, respectively.

|                             |           |              |       |       |  |   |        |       | 
|---------------------------- | --------- | ------------ | ----- | ----- |  | - | ------ | ----- | 
|                             |           |             
|                             |           | December 31,
|                             |           |             
|                             |           | 2002         |       | 2001 
|                             |           |              |       |      
|Other assets (in thousands): |           |              |       |       |  |   |        |      
|                             | Texas A&M |              | $     | 8,107 |  |   | $      | 7,210 | 
|                             | Other     |              |       | 1,144 |  |   |        | 4,822 | 
|                             |           |              |       |       |  |   |        |      
|                             |           | $            | 9,251 |       |  | $ | 12,032 |      
|                             |           |              |       |       |  |   |        |      

The long-term asset arising from the transaction
with Texas A&M represents the cumulative revenues recognized
related to the design, construction, installation, integration
and delivery of the system for Texas A&M, net of
amortization related to discounted services received. See
Note (4).

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SUREBEAM CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In November 1999, the Company entered into an
agreement with Hawaii Pride and affiliated parties, whereby
Hawaii Pride would acquire a SureBeam system and construct a
facility in Hilo, Hawaii for the purpose of disinfesting fruit
and other products. This system was delivered and paid for in
June 2000. In addition, the Company advanced $5.1 million
to Hawaii Pride, as of December 31, 2001. The monies
advanced were utilized for costs relating to the acquisition of
land, construction of the building and infrastructure, equipment
(excluding the SureBeam system) other start-up costs and working
capital purposes. During the fourth quarter of 2001, the Company
recorded an impairment charge of $1.4 million against the
outstanding receivable, which resulted in a net balance of
$3.7 million included in other assets as of
December 31, 2001. The Company reserved 50% of all
additional advances made to Hawaii Pride. During 2002, the
Company loaned Hawaii Pride an additional $745,000 and recorded
an additional $373,000 impairment charge. The Company has
advanced $5.8 million to Hawaii Pride through
December 31, 2002. As the Company continued to monitor
Hawaii Prides progress throughout 2002, SureBeam continued
to be encouraged with the demand that existed for the product
and believed that as the new papaya tree plantings matured
supply would be abundant, Hawaii Pride would achieve
profitability in the spring of 2003. During the fourth quarter
of 2002, Hawaii Prides primary distributor went bankrupt.
This resulted in a several month disruption in Hawaii
Prides distribution, a significant amount of fruit
spoilage and an uncollectible receivable of approximately
$250,000. Based on these events, the Company reassessed the
probability of collecting the loan in the ordinary course of
business from the cash flows of Hawaii Pride and recorded an
additional impairment charge of $4.0 million in the fourth
quarter, the remaining unreserved amount. The Company can
forgive $1.0 million of the amount advanced for the
exercise of its option for 19.9% of the equity of Hawaii Pride.
Although the Company has the ability to convert an additional
$1.9 million of the advance into 50% ownership of Hawaii
Pride, this conversion feature may only be exercised upon Hawaii
Prides default of its loan obligations, mismanagement of
the operating facility, a liquidity event or if Hawaii Pride
fails to operate the business in a prudent and reasonable
manner. The remaining balance of the advance represents a note
receivable bearing interest at 8%, with interest payments due to
us monthly. In June 2000, Hawaii Pride obtained a 15-year loan
of approximately $6.8 million from the USDA. If Hawaii
Pride defaults on its USDA loan obligations, or fails to comply
with USDA requirements, the Company has the right to acquire
100% of the equity of Hawaii Pride for a nominal amount. Under
the terms of the agreement, the Company will receive a
management fee based on the facilitys net revenues over
the term of the USDA loan.

|                                                  |                                                    |              |       |       |  |   |       |       | 
|------------------------------------------------- | -------------------------------------------------- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                                                  |                                                    |             
|                                                  |                                                    | December 31,
|                                                  |                                                    |             
|                                                  |                                                    | 2002         |       | 2001 
|                                                  |                                                    |              |       |      
|Deferred revenue and other income (in thousands): |                                                    |              |       |       |  |   |       |      
|                                                  | Deferred license income from The Titan Corporation |              | $     | 3,000 |  |   | $     | 3,000 | 
|                                                  | Deferred revenue from The Titan Corporation        |              |       | 646   |  |   |       |      | 
|                                                  | Deferred revenue from non-affiliated parties       |              |       | 678   |  |   |       |      | 
|                                                  |                                                    |              |       |       |  |   |       |      
|                                                  |                                                    | $            | 4,324 |       |  | $ | 3,000 |      
|                                                  |                                                    |              |       |       |  |   |       |      

In connection with the Companys license
agreement with Titan, the Company received $4.0 million in
both 2002 and 2001 for Titans right to use the
Companys intellectual property for all applications other
than food (excluding water), animal hides, and flower markets.
Of the $8.0 million received, $4.0 million and
$1.0 million were recorded as other income in 2002 and
2001, respectively, with the remaining $3.0 million
deferred until 2003.

The deferred revenue from the Titan Corporation
and non-affiliated parties represents payments received in
excess of revenue recorded on contracts with milestone billings.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note (8) Related Party
Transactions

In connection with the contribution agreement
with Titan, the Company entered into a number of other
agreements with Titan for such items as corporate services,
facilities, filing of income tax returns and employee benefit
plans. These agreements provided for, among other things,
continuation of services, which were historically provided by
Titan to SureBeam while the Company built its corporate
infrastructure on a stand-alone basis. As consideration for
these services, Titan charged to the Company an allocation of
the cost for these services to the extent that they pertained to
SureBeam. All service agreements with Titan terminated effective
as of the spin-off distribution of SureBeam on August 5,
2002, and the Company no longer receives services from Titan.

Corporate Services Agreement.Titan provided or made available to
the Company certain routine corporate services, which was
primarily comprised of administrative functions necessary to
implement the Companys decisions and operations including
benefits administration and information technology support as
well as allocated premises for occupancy. The Company shared
certain Titan systems, including its accounting system and human
resource system. Because Titan engaged in government contracts
work, Titan allocated costs to the Company based upon government
cost accounting requirements. The Company paid Titan for human
resources services based upon the Companys percentage of
the total number of Titan group employees. Except for occupancy
costs described below, the Company paid for other corporate
services based upon the average of three percentages:
(1) the percentage of the Companys payroll to the
total payroll of the Titan group, (2) the percentage of the
Companys operating revenues to the total operating
revenues of the Titan group and (3) the percentage of the
Companys average net book value, which is the sum of the
Companys tangible capital assets plus inventories, to the
total average net book value of the tangible capital assets plus
inventory of the Titan group as of the end of the last fiscal
year and as of the final day of each calendar quarter in the
current fiscal year. Titan had the right to adjust its fees
based upon its assessment of the Companys relative use of
these services.

The initial term of the Corporate Services
Agreement extended through December 31, 2001. This
agreement had automatically renewed for 2002 and expired at the
date of the spin-off. Amounts aggregating $1.1 million,
$1.4 million and $620,000 related to allocations under this
agreement were included as part of the Companys selling,
general and administrative expenses in the Companys
results of operations in the accompanying consolidated financial
statements for the years ended December 31, 2002, 2001 and
2000, respectively. Management believed that these allocations
were reasonable.

Facilities Allocation.Titan allocated approximately 8,200
square feet of facility space in San Diego, California to the
Company through June 2002, the date the Company relocated its
corporate headquarters. Under the Corporate Services Agreement,
Titan charged the Company for occupancy, maintenance, property
taxes, utilities, landlord pass-through expenses, property
insurance, reception desk services, telephone services,
centralized mail and postage and other services. The Company
paid Titan an annual fee determined by the Companys
percentage of Titans annual costs for this facility. This
percentage was based upon the percentage of the total square
feet in the facility that the Company occupied. Amounts
aggregating $274,000, $370,000 and $207,000 were included as
part of the Companys cost of sales and selling, general
and administrative expenses in the Companys results of
operations in the accompanying consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000,
respectively.

Tax Allocation Agreement.As long as Titan maintained beneficial
ownership of at least 80% of the total voting power of the
Companys capital stock and 80% of the total value of the
Companys outstanding common stock, the Company was to be
included in Titans consolidated federal income tax returns.

Prior to the spin-off, a Tax Allocation agreement
between SureBeam and Titan existed. Under the Tax Allocation
Agreement, the Company agreed to pay to Titan an amount
generally equal to the tax liability that the Company would have
incurred if it had prepared and filed a separate return. In
computing this separate tax

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

liability, the Companys tax attributes,
including net operating loss and tax credit carryovers, will be
deemed to be the amount that it would have had had it always
owned the businesses transferred to the Company by Titan.

As a member of the Titan group for purposes of
filing consolidated federal income tax returns, the Company
would be liable for the federal income tax of the Titan group if
Titan or any member of the group failed to pay its taxes. As of
the date of the spin-off, the Company is no longer a member of
the Titan group.

License Agreement.On October 16, 2001, Titan
purchased a perpetual and exclusive, non-royalty bearing license
to use the Companys intellectual property for all
applications and fields other than the food, animal hide and
flower markets in consideration of the following: 1) to
make available to the Company a $50.0 million senior
secured line of credit, subject to the consent of the requisite
percentage of its syndicate of senior lenders, with customary
financial and affirmative and negative covenants, 2) to
exchange the outstanding $75.0 million debt owed by the
Company to Titan for additional shares of the Companys
Class B and Class A common stock, subject to consent
of the requisite percentage of its syndicate of senior lenders,
and 3) a cash payment of $8.0 million, with a
$4.0 million payment on September 30, 2001 and four
installments of $1.0 million payable on each of
March 31, 2002, June 30, 2002, September 30, 2002
and December 31, 2002. Of the $4.0 million received in
both 2002 and 2001, $4.0 million and $1.0 million was
recorded as other income in 2002 and 2001, respectively, with
the remaining $3.0 million deferred until 2003.

Employee Benefit Plans.The Companys employees were
eligible to participate in the Titan benefit plans. Those plans
included a 401(k) plan, an employee stock ownership plan, a
non-qualified executive stock-based compensation plan, an
employee stock purchase plan, and a health and welfare cafeteria
plan. The direct cost of these plans for the Companys
employees were charged by Titan to the Company. Subsequent to
July 5, 2002, SureBeam established similar employee plans.
The Companys contributions to these plans were $268,000,
$313,000 and $226,000 in 2002, 2001 and 2000, respectively.

Subordinated Promissory Note.In August 2000, in connection with the
contribution by Titan to SureBeam of its electronic food
irradiation business, the Company assumed the cumulative
advances of $39.0 million and due to additional advances
the balance was $72.2 million as of December 31, 2001.
These advances were evidenced by the subordinated, unsecured
promissory note payable to Titan. Under this note, Titan agreed
to lend us a maximum of $75.0 million. Amounts not borrowed
could not be canceled by Titan. The promissory note was due in
August 2005 and bore interest, payable quarterly, at the greater
of the rate of 10% per annum or Titans effective weighted
average interest rate under its senior credit facility.

With respect to the exchange of the
Companys $75.0 million non-convertible debt for
common stock, the Company followed guidance in APB Opinion
No. 29, Accounting For Nonmonetary
Transactions, and determined that the use of the fair
value of the license on the date of the exchange was
appropriate. On December 31, 2001, $2.0 million of the
Companys subordinated note payable was exchanged for
190,385 shares of the Companys Class B common stock,
based upon the fifteen day trading average of the Companys
Class A common stock of $10.505 ended on December 28,
2001. Additionally, the remaining $73.0 million of the
Companys subordinated note payable to Titan was exchanged
on February 13, 2002 for 4,441,496 shares of the
Companys Class A common stock and 3,225,765 shares of
the Companys Class B common stock, based on the
twenty day trading average of the Companys Class A
common stock of $9.521 ended February 12, 2002.

Senior Credit Facility with The Titan
Corporation.During 2002, Titan
extended a $50.0 million senior secured credit facility to
the Company. As of December 31, 2002, the Company has
borrowed $25.0 million on this credit facility and it has
up to a maximum of $25.0 million available. The credit
facility allows the Company to borrow, in addition to its
previous borrowings, up to $12.5 million per quarter
through the fourth quarter of 2003, subject to the
$50.0 million cumulative limitation on borrowing. For the
quarter ending March 31, 2003, the maximum amount available
for borrowing is $12.5 million. The maximum amount

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

available for borrowing in the second, third and
fourth quarters of 2003 is based upon the Companys
earnings before interest, taxes, depreciation and amortization
(EBITDA) for the prior quarter as a percentage of the EBITDA
target in the Companys annual operating plan. The Titan
credit facility contains certain covenants, which limit the
Companys operating expenses and capital expenditures based
on the attainment of quarterly revenue or EBITDA targets. The
credit agreement also includes covenants limiting our incurrence
of debt, investments, declaration of dividends and other
restricted payments, sale of stock of subsidiaries and
consolidations and mergers. The credit agreement, however, does
not contain any financial covenants requiring us to maintain
specific financial ratios. As of December 31, 2002, the
Company was in compliance with all covenants of the credit
facility.

Under the Companys credit facility it is
obligated to make minimum quarterly principal payments as
follows: 13.75% of the outstanding principal balance as of
December 31, 2003 during each quarter in 2004; 25% of the
outstanding principal balance as of December 31, 2004
during each quarter in 2005; and, all remaining principal by
December 31, 2005. In addition, with some exceptions, the
Company is obligated to use net proceeds from the sale of assets
and securities to repay amounts advanced under the credit
facility. The interest rate is Titans effective weighted
average term debt rate under Titans credit agreement plus
three percent. As of December 31, 2002, the interest rate
on the credit facility was 8.08%. Interest is payable monthly
beginning in January 2003. The credit facility is secured by a
first priority lien on all of its assets.

Loan Receivable.In
October 1999, the Company loaned its President and Chief
Executive Officer $375,000. Pursuant to his employment
agreement, the loan would bear interest at 6.5% and be ratably
forgiven over a five-year period unless the employment agreement
was voluntarily terminated or he was terminated for cause. If he
voluntarily terminated or if he was terminated for cause, he
would be responsible for repaying the unforgiven balance plus
interest. The loan balance of $150,000 and $225,000 is included
in current assets and other assets, respectively, on the
accompanying balance sheets as of December 31, 2002 and
2001, respectively. In March 2003, this officer resigned and the
loan balance of $150,000 plus interest of approximately $2,000
became due and payable to the Company. See Note (16).

Revenues from The Titan Corporation.Titan has subcontracted the Company to
design and construct SureBeam systems for Titans contracts
with third parties. These systems were designed for applications
other than the food (excluding water), animal hide and flower
markets. Revenues derived from sales to Titan are recognized
under cost-plus 20% or fixed price contracts were
$19.6 million and $18.3 million for the years ended
December 31, 2002 and 2001, respectively.

Receivable from The Titan Corporation.As of December 31, 2002 and 2001,
the Companys receivable from Titan was $10.1 million
and $12.5 million, respectively, which represented the
receivable generated from various contracts to manufacture and
service SureBeam systems. In January 2003, the Company received
a payment of $7.2 million from Titan related its receivable
at December 31, 2002.

Note (9) Significant Customers

Revenues from two customers represented 53% and
25% of the 2002 total revenues, respectively. Revenues from
three customers represented 44%, 28% and 17% of the 2001 total
revenues, respectively, and 52%, 16% and 11% of the 2000 total
revenues, respectively. No other single customer accounted for
10% or more of the revenues for these periods. In 2002 and 2001,
one customer with greater than 10% of total revenue was The
Titan Corporation.

Note (10) Commitments and
Contingencies

The Company periodically is a defendant in cases
incidental to its business activities. Furthermore, providers of
products and services to the U.S. government are generally
subject to multiple levels of audit and investigation by various
U.S. government agencies. Any liabilities arising from audits by
the federal

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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

government are being retained by Titan as part of
the contribution by Titan to SureBeam. In the opinion of
management, the amount of ultimate liability, if any, with
respect to these actions will not materially affect the
financial position or results of operations of the Company.

On January 25, 2002, Titan and SureBeam
announced a settlement of the litigation with IBA. Under the
settlement, IBA dropped all the claims it made against Titan and
SureBeam in the litigation, including IBAs challenge to
the validity and enforceability of SureBeams core patent.
Titan and SureBeam agreed that IBA and its customers may
continue to operate or use IBAs electronic irradiation
facility in Bridgeport, New Jersey. The settlement terms
include, among other things, that IBA will buy its requirements
in the United States for e-beam and x-ray systems for use for
processing food and sanitizing mail from Titan and SureBeam
during the next four years, provided Titan and SureBeam offer
competitive terms. Titan and SureBeam also agreed to purchase
their requirements of accelerators with above 150 kilowatts of
power from IBA during the same four-year period, provided IBA
offers competitive terms. Other terms of the settlement
agreement were not disclosed.

In 1999, SureBeam entered into an agreement with
Cloverleaf Cold Storage in Sioux City, Iowa whereby Cloverleaf
constructed and leased to SureBeam an electron beam food
irradiation service center in which SureBeam would install food
irradiation systems and process food for its customers. The
facility lease commenced on February 1, 2000 with an
initial term of five years with an option to extend the lease
term for an additional five years. Monthly rental payments are
approximately $25,000 for the first year of the lease and are
adjusted annually based upon fluctuations in the Consumer Price
Index. In addition to the facility lease with Cloverleaf,
SureBeam issued a warrant to Cloverleaf to purchase 465,838
shares of the Companys Class A common stock for a
nominal amount. SureBeam also granted an additional warrant to
Cloverleaf to purchase 1,397,515 shares of SureBeam common stock
at an exercise price of $0.7156 per share. The fair value of the
warrants of $1.9 million was computed using the
Black-Scholes option-pricing model and has been recorded as
prepaid rent in the accompanying consolidated financial
statements and will be amortized over the initial five-year
lease term. In accordance with EITF 96-18, Accounting for
Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, the fair value of the warrants was valued at the
date the warrants were issued and Cloverleaf exercised the
warrants on March 16, 2001. In January 2001, the Company
amended the facility lease agreement with Cloverleaf Cold
Storage in Sioux City, Iowa. The amended facility lease
commenced on February 1, 2001 and has an initial term of
twenty years with an option to terminate the lease after ten
years. The related future minimum lease payments have been
included in the table below.

The Company is dependent on third-party suppliers
for components of its systems. These components include the
microwave cavities of the Companys linear accelerators,
which it currently obtains from a single source.

The Company leases space from unrelated third
parties under non-cancelable operating leases. Rent expense for
these leases amounted to $2.6 million, $2.0 million
and $1.4 million for the years ended December 31,
2002, 2001, and 2000, respectively. The related future minimum
lease payments as of December 31, 2002 are as follows (in
thousands):

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |  
|                         |  |  
|2003                     |  | $ | 2,621  | 
|2004                     |  |   | 2,637  | 
|2005                     |  |   | 2,244  | 
|2006                     |  |   | 2,220  | 
|2007                     |  |   | 2,072  | 
|Thereafter               |  |   | 17,039 | 
|                         |  |   |        | 
|                         |  | $ | 28,833 | 
|                         |  |   |        | 

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note (11) Income Taxes

The components of the income tax
provision/(benefit) are as follows (in thousands):

|         |          |      |   |      |  |      |        |        |   |   |        |        |  
|-------- | -------- | ---- | - | ---- |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|         |          | 2002 |   | 2001 |  | 2000
|         |          |      |   |      |  |     
|Current: |          |      |   |      |  |      |        |        |   |   |        |       
|         | Federal  |      | $ |     |  |      | $      | (3,132 | ) |   | $      | 147    |  
|         | State    |      |   |     |  |      |        |       |   |   |        | 26     |  
|         |          |      |   |      |  |      |        |        |   |   |        |       
|         |          |      |  |      |  |      | (3,132 | )      |   |   | 173    |       
|         | Deferred |      |   |     |  |      |        | 813    |   |   |        | (1,303 | )
|         |          |      |   |      |  |      |        |        |   |   |        |       
|         |          | $    |  |      |  | $    | (2,319 | )      |   | $ | (1,130 | )     
|         |          |      |   |      |  |      |        |        |   |   |        |       

Following is a reconciliation of expected income
tax expense (benefit) (based on the United States federal income
tax rate applicable in each year) to the actual benefit for the
years ended December 31, 2002, 2001 and 2000 (in thousands):

|                                                           |  |      |         |      |  |      |         |   |  |   |        |  
|---------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                           |  | 2002 |         | 2001 |  | 2000
|                                                           |  |      |         |      |  |     
|Expected federal income tax benefit                        |  | $    | (11,930 | )    |  | $    | (26,076 | ) |  | $ | (1,003 | )
|State income taxes, net of federal income tax
    benefits |  |      |        |      |  |      | 664     |   |  |   | (177   | )
|Change in federal valuation allowance                      |  |      | 7,514   |      |  |      | 7,253   |   |  |   | 50     |  
|Stock based compensation                                   |  |      | 2,394   |      |  |      | 9,081   |   |  |   |       |  
|Pre-spin off utilization of NOL by parent company          |  |      | 1,915   |      |  |      | 5,358   |   |  |   |       |  
|Present value adjustment                                   |  |      |        |      |  |      | 768     |   |  |   |       |  
|Other                                                      |  |      | 107     |      |  |      | 633     |   |  |   |       |  
|                                                           |  |      |         |      |  |      |         |   |  |   |        |  
|Actual income tax benefit                                  |  | $    |        |      |  | $    | (2,319  | ) |  | $ | (1,130 | )
|                                                           |  |      |         |      |  |      |         |   |  |   |        |  

Deferred tax assets as of December 31, 2002
and 2001, consist of the following temporary differences (in
thousands):

|                                      |                                                                            |                              |         |        |        |   |        |        |        |  
|------------------------------------- | -------------------------------------------------------------------------- | ---------------------------- | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                                      |                                                                            | 2002                         |         | 2001  
|                                      |                                                                            |                              |         |       
|Net operating losses                  |                                                                            | $                            | 3,914   |        |        | $ | 705    |       
|Accrued payroll and employee benefits |                                                                            |                              | 222     |        |        |   | 742    |       
|Deferred compensation                 |                                                                            |                              | 8,027   |        |        |   | 6,748  |       
|Deferred revenue                      |                                                                            |                              | 2,685   |        |        |   | 108    |       
|Reserves                              |                                                                            |                              | 3,137   |        |        |   | 1,148  |       
|Amortization                          |                                                                            |                              | 1,907   |        |        |   | 1,445  |       
|Other                                 |                                                                            |                              | 174     |        |        |   | 71     |       
|                                      |                                                                            |                              |         |        |        |   |        |       
|Deferred tax asset                    |                                                                            |                              | 20,066  |        |        |   | 10,967 |       
|Valuation allowance                   |                                                                            |                              | (17,866 | )      |        |   | (9,419 | )     
|                                      |                                                                            |                              |         |        |        |   |        |       
|Net deferred tax asset                |                                                                            | $                            | 2,200   |        |        | $ | 1,548  |       
|Deferred tax liabilities:             |                                                                            |                              |         |        |        |   |        |       
|                                      | Property and equipment, principally due to
    differences in depreciation |                              |         | (2,200 | )      |   |        | (1,548 | )     
|                                      |                                                                            |                              |         |        |        |   |        |       
|                                      |                                                                            | Total deferred tax liability |         |        | (2,200 | ) |        |        | (1,548 | )
|                                      |                                                                            |                              |         |        |        |   |        |       
|                                      |                                                                            | Net deferred tax asset       |         | $      |       |   |        | $      |       |  
|                                      |                                                                            |                              |         |        |        |   |        |       

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has established a valuation allowance
against its deferred tax asset due to the uncertainty
surrounding the realization of such assets. Management
periodically evaluates the recoverability of the deferred tax
asset. At such time as it is determined that it is more likely
than not that deferred assets are realizable, the valuation
allowance will be reduced. The Company has recorded a valuation
allowance of $17.9 million as of December 31, 2002 to
reflect the estimated amount of deferred tax assets that may not
be realized. The Company increased its valuation allowance by
approximately $8.4 million in the year ended
December 31, 2002. The valuation allowance includes
approximately $464,000 related to stock option deductions, the
benefit of which will eventually be credited to equity.

At December 31, 2002, the Company had
federal and state tax loss carryforwards of approximately
$10.0 million and $6.1 million respectively. The
federal and state net operating loss carryfowards begin to
expire in 2021 and 2006 respectively, if unused.

Prior to the spin-off, the Company filed a
consolidated federal income tax return with Titan. In accordance
the tax sharing agreement between Titan and the Company, Titan
must reimburse the Company a sum equal to the amount of benefit
realized by Titan that is attributable to the utilization of net
operating losses generated by the Company. Any resulting
reimbursement is due from Titan upon the earlier of (1) the year
in which the Company would have utilized the loss and obtained a
tax benefit had the Company filed a separate federal income tax
return in all tax years, and (2) the year in which the
applicable carryforward period expires. To date, a receivable of
$2.3 million has been recognized in connection with the use
of the Company losses by Titan. An additional amount may be
recognized depending upon the future profitability of the
Company.

The Internal Revenue Code limits the future
availability of net operating loss that arose prior to certain
cumulative changes in a corporations ownership resulting
in a change of control of the Company. These losses may be
subject to IRC Section 382 and may be limited in their use.
The extent of such limitation has not been determined at this
time.

Note (12) Stockholders Equity
(Deficit)

The Companys certificate of incorporation
allows for issuance of preferred stock upon approval by the
board of directors. The board of directors has the authority,
without further action by stockholders, to designate up to
5,000,000 shares of preferred stock, in one or more series and
to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon the preferred stock. As
of December 31, 2002, the board of directors has not
approved nor has the Company issued any preferred stock.

The Company has two classes of authorized common
stock, Class A common stock and Class B common stock.
The rights of the holders of Class A common stock and
Class B common stock are identical, except with respect to
voting and conversion. Each share of Class A common stock
is entitled to one vote per share. Each share of Class B
common stock is entitled to ten votes per share and is
convertible into one share of Class A common stock.

On December 31, 2001, in connection with the
Companys license agreement with Titan, the Company
exchanged $2.0 million of its subordinated promissory note
payable to Titan for 190,385 shares of Class B common stock
of the Company.

On February 13, 2002, the Company exchanged
$73.0 million of its subordinated promissory note payable
to Titan for 3,225,765 and 4,441,496 shares of Class B and
Class A common stock, respectively, of the Company.

Effective August 5, 2002, Titan exchanged
its 50.0 million shares of Class B common stock for
50.0 million shares of Class A common stock and
distributed all of its shares of the common stock to the
shareholders of Titan. The Class B common stock was
retired. Titan previously announced that the holders of

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

record of Titan common stock as of the close of
business on July 26, 2002, the record date for the
distribution, were to receive 0.6986 shares of SureBeams
common stock for every share of Titan common stock held.

Previously, Titan held over eighty percent of the
Companys common stock and held a higher percentage of the
voting power due to Titans ownership of shares of
Class B common stock, which had ten votes per share, as
compared to the Class A common stock, which has one vote
per share and is traded on the NASDAQ under the symbol SURE.

On December 2, 2002, the Company entered
into agreements with investors to sell an aggregate of 5,276,314
shares of its common stock for $4.75 per share, or an aggregate
purchase price of approximately $25.1 million. In addition,
the Company issued warrants to purchase 1,319,075 shares of its
common stock at an exercise price of $6.00 per share. The
Company issued these shares and warrants to the investors on
December 3, 2002. The warrants are exercisable from the
date of issuance until December 2, 2007. The shares issued
under the agreements were offered through a placement agent, for
which services the Company paid to the placement agent a fee of
approximately $1.8 million. After the placement agent fee
and before deducting related legal and accounting expenses, the
Company realized net proceeds of approximately
$23.3 million. The Company intends to use the proceeds for
working capital needs and general corporate purposes. The
Company issued all of the securities under an exemption from the
registration requirements of the Securities Act of 1933, as
amended (the Securities Act) pursuant to
Section 4(2) of the Securities Act and/or Rule 506 of
Regulation D under the Securities Act. All of the shares of
common stock issued to the investors or to be issued upon
exercise of the warrants issued to the investors are restricted
until the Company registers them. The Company agreed to file a
registration statement with the SEC covering the resale of the
shares issued or issuable to each selling stockholder. The
Companys agreement requires it to cause the S-3
registration statement to remain effective until the earlier of
(a) two years after it is declared effective by the SEC,
(b) the date on which each selling stockholders
shares could be sold in a single three-month period under
Rule 144 of the Securities Act, or (c) such time as
all the common stock offered by the registration statement have
been sold. The Company also agreed to indemnify each selling
stockholder for claims made against them arising out of, among
other things, statements made in the filed S-3 registration
statement, Registration No. 333-101971.

Note (13) Stock-based and Other
Compensation Plans

The Company provides stock-based compensation to
officers, directors and key employees through stock option
plans. Prior to the contribution to SureBeam from Titan in
August 2000, the Company had one employee stock option plan, the
1998 Stock Option Plan (the 1998 Plan). Total
options authorized for grant under the 1998 Plan were
11,180,124. Under the 1998 Plan, an options maximum term
is ten years, and the exercise price of each option must equal
the fair market value of the Companys stock on the date of
grant. All options vest in four equal annual increments
beginning one year after the grant date.

On February 1, 2000, the Company issued
46,584 options under the 1998 Plan, which were granted at less
than fair market value. On this date the fair value of a share
of the Companys Class A common stock was $13.95 per
share. Accordingly, the Company recognized stock-based
compensation related to these grants of $643,000 on
February 1, 2000. On May 1, 2000 and June 1,
2000, the Company issued 93,168 and 93,168 options,
respectively, at $0.14 per share to employees under the 1998
Plan, which were granted at less than fair market value. On
these dates, the deemed fair value of a share of the
Companys Class A common stock was $13.95 per share.
Accordingly, the Company has recognized deferred stock-based
compensation related to these grants of $2.6 million. This
deferred stock-based charge will be amortized to expense over
the four year vesting period of these options, $808,000,
$808,000, and $648,000 of such expense was recognized in 2002,
2001, and 2000, respectively.

In August 2000, in connection with the
contribution by Titan to the Company, the Company adopted a
Nonstatutory Stock Option Plan through which the Company
substituted all options under the 1998 Plan.

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys Nonstatutory Stock Option Plan
has 7,975,137 shares of Class A common stock authorized for
issuance. The plan provides for grants of nonstatutory stock
options to the Companys officers and directors and the
officers and directors of Titan. The Company has the right to
repurchase shares received on the exercise of an option at the
book value of those shares if the purchaser terminates service
prior to the completion of the initial public offering. This
constitutes a variable plan under APB No. 25. Accordingly,
deferred stock-based compensation has been recorded to the
extent that book value exceeds the exercise price of the options
at the date of grant. Deferred stock-based compensation is also
recorded for changes in book value occurring subsequent to the
initial grant date. Stock-based compensation related to these
grants is recognized as these options vest. The Company has not
recognized stock-based compensation related to these options, as
the exercise price per share has exceeded the book value per
share since the date of grant and for all periods presented. The
term of the stock options may not exceed February 19, 2008,
the plan termination date. As of December 31, 2002, options
to purchase a total of 7,928,553 shares of the Class A
common stock were granted and 46,584 shares remained
available for grant.

In connection with the completion of the
Companys initial public offering, stock options granted
under the Nonstatutory Stock Option Plan were converted from
variable plan options to fixed plan options. Accordingly,
deferred stock-based compensation of $78.6 million was
recorded, representing the extent to which the $10.00 per share
offering price exceeded the exercise price of the options.
Additionally, a portion of these options were vested at the time
of completion of the offering, approximately $38.7 million
was recognized as stock-based compensation at that time.
Included in selling, general and administrative expense for the
years ended December 31, 2002 and 2001, is
$15.8 million and $53.5 million, respectively, in
stock-based compensation associated with these options. The
remaining deferred stock-based compensation balance related to
these options will be recognized as stock-based compensation of
approximately $8.1 million and $1.3 million in 2003
and 2004, respectively, the remainder of the four-year vesting
period of the options.

In August 2000, the Company adopted and the
stockholders approved the 2000 Stock Option and Incentive Plan.
Outstanding options will continue to be governed by the original
terms of those options granted under the 1998 Plan. At that
time, the Company reserved an aggregate 2,170,800 shares of
common stock for issuance upon the exercise of stock awards
granted to employees, directors, and consultants under the plan.
In May 2002, the stockholders approved an additional 3,000,000
shares of common stock to be reserved for this plan. The
exercise price of an option cannot be less than 100% of the fair
market value of the common stock on the date of grant. The
maximum term of options granted is 10 years. The plan will
terminate in August 2010, unless sooner terminated by the board.
As of December 31, 2002, options to purchase a total of
3,339,824 shares of Class A common stock were granted and
1,830,976 shares remained available for grant.

In August 2000, the Company also adopted an
Employee Stock Purchase Plan, or Purchase Plan, covering an
aggregate of 250,000 shares of common stock. Under the Purchase
Plan, the board of directors may authorize participation by
eligible employees, including officers, in periodic offerings
following the commencement of the Purchase Plan. The initial
offering under the Purchase Plan commenced on March 16,
2001. Employees who participate in an offering may have up to
15% of their earnings withheld under the Purchase Plan. The
amount withheld will then be used to purchase shares of the
common stock on specified dates determined by the board of
directors. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair
market value of the common stock at the commencement date of
each offering period or the relevant purchase date at the end of
the offering period. As of December 31, 2002, 139,416
shares of Class A common stock were purchased for
participants and 110,584 shares of Class A common stock
remained available for purchase.

As of December 31, 2002, approximately
1,988,144 shares of Class A common stock were reserved for
future issuance for the stock incentive plans and employee
benefit plans.

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of the Companys
stock-based compensation plans as of December 31, 2002,
2001 and 2000 and changes during the years ended on those dates
is presented below:

|                                   |  |        |            |                |  |        |       |                |  |        |            |                |  |   |      |  |  |  |           |   |  |   |      | 
|---------------------------------- |  | ------ | ---------- | -------------- |  | ------ | ----- | -------------- |  | ------ | ---------- | -------------- |  | - | ---- |  |  |  | --------- | - |  | - | ---- | 
|                                   |  |        |            |                |  |       
|                                   |  | 2002   |            | 2001           |  | 2000  
|                                   |  |        |            |                |  |       
|                                   |  |        |            | Weighted       |  |        |       | Weighted       |  |        |            | Weighted      
|                                   |  |        |            | Average        |  |        |       | Average        |  |        |            | Average       
|Options                            |  | Shares |            | Exercise Price |  | Shares |       | Exercise Price |  | Shares |            | Exercise Price
|                                   |  |        |            |                |  |        |       |                |  |        |            |               
|Outstanding at beginning of period |  |        | 6,335,314  |                |  | $      | 1.16  |                |  |        | 8,063,643  |                |  | $ | 0.14 |  |  |  | 6,451,863 |   |  | $ | 0.14 | 
|                                  
|Granted                            |  |        | 2,720,000  |                |  | $      | 2.75  |                |  |        | 733,368    |                |  | $ | 8.94 |  |  |  | 2,124,216 |   |  | $ | 0.14 | 
|                                  
|Exercised                          |  |        | (2,273,067 | )              |  | $      | 0.14  |                |  |        | (2,414,713 | )              |  | $ | 0.14 |  |  |  |          |   |  | $ | 0.14 | 
|                                  
|Terminated                         |  |        | (201,650   | )              |  | $      | 11.08 |                |  |        | (46,984    | )              |  | $ | 0.25 |  |  |  | (512,436  | ) |  | $ | 0.14 | 
|                                   |  |        |            |                |  |        |       |                |  |        |            |                |  |   |      |  |  |  |           |   |  |   |      | 
|                                  
|Outstanding at end of year         |  |        | 6,580,597  |                |  | $      | 1.87  |                |  |        | 6,335,314  |                |  | $ | 1.16 |  |  |  | 8,063,643 |   |  | $ | 0.14 | 
|                                   |  |        |            |                |  |        |       |                |  |        |            |                |  |   |      |  |  |  |           |   |  |   |      | 
|                                  
|Options exercisable at end of year |  |        | 2,081,490  |                |  | $      | 0.73  |                |  |        | 1,769,023  |                |  | $ | 0.14 |  |  |  | 2,102,096 |   |  | $ | 0.14 | 
|                                   |  |        |            |                |  |        |       |                |  |        |            |                |  |   |      |  |  |  |           |   |  |   |      | 

The following table summarizes information about
stock options outstanding at December 31, 2002:

|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted Average    |  |                  |      |       
|Range of        |  |                     |           | Remaining           |  | Weighted Average |      |        |  | Weighted Average
|Exercise Prices |  | Shares              |           | Contractual Life    |  | Exercise Price   |      | Shares |  | Exercise Price  
|                |  |                     |           |                     |  |                  |      |        |  |                 
|$ 0.14          |  |                     | 3,590,147 |                     |  |                  | 5.25 |        |  | $                | 0.14  |  |  |  | 1,988,840 |  |  | $ | 0.14  | 
|               
|$ 1.63          |  |                     | 2,020,000 |                     |  |                  | 9.62 |        |  | $                | 1.63  |  |  |  |          |  |  | $ | 0.00  | 
|               
|$ 2.45          |  |                     | 25,000    |                     |  |                  | 9.64 |        |  | $                | 2.45  |  |  |  |          |  |  | $ | 0.00  | 
|               
|$ 6.11  $7.51  |  |                     | 600,000   |                     |  |                  | 9.12 |        |  | $                | 6.18  |  |  |  | 6,250     |  |  | $ | 7.51  | 
|               
|$10.00  $12.20 |  |                     | 115,450   |                     |  |                  | 8.52 |        |  | $                | 10.97 |  |  |  | 28,900    |  |  | $ | 10.97 | 
|               
|$14.90  $16.09 |  |                     | 230,000   |                     |  |                  | 8.46 |        |  | $                | 14.95 |  |  |  | 57,500    |  |  | $ | 14.95 | 
|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|               
|$ 0.14  $16.09 |  |                     | 6,580,597 |                     |  |                  | 7.13 |        |  | $                | 1.87  |  |  |  | 2,081,490 |  |  | $ | 0.73  | 
|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 

Certain officers and key employees participated
in the Titan non-qualified executive stock-based compensation
plan, which terminated on August 5, 2002. The Company also
has performance bonus plans for certain of its employees.
Related expense for these two plans amounted to approximately
$820,000, $2.4 million, and $22,000 in the years ended
December 31, 2002, 2001, and 2000, respectively.

Note (14) Segment Information

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

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

84



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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Prior to August 4, 2000, all of the
Companys revenues were derived from the manufacturing of
medical equipment sterilization and electronic food irradiation
systems, providing medical equipment sterilization services and
the manufacturing of linear electron beam accelerators for use
by government agencies. After August 4, 2000, the
Companys revenues consist of electronic food irradiation
system sales and food processing revenue.

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

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

The medical sterilization services segment
represents all irradiation services performed at Titan owned
service centers for medical sterilization. This segment
terminated on August 4, 2000.

The following tables summarize segment data for
the years ended December 31, 2002, 2001 and 2000 (in
thousands):

|          |                                |      |        |        |  |      |        |        |  |   |        |        | 
|--------- | ------------------------------ | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|          |                                | 2002 |        | 2001   |  | 2000
|          |                                |      |        |        |  |     
|Revenues: |                                |      |        |        |  |      |        |        |  |   |        |       
|          | Food processing services       |      | $      | 1,079  |  |      | $      | 1,014  |  |   | $      | 700    | 
|          | System sales and support       |      |        | 35,797 |  |      |        | 40,253 |  |   |        | 25,921 | 
|          | Medical sterilization services |      |        |       |  |      |        |       |  |   |        | 2,827  | 
|          |                                |      |        |        |  |      |        |        |  |   |        |       
|          |                                | $    | 36,876 |        |  | $    | 41,267 |        |  | $ | 29,448 |       
|          |                                |      |        |        |  |      |        |        |  |   |        |       

|                     |                                |      |       |        |   |      |        |        |   |   |       |        |  
|-------------------- | ------------------------------ | ---- | ----- | ------ | - | ---- | ------ | ------ | - | - | ----- | ------ | -
|                     |                                | 2002 |       | 2001   |   | 2000
|                     |                                |      |       |        |   |     
|Gross profit (loss): |                                |      |       |        |   |      |        |        |   |   |       |       
|                     | Food processing services       |      | $     | (6,000 | ) |      | $      | (1,729 | ) |   | $     | (1,373 | )
|                     | System sales and support       |      |       | 11,737 |   |      |        | 15,893 |   |   |       | 11,372 |  
|                     | Medical sterilization services |      |       |       |   |      |        |       |   |   |       | (153   | )
|                     |                                |      |       |        |   |      |        |        |   |   |       |       
|                     |                                | $    | 5,737 |        |   | $    | 14,164 |        |   | $ | 9,846 |       
|                     |                                |      |       |        |   |      |        |        |   |   |       |       

|                     |                                |      |         |        |  |      |         |        |  |   |        |        | 
|-------------------- | ------------------------------ | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------ | ------ | 
|                     |                                | 2002 |         | 2001   |  | 2000
|                     |                                |      |         |        |  |     
|Identifiable assets: |                                |      |         |        |  |      |         |        |  |   |        |       
|                     | Food processing services       |      | $       | 59,114 |  |      | $       | 38,937 |  |   | $      | 10,358 | 
|                     | System sales and support       |      |         | 28,137 |  |      |         | 25,093 |  |   |        | 17,579 | 
|                     | Medical sterilization services |      |         |       |  |      |         |       |  |   |        |       | 
|                     | General corporate assets       |      |         | 64,746 |  |      |         | 53,754 |  |   |        | 25,244 | 
|                     |                                |      |         |        |  |      |         |        |  |   |        |       
|                     |                                | $    | 151,997 |        |  | $    | 117,784 |        |  | $ | 53,181 |       
|                     |                                |      |         |        |  |      |         |        |  |   |        |       

85



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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

General corporate assets are principally cash and
cash equivalents, prepaid expenses, property and equipment,
deferred income taxes and other assets. Included in the assets
of food processing services, are $22,345, $13,349 and $0 during
2002, 2001 and 2000, respectively, of property and equipment
located in Brazil.

|                                                                              |                                |      |       |       |  |      |       |       |  |   |       |       | 
|----------------------------------------------------------------------------- | ------------------------------ | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                                              |                                | 2002 |       | 2001  |  | 2000
|                                                                              |                                |      |       |       |  |     
|Depreciation and amortization of property and
    equipment and other assets: |                                |      |       |       |  |      |       |       |  |   |       |      
|                                                                              | Food processing services       |      | $     | 3,044 |  |      | $     | 341   |  |   | $     | 87    | 
|                                                                              | System sales and support       |      |       |      |  |      |       |      |  |   |       |      | 
|                                                                              | Medical sterilization services |      |       |      |  |      |       |      |  |   |       | 453   | 
|                                                                              | Corporate                      |      |       | 1,785 |  |      |       | 3,878 |  |   |       | 2,519 | 
|                                                                              |                                |      |       |       |  |      |       |       |  |   |       |      
|                                                                              |                                | $    | 4,829 |       |  | $    | 4,219 |       |  | $ | 3,059 |      
|                                                                              |                                |      |       |       |  |      |       |       |  |   |       |      

All capital expenditures relate to the food
processing services segment, other than certain leasehold
improvements and fixed assets of $195,000, $1.4 million and
$126,000 during 2002, 2001 and 2000, respectively, which related
to general corporate assets.



|          |                                     
|--------- | ------------------------------------
|Note (15) | Quarterly Financial Data (unaudited)

The following tables contain selected
consolidated statement of operations data for each quarter of
fiscal years ended 2002 and 2001 (in thousands, except per share
amounts):

|                                     |         |                           |        |         |   |              |        |             |   |   |         |        |   |   |         |        |  
|------------------------------------ | ------- | ------------------------- | ------ | ------- | - | ------------ | ------ | ----------- | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                     |         |                          
|                                     |         | Fiscal 2002 Quarter Ended
|                                     |         |                          
|                                     |         | March 31                  |        | June 30 |   | September 30 |        | December 31
|                                     |         |                           |        |         |   |              |        |            
|Total revenues                       |         | $                         | 7,016  |         |   | $            | 10,785 |             |   | $ | 6,992   |        |   | $ | 12,083  |       
|Gross profit                         |         |                           | 1,168  |         |   |              | 3,766  |             |   |   | 117     |        |   |   | 686     |       
|Loss from operations                 |         |                           | (9,100 | )       |   |              | (6,078 | )           |   |   | (11,751 | )      |   |   | (11,025 | )     
|Net loss                             |         | $                         | (8,979 | )       |   | $            | (5,102 | )           |   | $ | (11,034 | )      |   | $ | (9,973  | )     
|Loss per common share:               |         |                           |        |         |   |              |        |             |   |   |         |        |   |   |         |       
|                                     | Basic   |                           | $      | (0.14   | ) |              | $      | (0.08       | ) |   | $       | (0.16  | ) |   | $       | (0.14  | )
|                                     | Diluted |                           | $      | (0.14   | ) |              | $      | (0.08       | ) |   |         | (0.16  | ) |   | $       | (0.14  | )
|Weighted average shares outstanding: |         |                           |        |         |   |              |        |             |   |   |         |        |   |   |         |       
|                                     | Basic   |                           |        | 62,794  |   |              |        | 66,869      |   |   |         | 67,336 |   |   |         | 69,881 |  
|                                     | Diluted |                           |        | 62,794  |   |              |        | 66,869      |   |   |         | 67,336 |   |   |         | 69,881 |  

86



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SUREBEAM CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |         |                           |         |         |   |              |        |             |   |   |        |        |   |   |         |        |  
|------------------------------------ | ------- | ------------------------- | ------- | ------- | - | ------------ | ------ | ----------- | - | - | ------ | ------ | - | - | ------- | ------ | -
|                                     |         |                          
|                                     |         | Fiscal 2001 Quarter Ended
|                                     |         |                          
|                                     |         | March 31                  |         | June 30 |   | September 30 |        | December 31
|                                     |         |                           |         |         |   |              |        |            
|Total revenues                       |         | $                         | 5,476   |         |   | $            | 9,617  |             |   | $ | 14,548 |        |   | $ | 11,626  |       
|Gross profit                         |         |                           | 2,526   |         |   |              | 3,402  |             |   |   | 5,293  |        |   |   | 2,943   |       
|Loss from operations                 |         |                           | (43,428 | )       |   |              | (9,410 | )           |   |   | (7,366 | )      |   |   | (11,609 | )     
|Net loss                             |         | $                         | (40,573 | )       |   | $            | (9,187 | )           |   | $ | (7,748 | )      |   | $ | (16,867 | )     
|Loss per common share:               |         |                           |         |         |   |              |        |             |   |   |        |        |   |   |         |       
|                                     | Basic   |                           | $       | (0.84   | ) |              | $      | (0.16       | ) |   | $      | (0.14  | ) |   | $       | (0.29  | )
|                                     | Diluted |                           | $       | (0.84   | ) |              | $      | (0.16       | ) |   |        | (0.14  | ) |   | $       | (0.29  | )
|Weighted average shares outstanding: |         |                           |         |         |   |              |        |             |   |   |        |        |   |   |         |       
|                                     | Basic   |                           |         | 48,405  |   |              |        | 55,841      |   |   |        | 56,131 |   |   |         | 57,624 |  
|                                     | Diluted |                           |         | 48,405  |   |              |        | 55,841      |   |   |        | 56,131 |   |   |         | 57,624 |  



|          |                  
|--------- | -----------------
|Note (16) | Subsequent Events

Effective March 31, 2003, Lawrence A.
Oberkfell, the Companys Chief Executive Officer, President
and Chairman of the Board, resigned and his loan balance of
$150,000 plus interest became due and payable to the Company.
See Note (8). On March 11, 2003, the Board of
Directors elected John C. Arme as Chairman of the Board.

Due to the war in Iraq, certain shipments of
equipment to Saudi Arabia that were scheduled to take place in
March 2003 have been delayed. This delay and any future delays
will cause delays in payments due upon contractual milestones.
The Company had anticipated milestone payments during 2003 of
$24.9 million. The Company anticipates shipping upon resolution
of the war in the Middle East.

Due to the outbreak of Severe Acute Respiratory
Syndrome, or SARS, in Asia, the U.S. State Department has
warned U.S. citizens not to travel to Vietnam because of
its lack of adequate medical facilities for proper treatment of
SARS. Therefore, the Companys personnel who have been
constructing a SureBeam system in Vietnam have left the country
pending resolution of this medical crisis. The departure of the
Companys personnel is delaying construction of the systems
in Vietnam and will delay its receipt of its final payment of
approximately $1.5 million to be paid upon completion. The
Company is not able to predict when its personnel will be able
to return to Vietnam or when the Vietnam systems will be
completed.

87



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information required as to this Item is
incorporated herein by reference from the data under the caption
Information Concerning Nominees and Continuing
Directors and Executive Officers in the Proxy
Statement to be used in connection with the solicitation of
proxies to be voted at our Annual Meeting of Stockholders to be
held in May 2003.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required as to this Item is
incorporated herein by reference from the data under the caption
Executive Compensation and Other Information,
Report on Executive Compensation and Employment
Agreements in the Proxy Statement to be used in connection
with the solicitation of proxies to be voted at our Annual
Meeting of Stockholders to be held in May 2003.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required as to this Item is
incorporated herein by reference from the data under the caption
Security Ownership of Certain Beneficial Owners and
Management in the Proxy Statement to be used in connection
with the solicitation of proxies to be voted at our Annual
Meeting of Stockholders to be held in May 2003.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required as to this Item is
incorporated herein by reference from the data under the caption
Certain Relationships and Related Transactions in
the Proxy Statement to be used in connection with the
solicitation of proxies to be voted at our Annual Meeting of
Stockholders to be held in May 2003.




PART IV






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within the 90 days prior to the date of this
report, SureBeam carried out an evaluation, under the
supervision and with the participation of our management,
including our President and Chief Executive Officer and our
Senior Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of SureBeams
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the President and
Chief Executive Officer and the Senior Vice President and Chief
Financial Officer concluded that SureBeams disclosure
controls and procedures are effective in timely alerting them to
material information required to be included in our periodic
filings with the Securities and Exchange Commission. There have
been no significant changes in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation.






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

(a) List of documents filed as part of this
Annual Report on Form 10-K:



| |    |                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Consolidated Financial
    Statements:The consolidated financial
    statements of SureBeam Corporation are included under
    Item 8 of this report.

88



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##### Table of Contents





| |    |                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Financial Statement
    Schedule:The financial statement
    schedule required under the related instructions is included on
    page 93.                                  
|
| | 3. | Exhibits:The
    exhibits which are filed with this report of which are
    incorporated herein by reference are set forth in the
    Exhibit Index on pages 94 through 96.

(b) Reports on Form 8-K:



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Current Report on Form 8-K filed
    December 5, 2002 pursuant to Item 5 (Other Events).

89



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##### Table of Contents



SIGNATURES

In accordance with Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.



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



| |     |                          
| | --- | -------------------------
| | By: | /s/ LAWRENCE A. OBERKFELL

| |                                          
| | -----------------------------------------
| |                                          
| | Lawrence A. Oberkfell                    
| | President and Chief Executive
    Officer
|
| | Date: March 31, 2003                     



| |     |                  
| | --- | -----------------
| | By: | /s/ DAVID A. RANE

| |                                                   
| | --------------------------------------------------
| |                                                   
| | David A. Rane                                     
| | Senior Vice President, Chief Financial
    Officer
| | (Principal Accounting and Financial
    Officer)  
|
| | Date: March 31, 2003                              

In accordance with the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

|                                               |  |                                    |  |                |  | 
|---------------------------------------------- |  | ---------------------------------- |  | -------------- |  | 
|                                               |  |                                    |  |               
|Signatures                                     |  | Title                              |  | Date          
|                                               |  |                                    |  |               
|/s/ LAWRENCE A. OBERKFELLLawrence A. Oberkfell |  | President, Chief Executive Officer |  | March 31, 2003
|                                              
|/s/ JOHN C. ARMEJohn C. Arme                   |  | Director, Chairman of the Board    |  | March 31, 2003
|                                              
|/s/ ROBERT O. ADERSRobert O. Aders             |  | Director                           |  | March 31, 2003
|                                              
|/s/ WILLIAM C. HALEWilliam C. Hale             |  | Director                           |  | March 31, 2003
|                                              
|/s/ MICHAEL J LICATAMichael J Licata           |  | Director                           |  | March 31, 2003

90



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##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

I, Lawrence A. Oberkfell, certify that:



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



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



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



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



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



| |     |                          
| | --- | -------------------------
| | By: | /s/ LAWRENCE A. OBERKFELL

| |                                   
| | ----------------------------------
| |                                   
| | Lawrence A. Oberkfell             
| | President, Chief Executive Officer
|
| | Dated: March 31, 2003             

91



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##### Table of Contents






CERTIFICATION OF CHIEF FINANCIAL
OFFICER

I, David A. Rane, certify that:



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



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



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



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



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



| |     |                  
| | --- | -----------------
| | By: | /s/ DAVID A. RANE

| |                                                   
| | --------------------------------------------------
| |                                                   
| | David A. Rane                                     
| | Senior Vice President, Chief Financial
    Officer
|
| | Dated: March 31, 2003                             

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##### Table of Contents



SUREBEAM CORPORATION AND
SUBSIDIARIES

SCHEDULE II  VALUATION
AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2002,
2001 and 2000


|                                |  |                           |       |             |  |            |       |         |  |   |        |   |  |   |       | 
|------------------------------- |  | ------------------------- | ----- | ----------- |  | ---------- | ----- | ------- |  | - | ------ | - |  | - | ----- | 
|                                |  | Balance at                |       | Additions   |  |            |       | Balance
|                                |  | Beginning                 |       | (charges to |  |            |       | at End 
|                                |  | of Year                   |       | expense)    |  | Deductions |       | of Year
|                                |  |                           |       |             |  |            |       |        
|                                |  |                          
|                                |  | (In thousands of dollars)
|2002:                           |  |                           |       |             |  |            |       |         |  |   |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                         | 1,428 |             |  | $          |      |         |  | $ | (1,178 | ) |  | $ | 250   | 
|2001:                           |  |                           |       |             |  |            |       |         |  |   |        |   |  |   |       | 
|Allowance for doubtful accounts |  |                           | 250   |             |  |            | 1,178 |         |  |   |       |   |  |   | 1,428 | 
|2000:                           |  |                           |       |             |  |            |       |         |  |   |        |   |  |   |       | 
|Allowance for doubtful accounts |  |                           | 350   |             |  |            |      |         |  |   | (100   | ) |  |   | 250   | 

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##### Table of Contents



APPENDIX E

SUREBEAM CORPORATION

ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

|        |        |                         |  |                                                                                                                                                                                                                                                        
|------- | ------ | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 3.1    |                         |  | Amended and Restated Certificate of Incorporation
    (incorporated by reference to Exhibit 3.1 to
    Registrants Registration Statement on Form S-1
    (No. 333-43672), as amended (the
    Form S-1)).                                          
|        | 3.2    |                         |  | Bylaws (incorporated by reference to
    Exhibit 3.2 to the Form S-1).                                                                                                                                                                                 
|        | 10.1   |                         |  | Form of Indemnity Agreement entered into between
    the Registrant and its directors and officers (incorporated by
    reference to Exhibit 10.1 to the Form S-1).                                                                                    
|        | 10.2   |                         |  | Registrants 2000 Stock Option and Incentive
    Plan (incorporated by reference to Exhibit 10.2 to the
    Form S-1).                                                                                                                                 
|        | 10.3   |                         |  | Form of Incentive and Nonstatutory Stock Option
    Agreements under the 2000 Stock Option and Incentive Plan
    (incorporated by reference to Exhibit 10.3 to the
    Form S-1).                                                                     
|        | 10.4   |                         |  | Registrants Employee Stock Purchase Plan
    (incorporated by reference to Exhibit 10.4 to the
    Form S-1).                                                                                                                                         
|        | 10.5   |                         |  | Registrants Nonstatutory Stock Option Plan,
    as amended (incorporated by reference to Exhibit 10.5 to
    the Form S-1).                                                                                                                           
|        | 10.6   |                         |  | Form of Stock Option Agreement under
    Registrants Nonstatutory Stock Option Plan (incorporated
    by reference to Exhibit 10.6 to the Form S-1).                                                                                                  
|        | 10.7  |                         |  | Sub-Lease Agreement between Cloverleaf Cold
    Storage and The Titan Corporation dated September 1, 1999
    (incorporated by reference to Exhibit 10.7 to the
    Form S-1).                                                                         
|        | 10.8   |                         |  | Industrial Real Estate Lease between B/G
    Management and The Titan Corporation dated April 10, 2000
    (incorporated by reference to Exhibit 10.8 to the
    Form S-1).                                                                            
|        | 10.10 |                         |  | Amended and Restated Agreement No. 3 for
    Purchase of an X-Ray System by and among the Registrant, The
    Titan Corporation, Hawaii Pride LLC, John W. Clark and Eric
    Weinert (incorporated by reference to Exhibit 10.10 to the
    Form S-1).
|        | 10.11  |                         |  | Supplemental Retirement Plan for Executives, as
    amended (incorporated by reference to Exhibit 10.11 to the
    Form S-1).                                                                                                                          
|        | 10.12 |                         |  | Contract for Purchase and Sale of Equipment and
    Services dated December 28, 1999 between Zero Mountain Cold
    Storage and Titan Scan (incorporated by reference to
    Exhibit 10.12 to the Form S-1).                                           
|        | 10.13  |                         |  | Agreement between Texas A&M University, Texas
    Agricultural Experiment Station and the Registrant (incorporated
    by reference to Exhibit 10.13 to the Form S-1).                                                                                 
|        | 10.14 |                         |  | Joint Venture and Strategic Partnering Agreement
    dated May 18, 2000 between Tech Ion Industrial Brasil S.A.
    and the Registrant, as amended (incorporated by reference to
    Exhibit 10.14 to the Form S-1).                                   
|        | 10.15  |                         |  | Letter Agreement dated September 30, 1999,
    as amended on October 18, 1999, between The Titan
    Corporation and Larry Oberkfell (incorporated by reference to
    Exhibit 10.15 to the Form S-1).                                                 
|        | 10.16  |                         |  | Letter Agreement dated July 14, 1999 between
    The Titan Corporation and Kevin Claudio (incorporated by
    reference to Exhibit 10.16 to the Form S-1).                                                                                             
|        | 10.17  |                         |  | Joint Venture Arrangement and Agreement for
    purchase of an electron beam system by and among the Registrant
    and Zero Mountain, Inc. dated August 8, 2000 (incorporated
    by reference to Exhibit 10.17 to the Form S-1).                     
|        | 10.18  |                         |  | Tax Allocation Agreement dated as of
    August 4, 2000 between The Titan Corporation and the
    Registrant (incorporated by reference to Exhibit 10.18 to
    the Form S-1).                                                                         

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|        |        |                         |  |                                                                                                                                                                                                                                                                                                                            
|------- | ------ | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.19  |                         |  | Corporate Services Agreement dated August 4,
    2000 between The Titan Corporation and the Registrant
    (incorporated by reference to Exhibit 10.19 to the
    Form S-1).                                                                                                                                               
|        | 10.20  |                         |  | Subordinated Promissory Note dated August 4,
    2000 between SB Operating Co. and The Titan Corporation
    (incorporated by reference to Exhibit 10.20 to the
    Form S-1).                                                                                                                                             
|        | 10.21  |                         |  | Contribution Agreement dated as of August 4,
    2000 among The Titan Corporation, the Registrant and Gene Ray
    (incorporated by reference to Exhibit 10.21 to the
    Form S-1).                                                                                                                                       
|        | 10.22  |                         |  | Contribution Agreement dated as of August 4,
    2000 between the Registrant and SB Operating Co. (incorporated
    by reference to Exhibit 10.22 to the Form S-1).                                                                                                                                                        
|        | 10.23  |                         |  | License Agreement dated as of August 4, 2000
    between SB Operating Co. and The Titan Corporation (incorporated
    by reference to Exhibit 10.23 to the Form S-1).                                                                                                                                                      
|        | 10.24  |                         |  | First Amendment to Sub-Lease Agreement between
    Cloverleaf Cold Storage and The Titan Corporation dated
    February 1, 2001 (incorporated by reference to
    Exhibit 10.24 to the Form S-1).                                                                                                                          
|        | 10.25 |                         |  | Building Lease dated as of November 17, 2000
    between Bradley Associates Limited Partnership and the
    Registrant (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2001 (the June 2001
    Form 10-Q)).                              
|        | 10.26 |                         |  | Strategic Alliance Agreement dated as of
    November 29, 2000 between Square-H Brands, Inc. and the
    Registrant (incorporated by reference to Exhibit 10.2 to
    the June 2001 Form 10-Q).                                                                                                                            
|        | 10.27 |                         |  | Amendment to Strategic Alliance Agreement dated
    as of March 28, 2001 among X H Partners, Square-H
    Brands, Inc. and the Registrant (incorporated by reference to
    Exhibit 10.3 to the June 2001 Form 10-Q).                                                                                                      
|        | 10.28 |                         |  | Second Amendment to Strategic Alliance Agreement
    dated as of November 28, 2001 between
    X H Partners, Square-H Brands, Inc. and the
    Registrant. (incorporated by reference to Exhibit 10.28 to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001 (the 2001
    Form 10-K)).
|        | 10.29  |                         |  | Lease dated November 28, 2001 between
    X H Partners and the Registrant (incorporated by
    reference to Exhibit 10.29 to the 2001 Form 10-K).                                                                                                                                                                          
|        | 10.30  |                         |  | Amendment to Lease dated as of November 28,
    2001 between X H Partners, L.P. and the Registrant
    (incorporated by reference to Exhibit 10.30 to the 2001
    Form 10-K).                                                                                                                                             
|        | 10.31  |                         |  | Exchange Agreement dated as of December 31,
    2001 between the Registrant and The Titan Corporation
    (incorporated by reference to Exhibit 10.31 to the 2001
    Form 10-K).                                                                                                                                          
|        | 10.32  |                         |  | Exchange Agreement dated as of February 11,
    2002 between the Registrant and The Titan Corporation
    (incorporated by reference to Exhibit 10.32 to the 2001
    Form 10-K).                                                                                                                                          
|        | 10.33  |                         |  | Contract for Purchase and Sale of Equipment and
    Services dated as of February 11, 2002 between the
    Registrant and The Titan Corporation (incorporated by reference
    to Exhibit 10.33 to the 2001 Form 10-K).                                                                                                    
|        | 10.34  |                         |  | Amended and Restated License Agreement dated as
    of October 17, 2001 between SB Operating Co., Inc. and
    The Titan Corporation (incorporated by reference to
    Exhibit 10.34 to the 2001 Form 10-K).                                                                                                               
|        | 10.35  |                         |  | Amendment to License Agreement dated as of
    October 17, 2001 between SB Operating Co., Inc. and
    The Titan Corporation (incorporated by reference to
    Exhibit 10.35 to the 2001 Form 10-K).                                                                                                                       
|        | 10.36  |                         |  | Quota Purchase Agreement dated October 23,
    2001 between the Registrant, Tech Ion Industrial Brasil, S.A.,
    SureBeam Holding Company LTDA., and Jospe Francisco Bufara de
    Medeiros (incorporated by reference to Exhibit 10.36 to the
    2001 Form 10-K).                                                       
|        | 10.37  |                         |  | Letter Agreement dated as of March 29, 2002
    between the Registrant and The Titan Corporation (incorporated
    by reference to Exhibit 10.37 to the 2001 Form 10-K).                                                                                                                                                   
|        | 10.38 |                         |  | Joint Venture Agreement dated April 30, 2002
    between RESAL Saudi Corp. and the Company (incorporated by
    reference to Exhibit 10.38 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2002 (the June 2002 Form 10-Q)).                                                     

95



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|        |        |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | ------ | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.39  |                         |  | Senior Secured Credit Agreement, dated as of
    August 2, 2002, between The Titan Corporation, as the
    Lender, and the Company, as the Borrower (incorporated by
    reference to Exhibit 10.39 to the Registrants
    Quarterly Report on Form 10-Q/A for the quarter ended
    June 30, 2002, as filed February 3, 2002).                                                                                                                               
|        | 10.40  |                         |  | Tax Sharing and Disaffiliation Agreement dated as
    of August 2, 2002 between The Titan Corporation and the
    Company (incorporated by reference to Exhibit 10.40 to the
    June 2002 Form 10-Q).                                                                                                                                                                                                                                                         
|        | 10.41  |                         |  | Employee Benefits Agreement dated as of
    August 2, 2002 between The Titan Corporation and the
    Company (incorporated by reference to Exhibit 10.41 to the
    June 2002 Form 10-Q).                                                                                                                                                                                                                                                                      
|        | 10.42  |                         |  | Reimbursement Agreement dated as of
    August 2, 2002 between The Titan Corporation and the
    Company (incorporated by reference to Exhibit 10.42 to the
    June 2002 Form 10-Q).                                                                                                                                                                                                                                                                          
|        | 10.43  |                         |  | Sub-sub-lease Agreement dated as of
    August 2, 2002 between The Titan Corporation, as
    Sublandlord, and the Company, as Subtenant, for certain space
    located at 2640 Murray Street, Sioux City, Iowa
    (incorporated by reference to Exhibit 10.43 to the June
    2002 Form 10-Q).                                                                                                                                                                
|        | 10.44  |                         |  | Sublease Agreement dated as of August 2,
    2002 between The Titan Corporation, as Sublandlord, and the
    Company, as Subtenant, for certain space located at
    9300 Underwood Avenue, Omaha, Douglas County,
    Nebraska 68114 (incorporated by reference to
    Exhibit 10.44 to the June 2002 Form 10-Q).                                                                                                                                             
|        | 10.45  |                         |  | Sublease Agreement dated as of August 2,
    2002 between The Titan Corporation, as Sublandlord, and the
    Company, as Subtenant, for certain space consisting of
    approximately 133 square meters and located at King Fahed
    Road, North to King Fahed Library, Olaya Area, Riyadh, Kingdom
    of Saudi Arabia, in the building commonly known as Abraj
    Attaawuneya (incorporated by reference to
    Exhibit 10.45 to the June 2002 Form 10-Q).
|        | 10.46  |                         |  | Sub-sub-lease Agreement dated as of
    August 2, 2002 between The Titan Corporation, as
    Sublandlord, and the Company, as Subtenant, for certain space
    located at 6780 Sierra Court, Suite A, Dublin, CA.
    (incorporated by reference to Exhibit 10.46 to the June
    2002 Form 10-Q).                                                                                                                                                             
|        | 10.47  |                         |  | Sublease Agreement dated as of August 2,
    2002 between The Titan Corporation, as Sublandlord, and the
    Company, as Subtenant, for certain space located at
    6780 Sierra Court, Suite R, Q, L and O, Dublin, CA
    (incorporated by reference to Exhibit 10.47 to the June
    2002 Form 10-Q).                                                                                                                                                       
|        | 10.48 |                         |  | Agreement for Purchase of a SureBeam X-Ray System
    dated effective March 27, 2002 between the Company and Son
    Son Co., Ltd. (incorporated by reference to Exhibit 10.48
    to the Registrants Quarterly Report on Form 10-Q for
    the quarter ended September 30, 2002 (the September
    2002 Form 10-Q)).                                                                                                                                       
|        | 10.49 |                         |  | Letter Agreement dated October 1, 2002,
    amending Agreement dated effective March 27, 2002 between
    the Company and Son Son Co., Ltd. (incorporated by reference to
    Exhibit 10.49 to the September 2002 Form 10-Q).                                                                                                                                                                                                                                  
|        | 10.50 |                         |  | Agreement for Purchase of a SureBeam Electronic
    Beam System dated August 1, 2002 between Salubris Limited
    Partnership and the Company (incorporated by reference to
    Exhibit 10.50 to the September 2002 Form 10-Q).                                                                                                                                                                                                                                
|        | 10.51  |                         |  | Amendment to Senior Secured Credit Agreement and
    Contract For Purchase and Sale of Equipment and Services dated
    as of March 28, 2003 between the Registrant and The Titan
    Corporation.                                                                                                                                                                                                                                                             
|        | 21.1   |                         |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 23.1   |                         |  | Consent of KPMG LLP, Independent Public
    Accountants.                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 23.2   |                         |  | Notice regarding consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 99.1   |                         |  | Periodic Report Certification by Chief Executive
    Officer of Annual Report on Form 10-K for the year ended
    December 31, 2002.                                                                                                                                                                                                                                                                                                                           
|        | 99.2   |                         |  | Periodic Report Certification by Chief Financial
    Officer of Annual Report on Form 10-K for the year ended
    December 31, 2002.                                                                                                                                                                                                                                                                                                                           



---



|  |                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential Treatment has been requested with
    respect to certain portions of this exhibit. Omitted portions
    have been filed separately with the Securities and Exchange
    Commission.

96